New Michigan Personal Property Tax Exemption Requirements

(January 26, 2015) The personal property tax reform mandated by Michigan voters by way of Proposal 1 last August is now in effect. This is welcome news for businesses, especially manufacturers. However, the new statutory provisions have their share of nuances and steps to take in order to benefit from the reform.  There are two main components of the reform package:  (1) an exemption for businesses with small amounts of personal property and (2) a phase-out of tax on certain other types of personal property which are defined as “eligible manufacturing personal property” (EMPP).

“Small Business” Exemption

If the combined true cash value of a business’ industrial and commercial personal property within a local taxing unit (city, township, village) is less than $80,000, as determined on December 31, 2014, the business can claim an exemption for taxes on that personal property for 2015.  The taxpayer must file an affidavit (Michigan Department of Treasury Form 5076) with the local assessor by February 10, 2015 (and each subsequent year as applicable) in order to claim the exemption.  There are additional provisions with regard to valuation methods, audits, recordkeeping and appeals of denials.

EMPP Phase-out

Only business personal property which meets the definition of “eligible manufacturing personal property” is entitled to an exemption from or phase-out of tax liability.  EMPP is defined as all personal property located on occupied real property if the personal property is predominantly used in industrial processing or direct integrated support.  Direct integrated support includes activity related to industrial processing such as R&D, testing, quality control, engineering, warehousing and distribution.  “Predominant use” means more than 50% of the original cost of all personal property on the occupied real property is used in industrial processing or direct integrated support.  EMPP is categorized as either new EMPP or existing EMPP.

New EMPP

EMPP first placed in service in 2013 or later is eligible for a new property tax exemption beginning in 2016.  The taxpayer must file an exemption affidavit with the local assessor by February 10, 2016.

Existing EMPP

The exemption for EMPP first placed in service prior to 2013 will be phased in between 2016 to 2022.  Beginning with tax year 2016, existing EMPP that becomes at least ten years old as of December 31 of the prior calendar year becomes exempt. For example, in 2016, existing EMPP that was acquired in 2005 or earlier will be eligible for exemption.  In 2023, all EMPP will be exempt.

Taxpayers with EMPP can take steps now to avoid future tracking and reporting obligations for not yet exempt personal property during the tax phase-out.  The taxpayer can do this by providing a schedule which estimates the amount of personal property it plans to claim as exempt for the 2016 tax year with its 2015 personal property tax statement which is due February 20, 2015.  Upon filing that schedule, the taxpayer is only required to file the exemption affidavit in 2016 (and not subsequent years) and will not be required to file personal property tax returns each year.

Related Issues

• All personal property not eligible for these exemptions remains subject to existing personal property tax laws.
• A new tax known as the State Essential Services Assessment (SESA) will be used to partially replace revenues from personal property taxes.  The SESA will be imposed on the exempt EMPP.  This tax will be computed based on the original cost of the EMPP.  It is essentially a special assessment which will be due on September 15 of each year.  Failure to pay the assessment will result in a tax exemption being revoked.  The amount of the assessment will generally be in the range of 10 to 20 percent of the personal property tax.
• There are many businesses which already have statutory personal property tax exemptions (PA 328) or abatements (PA 198 Industrial Facilities Tax).  Generally, those businesses will remain under those programs until the property qualifies for either the existing EMPP exemption or the small business exemption.

As this new personal property tax reform is rolled out, there will be many issues involving interpretation of the requirements and definitions and there will probably be new issues that were not anticipated in adopting the program.  This legal alert is intended to provide a general overview of the reform package.  For more information about this program or any other property tax matters, feel free to contact Scott Steiner or another member of the Rhoades McKee Tax Law or Real Estate Law Teams.