Michigan eliminates "throwback rule" and provides for voluntary disclosure.

• Author: Kisscorni, Edward S.

In 1997, Michigan courts issued four opinions that clearly struck down P.L. 86272 as the Michigan nexus standard (see The TaxAdviso; May 1998, p. 316). As a result of these decisions, the Michigan Department of Treasury issued Revenue Administrative Bulletin 98-1 (RAB 98-1), which moved Michigan to a Commerce Clause nexus standard.

The nexus standard change provided opportunities for Michigan-based companies. However, taxpayers were fated with recordkeeping and documentation problems in proving out-of-state nexus to avoid the "throwback rule." In response to this dilemma, the Michigan Treasury asked the legislature to eliminate it.

The effect of the change in nexus standard on some non-Michigan companies was more disastrous. Many non-Michigan firms, believing they were protected from filing under P.L. 86272, would now have to pay Michigan single business tax (SBT). To make matters worse, the change in nexus standard was made retroactive to 1989. To lessen the hardship on non-Michigan taxpayers, the Michigan Treasury asked the legislature to enact voluntary disclosure legislation.

New Nexus Standard

As a result of the judicial decisions on `nexus, the Michigan Revenue Commissioner convened a working group of business and professional tax specialists from both within and outside of government to assist in writing a new nexus standard; this resulted in the issuance of RAB 98-1 on Feb. 24, 1998. (A complete text of RAB 98-1 can be found at the Michigan Department of Treasury Website, at http://www.treas.state.mi.us.)

RAB 98-1 is not a promulgated rule and, therefore, does not have the force and effect of law. However, the position statement is forceful, and will probably be challenged in the courts.

RAB 98-1 states that an out-of-state business is subject to Michigan's SBT jurisdiction when it engages in any of the following activities:

* Has one or more Michigan resident employees conducting business activity in Michigan;

* Owns, rents, leases, maintains or has the right to use and uses tangible personal or real property permanently or temporarily physically located in Michigan;

* Employees own, rent, lease, use or maintain an office or other establishment in Michigan;

* Agents, representatives, independent contractors, brokers or others, acting on its behalf, own, rent, lease, use or maintain an office or other establishment in Michigan, and this property is used in the representation of the out-of-state business in Michigan and is significantly associated with its ability to establish and maintain a market in Michigan;

* Has goods delivered to Michigan in vehicles it owns, rents, leases, uses or maintains, or delivered by a related party acting as a representative of the out-of-state business; and

* Regularly and systematically conducts in-state business activity through its employees, agents, representatives...