Personal Property Tax Reform Update

Michigan Community College Association, June 9, 2016

Howard HeidemanMI Department of Treasury

1

2

Personal Property Tax Legislation

• In 2012, legislation was passed providing personal property exemptions for small taxpayers and Eligible Manufacturing Personal Property. Laws revised in 2013, 2014 and 2015.

• Reimbursement is provided through share of 6% Use Tax levied by Local Community Stabilization Authority.

• August 2014 voter approval of Proposal 1 allowed laws to take effect.

3

2014 Small Taxpayer Personal Property Exemption

• To be eligible for the exemption, all property used by a claimant or a related party in a city or township must have a true cash value under $80,000, including leased and vendor-supplied property. If this test is met, exemption is for personal property owned by the claimant.

• Exemption affidavit filed annually by Feb.10 Assessor may deny exemption for current year and prior three years.

• 2013 PA 153, SB 489

4

EMPP Exemption• The PPT on “Eligible Manufacturing Personal Property” will be phased

off of the tax rolls over the next 7 years under the following formula:– Beginning in 2016, all personal property first placed in service before

2006 and after 2012 will be exempt.– 2017 – Property first placed in service in 2006 will also be exempt.– 2018 – Property first placed in service in 2007 will also be exempt.– 2019 – Property first placed in service in 2008 will also be exempt.– 2020 – Property first placed in service in 2009 will also be exempt.– 2021 – Property first placed in service in 2010 will also be exempt.– 2022 – Property first placed in service in 2011 will also be exempt.– 2023 – All eligible manufacturing property will be exempt.

• Eligible Manufacturing Property is property that is used at least 50% of the time in industrial processing or direct integrated support of industrial processing.

5

EMPP Exemption Definitions• Direct Integrated Support (DIS) means any of:• R & D; Testing and Quality control functions; and Engineering;

related to goods produced in Industrial Processing and conducted in furtherance of that Industrial Processing.

• Receiving or storing equipment, materials, supplies, or components for Industrial Processing, or scrap or waste resulting from IP, at the IP site or at another site owned or leased by the owner or lessee of the IP site.

• Storing of finished goods inventory produced by a business engaged primarily in IP, if the inventory is stored either at the site where it was produced or at another site owned or leased by the business that produced the inventory.

• Sorting, Distributing or Sequencing functions related to material handling for IP inputs.

6

EMPP Exemption

• Industrial Processing (IP) definition is same as is used in the Sales/Use Tax (MCL 205.54t and MCL 205.94o)

• “Predominantly used in IP or DIS” is determined as follows:• •Multiply “original cost” of each item of personal property by the

percentage of use in IP or DIS. • For IP property, use the percentage allowed under Sales/Use Act.• If result is over 50% all personal property on the occupied real

estate is considered “predominantly used in IP or DIS.”• If result is under 50%, then none of the personal property located

on the occupied real property will be exempt as EMPP.

7

EMPP Exemption

Example Calculation of 50% test:Asset Original Cost % Used in IP or DIS =#1 $100 100% $100#2 $100 50% $ 50#3 $100 20% $ 20

$300 $170 $170 / $300 = 57% > 50%

The personal property at the location is all EMPP as the personal property is used more than 50% in IP or DIS

8

EMPP Exemption• For more information about “industrial processing”

see:– The Department of Treasury’s RAB 2000-4, available at

https://www.michigan.gov/documents/rab-2000-4_108793_7.pdf.

– The Department’s Revenue Technical Tax Training Manual for the Industrial Processing Exemption, available at http://www.michigan.gov/documents/SUExemptions%26Deductions_36031_7.pdf.

9

EMPP ExemptionExcluded Personal Property:•Utility personal property (as defined in MCL 211.34c) is not used in industrial processing or direct integrated support.•Equipment used to generate, distribute, or transmit electricity for sale is excluded from the definition of industrial processing. MCL 211.9m(8)(c) & (d).•“Personal property that is not owned, leased, or used by the” taxpayer “where the personal property is located is not [EMPP], unless the personal property is located on the occupied real property to carry on a current on-site business activity.” MCL 211.9m(8)(c).

