Michigan business tax: the goal was simplification, but the result - not exactly.

• Author: Billings-Middleton, Brenda L.

The development of a replacement tax for the State of Michigan's Single Business Tax (SBT) involved many different organizations drafting proposed replacement tax plans and providing guidance to the Michigan legislature regarding the need for tax simplification, a low tax rate, and a broad base for the tax. The common theme in many of these meetings was to provide a replacement tax structure that would be deemed competitive when compared to other states; thus lending itself to new business growth.

The Michigan Legislature also had several objectives in developing the new replacement tax, including complete revenue replacement of funds lost owing to the repeal of the SBT, tax simplification, and the adoption of a tax structure that would be comparable to other states.

Depending on a company's specific tax situation, what came out of this process may or may not be considered to be an improvement over the much reviled SBT. One common theme voiced by various commentators is the new tax does not appear to be any "simpler" than the prior tax structure; indeed some believe it to actually be worse.

Overview

The Michigan Business Tax (MBT) became effective January 1, 2008, with the SBT being repealed effective December 31, 2007. (1) The MBT contains four separate taxes as well as a surcharge tax. There are three different types of taxpayers included within the scope of the new statute: the "standard taxpayer," financial institutions, and insurance companies.

The four separate taxes are: (1) a 4.95 percent business income tax; (2) a 0.8 percent modified gross receipt tax; (3) a 0.235 percent franchise tax on financial institutions; and (4) a 1.25 percent premiums tax on insurance companies. (2) The surtax is 21.99 percent of the combined gross receipts tax and business income tax before credits. (3)

Nexus

The MBT outlines two alternative nexus standards in the statute. The first is a physical presence requirement of more than one day with one day being interpreted by the Michigan Department of Treasury to encompass any portion of a single day. The second requirement is the taxpayer "actively solicit" business in the state and has Michigan Gross Receipt of $350,000 or more. (4) The statute provides that "actively solicits" will be defined by the Department through written guidance that will be applied prospectively. (5)

Physical presence means "any activity conducted by the taxpayer or on behalf of the taxpayer by the taxpayer's employee, agent, or independent contractor acting in a representative capacity. Physical presence will not include activities of a professional providing service in a professional capacity or other service providers if the activity is not significantly associated with the taxpayer's ability to establish and maintain a market in this state." (6)

The Michigan Department of Treasury has issued more than 130 pages of frequently asked questions (FAQs) clarifying technical issues and (1) revenue administrative bulletin (RAB) addressing the nexus standard for the MBT. The documents reflect a departmental interpretation of the statute but...