News and Views on the Alphabet Soup of MI Taxes
On February 17, 2011, as part of his 2012-2013 budget, Michigan Governor, Rick Snyder announced his proposal for the elimination of the Michigan Business Tax (MBT) and for the replacement of it with a flat Corporate Income Tax (CIT) of 6%. While not surprising (it was part of his campaign platform) it is unsettling. You see, the MBT was passed in 2007 but it didn’t replace the Single Business Tax (SBT) until January 1, 2008. Tax professionals are already tasked with knowing both the SBT and MBT. They must retain a working knowledge of the SBT as the audit periods are still open and they obviously must contend with the complexities of the current MBT. Now they must grapple with the reality that they may have another tax to plan for. In theory, you could have a tax professional defending an SBT audit, filing MBT returns and at the same time be involved with tax planning for the CIT. Talk about a heavy workload and it’s not far fetched at all. While we cannot say for sure that the Governor’s CIT will pass, it does seem probable. And there seems to be growing support for the elimination of the MBT. If the MBT is eliminated it will have to be replaced by something. In the meantime, working with the SBT, MBT and it’s component parts the BIT and MGRT will be taxing enough.
What is the Michigan Business Tax (MBT)?
Although referred to as a single tax, the MBT is actually four taxes in one. The taxes that make up the MBT are a Business Income Tax (BIT), a Modified Gross Receipts Tax (MGRT), a Gross Premiums Tax and a Franchise Tax. The MBT is imposed on all taxpayers with business activity in MI; it is not limited to corporations. Most taxpayers pay both the BIT and the MGRT but not the other two. Insurance companies and financial institutions usually do not pay the BIT or MGRT and pay the other two taxes instead. Since most taxpayers are only concerned with the BIT and the MGRT let’s take a closer look at those.
The BIT is assessed on business activity that occurs in MI. The tax base starts with federal taxable income or the equivalent and has specific statutory additions and subtractions. The adjusted income is apportioned to MI based on the proportion of MI sales to total sales. The tax rate equals 4.95%.
The MGRT is the taxpayer's gross receipts less "purchases from other firms". “Purchases from other firms” may include but are not limited to purchased inventory, capital expenditures and some materials and supplies. The modified gross receipts are apportioned to MI based on the proportion of MI sales to total sales. The tax rate equals .08%.
The MBT also contains multiple credits, exemptions, reductions, unitary filing requirements and surcharges that require too much detailing to go into here.
What are the Michigan Nexus Standards for the MBT?
There are actually 3 nexus standards under the MBT. For the MGRT there are two alternative methods and the BIT has its own method. For the MGRT, RAB 2008-4 states, “a person has nexus with the state if that person has physical presence in the state for more than one day during the tax year. Alternatively, a person has nexus with the state if the person actively solicits sales in this state and has Michigan gross receipts of $350,000 or more.” In addition RAB 2008-4 states that the BIT is “levied on taxpayers with Michigan business activity… unless prohibited by … PL 86-272” It is important to note that although PL 86-272 may protect a taxpayer from the BIT portion of the MBT, those activities still subject them to the MGRT portion of the MBT.
MI has defined both “physical presence” and “actively solicits” in relation to the MBT. Needless to say they are very broad far reaching definitions.
In general we usually prefer Voluntary Disclosure Agreements (VDAs) over amnesties. For reasons why, please refer to my previous article, “You Missed the Tax Amnesty Express: Don’t Worry. You are probably better off with a VDA anyway!” However each state amnesty is unique and should be compared with the state’s VDA program in relation to your specific set of circumstances. Make no mistake though, if you have an outstanding liability, you ought to strongly consider one or the other and act before the state finds you. The final details of the program have not yet been released but we know that the program will run from March 15, 2011 through June 30, 2011. The following taxes will be covered:
- Individual Income Tax
- Inheritance Tax
- Michigan Business Tax
- Motor Fuel Tax
- Sales and Use Tax
- Single Business Tax
- Severance on Oil and Gas Tax
- Tobacco Products Tax
We recommend you keep an eye on MI if you have business interests there and keep abreast of announcements regarding their amnesty program. If you have exposure and need help in determining your best course of action, please let us know.
In summary Michigan’s MBT is one of the most unique and complex taxes that any state levies. The multiple layers and intricacies are compounded by the fact that not only is it evolving but you still have to know the SBT and will probably soon be planning for a new tax. If you need help sorting it out we stand ready to be a resource for you. Let us know how we can help.