10

Reimbursement for 2016+• Beginning for 2016, estimated 100%

reimbursement for all millages.• Reimbursements for most millage will be

calculated using millage rates available to Treasury and personal property exemption loss amounts reported by county equalization directors. Taxing units will not have to claim reimbursement.

• Local school districts and ISDs will continue to report debt millage levied.

11

Other Reimbursement Details• Beginning for 2016, personal property

exemption loss calculated by subtracting current year CP TV and IP TV from 2013 CP TV and IP TV.

• Calculations include IFT property (new at 50%).

• Calculations exclude property classified as either IP or CP in one year but classified as real property or utility personal in other.

12

Other Reimbursement Provisions

• Except for local school/ISD debt millage, reimbursements calculated using each taxing unit’s sum of the lowest rate of each individual millage levied between 2012 and the immediately preceding year. Treasury reports rates by May 1 of each year.

• Beginning in 2016, school/ISD debt rates reported to Treasury by August 15.

13

Debt Millage Rate Calculation

• Estimated reimbursement for debt millage must be used to calculate debt mill rates.

• For school districts and ISDs, add personal property exemption loss to current year total real and personal TV.

• For other taxing units, multiply personal property exemption loss by debt millage rates being reimbursed to estimate debt millage reimbursement, and reduce annual debt service by this amount.

14

Other Reimbursement DetailsCY 2016 through CY 2018• Tier I Reimbursements, guaranteed at

100% reimbursement of calculated loss:– Local school district and ISD loss– Essential services loss, including loss from

expiring tax exemptions– Tax increment financing loss, including any

loss from increased captured value.– Small taxpayer exemption loss.

15

Other Reimbursement DetailsCY 2016 through CY 2018

Tier II Reimbursements: NoneTier III Reimbursements: Reimbursement for

all other losses, based on each taxing unit’s share of the total losses and available $ after Tier I payments

Available $ are estimated to be sufficient to provide 100% reimbursement.

16

FY 2017 Budget Preparation• In estimating FY 17 revenues, for the

millage rates being reimbursed, local units should assume that their FY 17 property tax revenues from industrial/ commercial personal property, including LCSA reimbursement, will equal their FY 14 property tax revenue from industrial/commercial personal property.

• Millage increases after 2012 will not be reimbursed.

17

Other Reimbursement DetailsAfter CY 2018

• For 2019 5% of the $ otherwise available for Tier III are distributed under Tier II based on each taxing unit’s share of EMPP tax loss calculated using modified acquisition cost of EMPP.

• That % is increased by 5% each year for 20 years, until no $ are distributed under Tier III.

18

Timing of Reimbursement• County allocated millage: by September 20

(November 20, 2016).• Other county millage, township millage, and

other millage levied 100% in December: the following February 20.

• All other millage: October 20 (November 20, 2016).

• Treasury to advance to Authority $ necessary to make timely payments.

19

Other Reimbursement Provisions—Prior Year Adjusts

• Except for debt losses and essential services loss, reimbursements for a year are adjusted to reflect the final court order related to any prior year calculation.

• Adjustment made only if changes in prior-year taxable value can be calculated from taxable values reported by county treasurers to MI Department of Education.

• Need a way to adjust MDE taxable values for CP and IP excluded from calculations.

20

Other Reimbursement Provisions—Millage Used for Essential Services

• Reimbursement for essential service millage includes reimbursement for loss from expiring tax exemptions.

• Assessors have been asked to complete Form 5403 and Form 5429 to report the 2016 taxable value of EMPP subject to an expired/extended tax exemption.

• Need to clarify calculation and reporting of the number of general operating mills used for essential services.

21

TIF Plan Reimbursements• Beginning for 2014, reimburse TIF plans

for PPT loss.TIF plans file Form 5176. Beginning for 2016, PPT loss includes the loss of increased captured value, which means:– Anticipated revenue from expiring tax exemptions– Revenue from anticipated future investment– Seven tests must be met for TIF plan to be

reimbursed for increased captured value

• Reimbursement to a taxing unit reduced for payments to TIF plans for that taxing unit’s millage.

PPT Reform: Impact on PA 198

• PA 198: Any certificate involving EMPP in effect on or after 12/31/12 will remain in effect until EMPP would otherwise become exempt under MCL 211.9m, 211.9n, or 211.9o.

