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Michigan Business Tax Update: Parent Companies to Foreign Owned Businesses May Be Taxed in Michigan

Although it is difficult to believe the State of Michigan intended to tax the parent companies of subsidiaries based in Michigan, under the current tax law, this appears it will be the likely result for many foreign owned companies.

Last March, we sent out a letter to let you know we would follow the Michigan Business Tax (MBT) legislative process and advise you on the State of Michigan's ultimate position regarding foreign owned companies.

In our initial review of the MBT, it became clear that the tax had expanded to trap many of the foreign companies currently shipping goods into Michigan. Soon after enactment proposals were sponsored by legislators to minimize the MBT impact on foreign companies whose business activity in Michigan was relatively insignificant. However, none of these proposals passed.

Recent Development

In October, the Department of Treasury issued a Revenue Administrative Bulletin which affirmed that all businesses, including foreign owned businesses, are subject to MBT if they meet the nexus tests.

When a foreign company expands into the U.S., the parent company often sells its product, whether it's software, steel, or automotive components, to its U.S. subsidiary. Also, from time to time, the foreign company executives or owners visit the state to meet with the U.S. executives, or its key customers, visit a trade show, or even attend the SAE or the North America International Auto Show. These activities, as inconsequential as they may seem, will trap the foreign parent in the MBT net.

How it Works

The Michigan Business Tax is comprised of two main taxes: the modified gross receipts tax and the business income tax. Many of the foreign companies may not be subject to the business income tax. However, the modified gross receipts tax will capture many of the foreign operating companies.

The standard to determine nexus under the modified gross receipts tax is very broad. Nexus occurs under this provision if the taxpayer actively solicits sales in Michigan and has gross receipts of $350,000 or more sourced to Michigan. It is the broad definition of “actively solicits” that traps many of the foreign companies into the Michigan Business tax. Active solicitation includes, but is not limited to, solicitation through:

Use of telephone, mail, and e-mail
Advertising including, print, radio, internet, television, and other media
Maintenance of an internet site over or through which sales transactions occur with persons within the State of Michigan

This is an extremely low barrier.

The nexus standards required under the business income tax is somewhat higher than those under the modified gross receipts tax due to the U.S. government's imposition of jurisdictional standards that all states must follow when imposing a tax on net income. This standard is satisfied when a taxpayer has a physical presence in the state. Physical presence is typically easy to identify. An office, equipment, job site, and employees within the state are examples of physical presence.

However, if the only activity of the taxpayer is the solicitation of sales, this will not create nexus under the standard for the purpose of the business income tax portion of the MBT. Furthermore, the state has indicated they will follow federal rules in calculating the beginning base for the MBT business income tax. This means if a foreign entity does not have a taxable presence for federal tax purposes, there is no business income for the purpose of calculating the business income tax for MBT. U.S. income tax treaties generally allow for a much wider range of activities that will not result in a taxable presence for federal tax purposes.

If you are unsure about how the MBT will affect your business, and would like to work with tax professionals who have made it their business to understand how to minimize taxes, as well as comply with the filing requirements, please contact Rob Dutkiewicz at 248.208.8860.

Nov 08

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