Clayton & McKervey, P.C.

Home

News & Events

Michigan Business Tax

By: Margaret Amsden

At a sold out event, CFOs, controllers, business owners, and others interested in the implications of the new Michigan Business Tax ("MBT") gathered to hear updates on the tax since our last roundtable on this topic in September 2007.

Margaret Amsden, Shareholder at Clayton & McKervey, presented a general overview of the MBT, plus more specific topics, such as, details on the two components of the tax - modified gross receipts tax and business income tax, nexus and apportionment issues, planning risk and opportunities, and some remaining uncertainties in the law.

Questions from the attendees covered a variety of topics. The most popular included:

What can be excluded from gross receipts?

Gross receipts are defined first by the method of accounting a company uses.

A cash-basis company will include all receipts received during the year in gross receipts. Accrual-basis companies will look at total revenue. Excludable items include:

Amounts received in an agency capacity
Proceeds in excess of gain on the sale of capital assets and land
Receipts of PEO for actual wages of leased employees
Cash and in-kind discounts
Other items specifically defined by the State

Guests at the roundtable had a number of questions regarding other items includable in gross receipts. Some of the items discussed were:

Allowance for bad debts: If the allowance does not get closed out to sales at the end of the year, those sales are includible in gross receipts
Receipts of staffing companies for the wages of employees provided to clients: Unlike PEOs, which net employee wages from gross receipts, staffing companies include all receipts in gross receipts for Michigan tax purposes
Income from flow-through entities: This is includible. It does create a double tax situation in some cases, but per the law, it is subject to the modified gross receipt tax

Is there any way to get around these low nexus standards?

Nexus for MBT purposes is defined as:

One day of physical presence or
Active solicitation of sales in Michigan

A recent Revenue Administrative Bulletin ("RAB") states that a company can avoid nexus as long as they do not have a physical presence of more than 10 days and they do not participate in any activities associated with making sales. (The RAB lists specific activities that would cause nexus.)

Federal law prohibits a state from charging income tax on such a low nexus standard. The law will offer protection to some out-of-state companies from the business income tax portion of the MBT. It will not protect companies from the gross receipts portion of the tax.

This low nexus standard creates a complication for out-of-state or foreign parents of Michigan subsidiaries. The State has reported that sales to a Michigan subsidiary (assuming it is greater than the $350,000 threshold) does constitute "active solicitation of sales" even if the parent has no other activity in the state. Questions from the audience included whether nexus is established for a foreign parent that sells goods to a Michigan subsidiary that then turns around and sells to an identifiable out-of-state customer. In this case, since title was transferred to the Michigan sub, it would be considered a Michigan sale and thus subject the foreign parent to MBT. On the plus side, if the foreign parent is not subject to federal tax, it will likely avoid most or the entire business income tax portion of the MBT.

There is a plus side for Michigan companies. Companies can apportion sales out of Michigan if they meet the Michigan nexus standard in another state. Since it is so low, this will not be hard to do.

How has sourcing sales changed for apportionment purposes?

Sourcing sales has changed due to the MBT. The new rules will potentially allow more sales to be apportioned out of Michigan for service companies. The biggest burden is the administrative issues surrounding it.

Sales of goods will be sourced to where the product is shipped. It was mentioned this could create some administrative difficulties, as this may have never been tracked or reported on before.

Service companies will now source sales to where the benefit is received. In the past, a company that performed all its services in Michigan and incurred all of its costs of those services in Michigan could not apportion those sales out of he state, even if their client was in another state.

A common question among attendees at the MBT conference related to sourcing of sales and the d ifficulties in determining where the benefit of a service is actually received. Michigan has developed ordering rules that allow companies to first look at where "benefit is received" down to finally, "what is the client's billing address?" in order to source sales in the more complex arrangements.

How do I know if my company is part of a unitary group?

For the first time, Michigan will require companies with common ownership and "flow of value" to file combined Michigan returns.

In order to determine which companies will make up a unitary group, two tests must be performed:

Control test
Flow of value test

The control test requires disclosure of all companies more than 50 percent owned or controlled by other companies, either directly or indirectly.

If the control test is met, companies must meet the flow of value test to be considered a unitary group. There are no quantitative tests to determine if there is "flow of value" between two entities.

It was stressed that the State of Michigan is aware this is one method companies will use to avoid taxation. The State is prepared to scrutinize the choice to be included or not be included in a unitary group to ensure decisions were not made for tax avoidance reasons only. It is important to build supporting evidence today, in case your position is challenged by the State at a later date.

What other administrative changes will have to be made to receive all the benefits available in the MBT?

Make sure you check your company's real and personal property tax bills to verify they are classified "industrial." This will qualify the company for the personal property tax credit, and for a separate reduction in property taxes that was promised with the passing of the MBT. Don't assume your municipality has it recorded correctly uu Note that quarterly estimates are now due on the 15th instead of at the end of the month
Accounting for changes in deferred taxes with your first period MBT return may allow a deduction in future years
"Purchases from other firms" is a deduction allowable in calculating the modified gross receipts tax. The deduction includes capital assets, inventory, and materials and supplies relating to the maintenance and use of fixed assets or the production of inventory. Items that may have been buried in an office supplies account may have to be extracted in order to get the full benefit of this deduction

For more information, please consult your tax advisor or Margaret Amsden at 248.208.8860.

Click here to view a copy of Margaret's presentation.

248.208.8860 | 2000 Town Center, Suite 1800 | Southfield, MI 48075