• EMPP with extended PA 198 exemption that was in effect before January 1, 2013 is subject to ESA, based on ½ of fair market value at the time of acquisition by the first owner (FMV).

• If the PA 198 exemption was first in effect after 12/31/12, the ESA is based on 100% of FMV.

22

PPT Reform: Impact on PA 198

• For EMPP exempt under 211.9m or 211.9n that otherwise would have been subject to an IFT effective before 1/1/13, ESA applies at ½ of FMV.

23

PPT Reform: Impact on PA 328• PA 328: Any certificate involving EMPP in effect

on or after 12/31/12 will remain in effect until the later of: 1) EMPP would otherwise become exempt, or 2) the exemption was originally set to expire.

• EMPP with extended PA 328 exemption is subject to ESA.

• PA 328 property is also subject to ESA if PA 328 exemption is approved in 2014, unless: 1) it was applied for before August 5, 2014 and 2) $25 million of new EMPP investment is to be made within 5 years.

• After 2014, no PA 328s approved for EMPP. 24

Filing Requirements

For parcels with no exempt EMPP and no EMPP subject to State ESA, property owners must deliver Personal Property Statements to Assessor by February 20. (MCL 211.19(2)).

– See Bulletin 12 of 2015, Property Tax Calendar for 2016.

25

Filing Requirements

• Form 5278 Filing Requirements – Beginning in Tax Year 2016:– For parcels with exempt EMPP, the

taxpayer completes new, combined Form 5278, Affidavit and Statement for EMPP and ESA, and delivers it to the local unit assessor by February 20 (May 31, 2016).

– For certain PA 198 and PA 328 EMPP subject to State ESA, taxpayer delivers Form 5278 to local unit assessor by February 20. 26

Filing Requirements• Form 5278 Filing Requirements –

Beginning in Tax Year 2016:• Form 5278 is a combined EMPP affidavit, a

personal property statement for EMPP still subject to ad valorem tax/IFT, and a report of costs to calculate a new state tax (State Essential Services Assessment, or ESA) on exempt EMPP and certain IFT and PA 328 property.

• Form 5278 is filed instead of the PP Statement. DO NOT file personal property statement (Form 632) for same parcel.

27

28

2016 Form 5278, for parcels with Exempt EMPP, subject to State

ESA, and certain IFT and PA 328 EMPP subject to ESA

• Part 1 Parcel Information and Affidavit to claim EMPP exemption.

• Part 2 Personal Property Statement for EMPP still subject to ad valorem tax or IFT.

• Part 3 Report of fair market value of EMPP subject to State ESA.

EMPP Exemption Claimants’ Responsibilities

• The exemption claimant must provide access to books and records upon request to the city or township assessor, county equalization, or Treasury for four years after the year the exemption is claimed. § 22(2), 22(3).

• If a person fraudulently claims an exemption, they are guilty of a misdemeanor (30 days-6 months jail) and/or $500-$2,500 fine. MCL 211.21(2).

• If personal property no longer qualifies as EMPP, claimant must rescind exemption by filing Form 5277 with assessor. 29

Responsibilities of the Assessor• Each year, the assessor sends a notice by January 10

to all persons with personal property in their possession. The notice is required to include descriptions of the new exemptions available under 9m, 9n, and 9o and explain how to apply for and get more information about those exemptions. MCL 211.19(2).

• The assessor must preserve all filed exemption affidavits for at least 4 years after completion of the assessment roll for which the affidavits were filed. MCL 211.22(4).

• The assessor is required to report a person’s fraudulent exemption claim to the local prosecutor. MCL 211.21(2). 30

Exemption Denials• An assessor may deny a claimed exemption by notifying the

exemption claimant in writing of the reason for the denial and how to appeal under MCL 211.30 or 211.53b. 9m(5); 9n(4); 9o(5).

• For the Small Business Tax Exemption, the denial may be for current year and immediately preceding three years. 9o(5).

• For the 9m and 9n exemptions for EMPP, the denial is for the current year only. 9m(5); 9n(4).

• Within 30 days of the exemption denial, the local tax authority or the county “shall” correct the rolls by removing the exemption and will issue revised tax bills with interest and penalty. 9m(5); 9n(4); 9o(5).

31

Appeals Process

• The exemption claimant may appeal the denial to the March Board of Review or to the Michigan Tax Tribunal 9o(5), 9m(5), 9n(4).

