Michigan nexus developments.

• Author: Hammerschmidt, Thomas D., Jr.
• Position: Scope of Michigan single business tax liability

Overview

Since 1976, Michigan has levied a business activities tax on individuals, corporations, partnerships, joint ventures, and other businesses with business activities in the State. The "single business tax" (SBT) is a form of value-added tax and is imposed on a business without regard to profitability.

The SBT tax base begins with U.S. federal taxable income and adds back employee compensation and benefits, federal tax depreciation, and royalty and interest expense. The SBT allows a subtraction from the tax base for interest income, dividends, and royalties received. An additional reduction to tax base is permitted for the entire cost of the current year's capital acquisitions. The resultant tax base is then apportioned using the following factors: 50 percent sales, 25 percent payroll and 25 percent property. The apportioned tax base is multiplied by the tax rate of 2.3 percent (2.35 percent prior to October 1, 1994). An alternative method, which may be elected by any taxpayer, is to pay tax at a rate of 2.3 percent (beginning October 1, 1994) based on 50 percent of the Michigan apportioned gross receipts. Thus, the SBT liability is effectively capped at 1.15 percent (1.175 percent prior to October 1, 1994) of gross receipts derived from the sale of products or services within the State.

Recent developments have significantly modified the Michigan nexus standard that is used for determining whether a business has sufficient contacts with the State to be subject to the SBT, and whether an in-state taxpayer's tax base can be apportioned to another State (the so-called throwback issue). Consequently, refund opportunities may be available for taxpayers based in Michigan that make sales to customers in other States. Taxpayers may be able to reduce their SBT liability if they can demonstrate sufficient nexus with a State to which it ships its goods, thereby avoiding the throwback of these sales to Michigan and inclusion in the Michigan numerator of the sales factor of the apportionment formula. At the same time, the expanded nexus standard has extended the reach of the Michigan Treasury Department, which can now attempt to subject a non-Michigan business to the SBT if it makes sales into the State or conducts other business activities within the State.

What is the Nexus Standard

for the Michigan SBT?

Last Spring, in the companion cases of Gillette(1) and Guardian Industries(2), the Michigan Court of Appeals held that Public Law No. 86-272 had no application to the SBT because it is not a tax based on or measured by net income. Instead, federal constitutional (Commerce Clause) principles that require a "substantial" nexus to support a state tax on interstate business activities will apply to the SBT.

Public Law No. 86-272 was enacted by Congress in 1959 to stem the proliferation of state income taxes imposed on interstate business activity where the only activities of a nonresident taxpayer in a State were the solicitation of orders for its products. The Michigan Department of Treasury had announced in the early 1980s that it would follow the principles and standards developed in court cases related to Public Law No. 86-272 as a guide in imposing the SBT on out-of-state taxpayers. This policy was followed until the decisions in Gillette and Guardian rejected the Public Law No. 86-272 jurisdictional standard, and the Department's new policies on nexus significantly changed the rules applicable to the SBT - in most cases, on a retroactive basis. The Department is now attempting to impose an SBT filing requirement - and the associated tax liability - on taxpayers whose activities in Michigan had...