Issues Relative to the Constitutionality of Local Sales Taxation in Michigan
Report 305, June 1992
Introduction
Recently, there has been considerable discussion regarding the use by units of local government of general or selective sales taxes to finance regional public transportation services. Legislation has already been adopted authorizing Wayne County and several other units of local government to levy excise taxes to finance professional sports stadia and convention facilities. Although the state Legislature may employ the term “excise taxes” or “gross receipts taxes” to denominate what are essentially sales taxes, Michigan courts have held that “a court must determine the true nature of a tax and not be misled by legislative legerdemain.”
Public Act 180 of 1991 authorizes certain eligible municipalities to impose an excise tax at a rate not to exceed one percent of the gross receipts of restaurants and hotels, and not to exceed two percent of the gross receipts of automobile rental companies. Restaurant meals are already subject to the general state sales tax, which is levied on gross taxable sales at retail of tangible personal property while hotel accommodations and automobile rentals are subject to the state use tax.
Act 180 requires an eligible municipality which intends to avail itself of the taxing authority granted by the act to first seek voter approval. In addition to Wayne County, the act applies to Oakland County and to the City of Pontiac (because Pontiac levies a city income tax) and to Ingham, Kent, Muskegon, and Washtenaw counties and to the most-populous city in each of these latter four counties (Lansing, Grand Rapids, Muskegon, and Ann Arbor, respectively).
Whether units of local government in Michigan may impose, or be authorized to impose, general or selective sales taxes is by no means clear. (In 1970, however, the state Attorney General concluded that local units were without such authority.) There are several basic legal issues involved in the use of local sales taxes that have yet to be resolved:
First, Section 8 of Article 9 of the Michigan Constitution limits the rate of sales tax that the Legislature may impose on retailers to four percent of their gross taxable sales of tangible personal property. It is arguable whether this limitation was intended to apply only to state sales taxes imposed by the Legislature or also to sales taxes imposed by units of local government.
Second, Sections 10 and 11 of Article 9 of the state Constitution require respectively that “of all taxes imposed on retailers on taxable sales at retail of tangible personal property,” 15 percent be allocated to townships, cities, and villages and 60 percent to the state school aid fund. The use of the term “all” taxes can be construed to require that 75 percent of both a state sales tax and of any local sales taxes be earmarked to townships, cities, villages, and school districts. Such an allocation would effectively preclude using local sales taxes to finance a sports stadium, convention facility, or regional transportation system.
Third, while Article 7 of the state Constitution accords charter counties (at present, Wayne County) and cities and villages broad authority to impose nonproperty taxes without legislative authorization, but “subject to limitations and prohibitions” set forth in the state Constitution and laws, the four percent limitation upon the rate of the sales tax and the allocation requirements may well be such limitations and prohibitions upon the authority of charter counties cities, and villages to levy nonproperty taxes. In any event, noncharter counties and regional authorities have no constitutional authority to impose nonproperty taxes, but the Legislature might authorize such taxes by law.
The Convention which drafted the present state Constitution drew a distinction between charter counties, cities, and villages, and all other units of local government. The former category of units of local government were to have constitutional authority to levy, without necessity of legislative authorization, any tax not otherwise prohibited, while other units of local government could levy only those taxes explicitly authorized by the Legislature.
The use of local sales taxes in Michigan, if otherwise constitutional, would require legislative authorization, which has already been granted to certain units of local government to finance professional sports stadia and convention facilities, and voter approval as required by Section 31 of Article 9 of the state Constitution. (Section 31 was added to Article 9 by the tax limitation “Headlee” amendment in 1978.) Still, any attempt to collect a local sales tax would likely face legal challenges on one or more of the unresolved legal issues discussed above. While the following analysis is of Public Act 180 of 1991, which authorizes selective sales and use taxes to finance professional sports stadia and convention facilities, it also applies to the proposed use of local sales taxes for other purposes such as regional public transportation services.