• March BOR:– If the Board approves the exemption, “the Board shall

remove the personal property from the assessment roll.” MCL 211.30(4).

– The March Board must notify the exemption claimant in writing of its decision by the first Monday in June. MCL 211.30(4).

• The exemption claimant may appeal a decision of the March BOR to the Michigan Tax Tribunal by May 31 under MCL 205.735a(6).

32

33

New State Essential Services Assessment (SESA)

• Levied on all exempt EMPP, starting in 2016.• Tax base is fair market value of EMPP at time of

acquisition by first owner, and presumed to be acquisition price.

• For EMPP first acquired 1 – 5 years before the tax year, tax rate is 2.4 mills.

• For EMPP first acquired 6 – 10 years before the tax year, tax rate is 1.25 mills.

• For EMPP acquired earlier, 0.9 mill rate.

State Essential Services Assessment

• Beginning on May 1, the ESA Statement (return) is available on Michigan Treasury Online (MTO) and the e-File application, MeF, is open for taxpayers to certify, pay and submit returns.

• By August 15, taxpayers are required to submit electronically to Treasury a completed statement and full payment of the assessment. Taxpayers may edit and approve Treasury-prepared statement or electronically submit their own if prepared on approved software. Payment after August 15 is subject to penalty.

• If statement and payment are not made by October 15, the EMPP exemption is rescinded for that tax year. Taxpayers must then submit a personal property statement not later than 30 days after rescission and exempted taxes are billed.

34

State Essential Services Assessment

• For taxpayers making a minimum of $25 million investment in additional EMPP, the Michigan Strategic Fund Board may provide a 50% or 100% exemption from the ESA.

• Treasury shall refund any overpayments.• Treasury may audit statements.

35

House Bill 5526—2016 PA 108• Requires EMPP exemption form (not an affidavit) to be

filed annually, combined with reporting of costs for ad valorem/IFT tax rolls and ESA.

• For EMPP exemptions denied by the assessor, eliminates appeal to the July or December board of review. Taxpayers will appeal to the MI Tax Tribunal (if denial is after start of March board of review).

• Re-opens the window to claim a 2016 EMPP exemption. Businesses may claim the 2016 exemption by delivering a complete Form 5278 to the assessor by May 31, 2016.

36

RESOURCES• 2015 STC Bulletin 7-EMPP exemptions• 2015 STC Bulletin 8-Specific Tax Changes• 2015 STC Bulletin 9-State ESA• www.michigan.gov/ppt Personal Property Tax• www.michigan.gov/esa• Submit questions to:PPTquestions@Michigan.govESAquestions@Michigan.govSign up for the ESA listserv at

www.michigan.gov/esa

37

38

2015 Public Acts• HB 4553 Amendments to Property Tax

Act 2015 PA 119 • HB 4554 Amendments to State ESA

2015 PA 120• HB 4556 Amendments to Local

Community Stabilization Authority Act 2015 PA 122

• HB 4557 Amendments to 1974 PA 198 2015 PA 123

39

2016 Public Acts• HB 5526 Amendments to Property Tax

Act 2016 PA 108 • HB 5525 Amendments to State ESA

2016 PA 107• HB 5176 Amendments to Local

Community Stabilization Authority Act 2016 PA 124

• HB 5527 Amendments to 1974 PA 198 2016 PA 110

FY 16 $96.4 million*FY 17 $380.9 million*FY 18 $410.8 million*FY 19 $438.0 million*FY 20 $465.9 millionFY 21 $491.5 millionFY 22 $521.3 millionFY 23 $548.0 millionFY 24 $561.7 million* Up to $0.3 million for administration

Use Tax $ to Authority for Reimbursements

FY 14 $9.9 millionFY 15 $19.9 millionFY 16 $30.9 millionFY 17 $42.0 millionAfter FY 17, estimated 1% annual increase

Est. State Use Tax $ to School Aid Fund for PPT Cuts

42

Howard HeidemanMichigan Department of Treasury

• HeidemanH@michigan.gov•  (517) 373-9002

• Evah Cole Michigan Department of Treasury• ColeE@michigan.gov•  (517) 373-2864

Contacts for Reimbursement Qs