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• Tax Highlights

The Michigan Business Tax: How It Will Affect Your Company

On July 12, 2007, Michigan Governor Jennifer Granholm signed Senate Bill 94 into law, which establishes a new Michigan Business Tax (MBT) that supersedes the Michigan Single Business Tax (SBT) that was scheduled to expire on December 31, 2007. The new MBT will be effective January 1, 2008. Fiscal year taxpayers will be required to file two short-period returns for 2007. Consequently, the due date for the final SBT return is April 30, 2008 for ALL taxpayers (calendar or fiscal year entities).

How Is the Tax Calculated?

The MBT is comprised of two separate taxes—a business income tax (BIT) and a gross receipts tax (GRT). Most businesses with Michigan customers will be liable for the GRT and many of these businesses will also be subject to BIT.

1. The BIT is imposed at a rate of 4.95% on the taxpayer's apportioned business income tax base.
2. The GRT is imposed at a rate of .8% on a tax base comprised of gross receipts less purchases from other firms.
   
   "Gross receipts" are considered "the entire amount received by the taxpayer from any activity whether in intrastate, interstate or foreign commerce carried on for direct or indirect gain, benefit or advantage to the taxpayer or to others."
   
   Specific examples of "purchases from other firms" include purchases of the following:
   
   1. Inventory
   2. Depreciable or amortizable assets
   3. Materials and supplies (including office supplies)
   4. For staffing companies, compensation paid to personnel supplied to customers
   5. For construction contractors, certain payments made to subcontractors

Various credits are available to reduce the tax, some of which include credits for employing Michigan residents, investing in Michigan-based assets and performing research in Michigan. An important credit is available for small businesses with gross receipts under $20 million and adjusted business income under $1.3 million.

Flow-Through Entities

In addition, owners of flow-through entities (e.g., partnerships, S corporations, limited liability companies, etc.) will have an individual Michigan income tax filing obligation. Federal law P.L. 86-272 provides an exception to this individual income tax filing obligation if the taxpayer's activity in the state is limited to soliciting orders for the sale of tangible personal property when the order is sent outside Michigan for approval and shipment.

MBT Surcharge

In October, the legislature passed a new budget, which included a sales tax on services and was immediately reconsidered. On December 1, 2007, the day the sales tax on services was set to be enacted, it was revoked and replaced with an MBT charge of 21.99%. If a taxpayer does not have any applicable credits, this results in a GRT tax rate of .97592% and a BIT tax rate of 6.038505%.

Beware of the Nexus Standard—More Taxpayers Subject to the MBT

For the GRT, the taxpayer will have "substantial nexus" if the taxpayer has a physical presence in Michigan for more than one day during the tax period or if the taxpayer "actively solicits" Michigan sales and has gross receipts of $350,000 or more sourced to Michigan.

The MBT Act did not define "actively solicits," but indicated that written guidance would be issued and applied prospectively. In RAB 2007-6, the Michigan Department of Treasury defined "actively solicits." It indicates that "actively solicits" applies to taxpayers even if they have no physical presence in the state. For example, sending catalogs to Michigan residents or telephoning existing Michigan customers will create nexus under the definition of active solicitation. In addition, having a Web site where Michigan customers can order property or services is considered active solicitation and a filing obligation exists for taxpayers who have this capacity. Under this RAB, taxpayers will have a much greater chance of being subject to the MBT than taxes in other states.

For the BIT, the same nexus standard applies as for the GRT, except that federal law P.L. 86-272 should protect many businesses. Service providers do not qualify for this exemption and will be liable for both the GRT and BIT.

Single Factor Apportionment

The new tax system will feature a single sales factor for apportionment of both the BIT and GRT. The single sales factor sourced to Michigan will include:

• Sales of tangible personal property - delivered or shipped into Michigan
• Sale, lease, rental or licensing of real property - if located in Michigan
• Sale, lease, rental or licensing of personal property - if utilized in Michigan
• Lease or rental of mobile transportation equipment to the extent it is used in Michigan
• Royalties if the property is used in Michigan
• Services, based on the amount of benefit the recipient receives in Michigan

Summary

The MBT has a far-reaching nexus standard, and we believe many additional businesses will need to file MBT returns including businesses without a physical presence in the state. While the GRT portion of the tax seems easy to calculate, we believe calculating cash basis purchases from other firms will challenging for accrural basis taxpayers. Finally, the BIT is a traditional income tax and P.L. 86-272 will provide some relief for taxpayers selling tangible personal property.

In our opinion, out-of-state taxpayers selling services, especially through an S corporation, will be most adversely affected. On the other hand, the legislature expects that in-state manufacturers of tangible personal property should see tax relief because of the tax credits and property tax relief.

If you have any questions, please contact Ken Buczkowski at 312-980-2951 or Jason Parish at 312-980-2959 for more information. Our thanks to Deb Rood for her contribution to this article.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.