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The Michigan Business Tax: The Basics

The Michigan Business Tax (MBT) was enacted on January 1, 2008 and replaced the Single Business Tax. The MBT comprises two separate taxes: a business income tax and a modified gross receipts tax. Taxpayers are subject to the MBT once substantial nexus is established.

Nexus

Taxpayers have "substantial nexus" if they (1) have physical presence in the state of Michigan for more than one day or (2) actively solicit Michigan sales and have gross receipts of more than $350,000 sourced to Michigan. From Michigan's standpoint, if you deliver $350,000 or more of goods into Michigan, you have a filing obligation. However, according to the law, the business must "actively solicit" Michigan sales. "Actively solicit" is defined as a "purposeful solicitation of persons within this state. Active solicitation includes, but is not limited to, solicitation through (1) the use of mail, telephone, and e-mail; (2) advertising, including print, radio, television, and other media; and (3) maintenance of an internet site over or through which sales transactions occur with persons in Michigan."

Business Income Tax

The business income tax is a tax on taxpayers' net income with substantial nexus at a rate of 4.95%. Manufacturers may be protected from this portion of the Michigan Business Tax because of a federal law. This federal law restricts states from imposing an income tax if the only activity of that company within the state is the solicitation of sales of tangible personal property. Keep in mind that the federal law does not protect against activities such as making repairs or providing maintenance to the property sold, so it is important to carefully analyze each manufacturer's activities in the state.

Modified Gross Receipts Tax

The modified gross receipts tax is a franchise tax based on the gross receipts of a business. Since this tax is a franchise tax, the federal law does not provide any protection. The modified gross receipts tax is imposed on the modified gross receipts tax base, after apportionment, at a rate of 0.08%. The apportionment is a fraction with the Michigan sales as the numerator and sales from everywhere as the denominator.

Gross receipts are "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 other." Items that are excluded from gross receipts in computation of this tax include trade discounts, refunds from returned merchandise, and payment of the principal portion of loans. Once gross receipts are calculated, they are modified for "purchases from other firms." Purchases from other firms include cash expended for inventory, depreciable assets, and supplies.

Flow-Through Entities

If a flow-through entity has an MBT filing obligation for business income tax purposes, the individual partners or shareholders will also be subject to individual income tax on the same income. Once again, manufacturers may not be subject to this tax because of the protections afforded by the federal law. However, in many instances the same income is subject to tax twice — once at the corporate level and again at the individual owner level.

Planning for the Michigan Business Tax

1. Federal law may exempt out-of-state companies from paying income tax. However, states are very aggressive in asserting that an activity crosses the line and creates an income tax filing obligation. It is important to consult with a professional, on an annual basis, to ensure that the activities occurring in the state are protected and that nobody is overstepping these boundaries.
2. Michigan law states that any shipment with an ultimate destination in Michigan is considered a Michigan sale. Make sure to get documentation from customers as to where the goods sold are going — if the goods end up outside of Michigan, you may be able to avoid tax on those receipts.
3. Make sure to identify all your purchases from other firms. Examples of purchases include inventory, depreciable assets acquired during the year, and materials and supplies that are not included in inventory or depreciable property. In addition, consider breaking the "repairs and maintenance" account into two — one for services purchased and another for parts.

Summary

Because delivering $350,000 of goods into Michigan generally creates a filing obligation, the Michigan Business Tax affects many taxpayers. Manufacturers are often protected by federal law from the income tax portion of the tax, and steps can be taken to reduce the modified gross receipts tax. Consulting with one of Blackman Kallick's state and local tax professionals can ensure that the correct amount of tax is paid and not a penny more. Please contact Jason Parish at jparish@BlackmanKallick.com or 312-980-2959 to set up a meeting to review the calculation. Our thanks to Deb Rood for her contribution to this article.

Works Cited

1. CCH. “Michigan Corporate Income Tax Guide,¶10-075,Michigan,Nexus—P.L. 86-272—Doing Business in State.” Wolters Kluwer. 2010 Web. September 17, 2010. http://intelliconnect.cch.com/scion/secure/index.jsp#page[3].
2. P.L. 86-272
3. Revenue Administrative Bulletin 2007-6
4. Revenue Administrative Bulletin 2008-4

 

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.