On July 2, 2007, the Michigan Legislature passed the long-awaited replacement tax for the Single Business Tax (SBT), which is due to be repealed on December 31, 2007. There are five bills related to this effort: Senate Bill 94 and House Bills 4369, 4370, 4371, and 4372. The bills enact a new tax to be called the Michigan Business Tax (MBT) and will provide substantial personal property tax relief to Michigan businesses.
Michigan State Treasurer Robert J. Kleine has indicated that the Department of Treasury adopted the following action plan to implement the MBT:
- Steps to Implement
- Treasury Tax Policy staff to analyze operational impacts and develop policies and procedures.
- Begin design of new forms.
- Establish project control office to create full project plan with Department of Information Technology (IT) and IT vendor.
- Place tax calculator on website.
- Develop training seminars; schedule and launch other communications.
- Anticipated Training
- Michigan Association of CPA State Tax Conference, November 7–8, 2007.
- University of Michigan and Michigan State University tax schools, Fall/Winter 2007–2008.
- Web-based training module.
- MBT Timeline
- First estimated payments due – April 2008.
- New automation design complete – May 2008.
- Final build of MBT system – November 2008.
- Final testing and implementation – January 2009 (Note: first annual return for a taxpayer with a January 31, 2008 fiscal year would be May 31, 2009, without extension).
Senate Bill 94
This new legislation is being promoted as revenue neutral. If collections exceed $2,398,000,000 for 2008, there is a trigger that would apply 50% of the excess to the Michigan “rainy day fund” and refund the other 50% to taxpayers. This repayment structure diminishes for 2009 and 2010 and is eliminated for tax years after 2010. There is some question as to the effect of unitary filing on the model the Legislature used to estimate tax collections. The model was developed without factoring unitary payments into the estimate. This may take this new tax out of a revenue neutral position.
The tax is imposed at the “entity” level. Sole proprietors, corporations, estates, trusts, and federal “flow through” entities are defined as taxpayers under the Act. This essentially eliminates any tax advantages afforded to partnerships, limited liability companies (LLCs), etc.
A taxpayer is required to file a MBT return if its allocated or apportioned gross receipts exceed $350,000. The MBT requires most taxpayers with Michigan nexus to pay tax on two elements:
- “Business income” (after allocation and apportionment) is taxed at 4.95%.
- “Modified gross receipts” (after allocation and apportionment) are taxed at 0.80%.
It is important to note that both of these bases are taxable to the same business in the same taxable year; taxpayers do not have the choice of paying on either the “business income” or “modified gross receipts.”
Essentially, “business income” is federal taxable income attributable to business activities with certain adjustments. Examples of such adjustments are interest earned from obligations of states other than Michigan, taxes measured on income, federal net operating loss carryovers, etc. Some other non-traditional adjustments include:
- Subtraction for income attributable to another entity whose business activities are taxable under the MBT or whose business activities would be taxable under the MBT if conducted in Michigan.
- Subtraction for income attributable to “net earnings from self employment” (as defined in § 1402 of the Internal Revenue Code) earned by the sole proprietor or equity owners of federal flow-through entities.
- Addition of royalty, interest, etc. expenses attributable to the use of certain intangible property belonging to a non-unitary related company. The statute provides an opportunity to rebut this addition.
For future years, any “business loss” calculated in arriving at this element of the tax base may be carried forward ten years.
The “modified gross receipts” base is gross receipts less:
- Inventory purchased;
- Depreciable assets purchased;
- Materials and supplies purchased, to the extent not included above;
- Compensation paid to personnel supplied to customers of “staffing companies” as listed in the Standard Industry Classification (SIC) Code industry group 736; and
- Payments to subcontractors by contractors classified in SIC Code major groups 15, 16, and 17.
The statute imposes “waters edge” unitary reporting requirements to develop both the business income and modified gross receipts bases.
For the 2008 tax year, a taxpayer may deduct an unused SBT “business loss” against the combined tax base subject to certain “federal SRLY” type restrictions. There are a number of persons and activities that are exempt from the general tax base:
- Federal and state governments.
- Most non-profit entities exempt from federal income tax (however, any federal “unrelated taxable business income” is taxable).
- Producers of agricultural goods.
- Some other activity.
Insurance companies are taxed at 1.25% (previously 1.07%) of gross direct premiums written on property or risk located or residing in Michigan. There are a number of adjustments and credits available to insurance companies. However, under the SBT Act, the tax imposed on insurance companies was in lieu of all other taxes except property tax. The old law exempted insurance companies from most Michigan taxes, including Michigan Use Tax. Under the MBT, insurance companies are now subject to property tax and sales and use taxes.
Financial institutions are taxed at 0.235% of net worth (assets minus liabilities with certain adjustments). The statute provides significant discussion describing a financial institution and the elements of its tax base.
The statute would assert nexus on any person who has a physical presence of more than one day or actively solicits business in Michigan with gross receipts of $350,000 or more per year. The statute does recognize the limitations of Public Law 86-272, as it affects the “business income” tax base.
