A trade war between Michigan and Canada appears to have been averted as the two sides reach agreement on a controversial tax that would have cost Canadian companies millions of dollars annually.

The Michigan House of Representatives recently approved Gov. John Engler's plan to phase out the Single Business Tax (SBT) over 23 years, a move that all businesses embrace.

But included in that language was a provision to tax all foreign companies for business activity in the state, even if the companies have no permanent establishment in Michigan and even if they are not subject to U.S. corporate income tax (see Ward's Automotive Reports — Feb. 22, '99, p.2).

Also under the House version, the tax would be applied to foreign companies partially based on their total employment worldwide.

But after intensive negotiations in Lansing, the Senate, and later the House, passed a version that would tax only what is “value added” in Michigan, alleviating much of the Canadian concern. Also, it would excuse some Canadian firms without permanent Michigan operations from paying the SBT. The governor is expected to sign the bill.

The Canadians won a big victory in defeating a proposal to make the tax retroactive up to 10 years. Now, it appears the tax will be applied only for 1999, at the earliest. Canadian firms appear satisfied to be getting some legislative relief. Without it, Canada was considering retaliatory measures.