Michigan announces nexus standards for SBT.

• Author: Dally, Curtis L.
• Position: Michigan Single Business Tax

For tax years beginning January 1996, the Michigan Single Business Tax (SBT) apportionment factors for most Michigan taxpayers is weighted 80% to sales, 10% to property and 10% to payroll (previously, the weighting was 50-25-25). For tax years beginning after 1998, the apportionment factors will be weighted 90% to sales, 5% to property and 5% to payroll.

This law change could greatly enhance a tax savings opportunity that currently exists for companies physically located in Michigan with significant sales to customers in other states. This opportunity has evolved over time from numerous court decisions on the question of how sales are to be apportioned to Michigan (and to other states) for SBT purposes.

Background

The SBT was intended to be a "single" tax on businesses. It replaced the corporate income tax, the corporate franchise tax, the business intangibles tax and the ad valorem tax on business inventories. The SBT is levied on "the privilege of conducting a business activity in Michigan," not on business income itself. Michigan law defines "business activity" in the state as any transfer of legal or equitable title of property, the performance of services or any combination thereof, that is transacted within the state.

However, for a state to be able to assess a tax of any kind, a taxpayer must have nexus in that jurisdiction. P.L. 86-272 was passed in 1959, setting forth a uniform set of rules that states must follow when determining nexus for purposes of levying an income tax. The SBT is not an income tax, but rather a form of a value-added tax. Thus, P.L. 86-272 does not apply to the SBT. Nevertheless, Michigan has historically used the concepts enunciated in P.L. 86-272 to determine taxability under the SBT However, in a series of Michigan court cases (including Gillette Company and Guardian Industries), the use of P.L. 86-272 for determining nexus in Michigan was determined to be invalid, because the SBT is not an income tax. The courts tried to create a new set of rules for determining nexus on a broader basis. However, the guidelines have been confusing.

The impact of having a broad definition of Michigan nexus is clear: More out-of-state taxpayers will be subject to the SBT However, for taxpayers domiciled in Michigan, the broadened Judicial definition(s) of nexus, together with the heavier weight given to the sales factor, may offer an opportunity for Michigan SBT savings.

Many states, including Michigan, have adopted...