Tax base is apportioned on a “one factor” formula. Sales and rentals of property are sourced to Michigan, based on the property being “shipped to” or “located” in Michigan. Sales of services are sourced to Michigan on the same proportion as the customer derives a “benefit” in Michigan. The statute requires that the numerator of the sales factor for a unitary return be calculated to include all Michigan destination/benefit sales, regardless of whether a member of the unitary group has nexus in Michigan (a.k.a. the Finnegan rule).
There are many specific sourcing requirements for income earned from intangible assets, including credit card sales. There are separate apportionment formulas for specialized industries, such as transportation companies and telecommunication services. There is a special apportionment sourcing to address the post-sale effect of certain corporate and other entity “spin-offs.”
The statute devotes 27 pages to allowable credits. The nature and complexity are far too detailed to discuss in this article. The following lists the various credits available under the MBT:
- Unused SBT credit carryovers to be used in 2008 and 2009 only.
- Compensation paid in Michigan.
- Investment credit, including recapture.
- Certain research and development activity.
- Certain expenditures made by a qualified “motor-sport entertainment complex.”
- Certain expenditures made by an owner of a qualified stadium.
- Special “phase-in” credit for taxpayers whose allocated or apportioned gross receipts are greater than $350,000 and less than $700,001.
- 35% refundable credit on certain industrial personal property tax.
- 23% (for 2008, 13.5% for subsequent years) refundable credit on certain telephone personal property tax.
- 10% refundable credit on certain natural gas pipeline property tax.
- “Start-up business” credit.
- “Small business” credit (subject to certain income and activity limitations).
- Venture capital credit.
- Certain charitable contributions: public broadcast station, public library, institution of higher learning, Michigan Colleges Foundation, Michigan Housing and Community Development Fund.
- Certain charitable contributions: municipal or nonprofit art, historical or zoological institute, institute devoted to custody and display of objects of lasting interest or value.
- Payment of workman’s disability compensation.
- Endowments to a community foundation or an education foundation.
- Certain charitable contributions: shelter for homeless persons, food kitchens, food bank, or certain similar entities.
- Alternative energy credit.
- Locating all or a portion of a business in a Michigan Renaissance Zone.
- Historic rehabilitation credit.
- Michigan economic growth authority credit.
- Qualified low-grade hematite use.
- New motor vehicle dealer credit.
- Multipurpose large retailer credit.
A taxpayer expected to have an annual liability exceeding $800 is required to file quarterly estimates (April 15th, July 15th, October 15th, and December 15th for a calendar year taxpayer). There is a narrowly construed “safe haven” provision.
The annual return is due on the last day of the fourth month after the close of the tax year. There will be a short period return required for any taxpayer who is not on a calendar year accounting basis. There are provisions for an extension of time to file a return.
This new legislation was developed by the Michigan Legislature after reviewing a number of proposals and replacement options considered over the last 15 months. With the repeal of the SBT as of December 31, 2007, the Legislature decided to pass this legislation knowing there are a number of issues that will need to be addressed in a “technical corrections” bill yet to be crafted. The Chair of the House Taxation Committee recently stated that any proposed change to be considered in a technical corrections bill will be reviewed carefully. The Michigan Chamber of Commerce has identified 30 areas that need to be addressed. Of note, the following are significant omissions and should be considered for compliance purposes:
- There is no “casual transaction” or “non-business income” provision.
- The “safe haven” provision for estimated tax requires payment of actual tax due each quarter or penalty may be assessed. Gross receipts and income fluctuate throughout the year. Expect some difficulty on estimated penalty and interest.
- Apportionment is calculated for unitary groups on a “waters edge” theory. Gross receipts in the tax base are not subject to the same restriction.
- Unitary methodology is vague: unitary group including non-corporate persons, no guidance on unitary members who have different tax years, etc.
- Expect a number of court challenges on constitutional and other grounds.
House Bill 4369
Along with the implementation of the MBT, the Michigan Legislature is providing significant personal property tax relief. House Bill 4369 exempts commercial and industrial personal property from some of the 18-mill local school tax. Industrial property is exempt from all of the 18-mill tax; commercial property is exempt from 12 of the 18-mill tax.
House Bill 4370
This bill exempts industrial personal property from the 6-mill state education property tax.
House Bill 4371
This bill exempts industrial personal property subject to the industrial facilities tax from the portion of the industrial facilities tax attributable to the state education tax and the local 18-mill school property tax.
House Bill 4372
This bill amends the General Property Tax Act by incorporating the personal property tax exemptions contained in House Bills 4369, 4370, and 4371.
As noted above, industrial personal property receives favorable treatment over commercial property. The classification process and related reclassification remedies occur well before a taxpayer receives the personal property tax bill. Taxpayers should pay close attention to how their personal property is classified for property tax purposes and take necessary steps to have the property reclassified as appropriate in a timely manner. If you wait until you receive the tax bill, it’s too late. This is also a time to look at real property classifications and determine if some of it should be reclassified as personal property.
If you have any questions regarding the above information, please contact Mr. Joe Tomczyk, Director of the Ryan & Company Lansing office, at 517.484.1184, or Ms. Kellianne Nagy, Director of the Ryan & Company Detroit office, at 248.399.2100. Mr. Tomczyk and Ms. Nagy can also be reached via e-mail.