Michigan business tax: overview and issues to consider.

• Author: Wright, Charles T.

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Companies doing business in Michigan have become accustomed to the infamous single business tax (SBT), which has a federal taxable income starting point and addbacks for compensation and depreciation expense. For a state dependent on the cyclical auto industry, this value-added tax provided a smooth revenue stream to the Department of Treasury. These same addbacks, however, generally resulted in a tax liability for businesses that would otherwise be in a loss position. In August 2006, the SBT was repealed, effective December 31, 2007. In its place, the Michigan business tax (MBT) was created, which applies to all business activity after December 31, 2007. This column briefly describes the primary components of the new MBT and highlights three important issues for taxpayers to consider.

Overview

* The MBT is effective January 1, 2008 (unless otherwise indicated).

* The MBT has two tax bases, and taxpayers are subject to both: a business income tax (BIT) imposed at a rate of 4.95% and a modified gross receipts tax (GRT) imposed at a rate of 0.80% (collectively referred to here as the "BIT/GRT calculation").

* The state claims jurisdiction to impose the MBT (and thus both the BIT and GRT) on a low nexus standard, with taxability triggered by either (1) physical presence in Michigan for more than one day annually or (2) active solicitation in Michigan and $350,000 or more of Michigan-sourced gross receipts. Despite the low nexus standard, the BIT is not levied on taxpayers with Michigan activities that do not exceed the EL. 86-272 safe harbors.

* Both the BIT and GILT are computed on a unitary combination basis.

* Apportionment of both BIT and GRT bases is on a 100% weighted sales factor.

* Substantial credits are provided for Michigan compensation, capital investment, and research and development (R&D).

* Financial institutions are subject to a 0.235% franchise tax on net capital. The nexus standard for the financial institutions franchise tax is the same as for the MBT.

* Insurance companies are taxed at 1.25% on gross direct premiums.

* Michigan personal property taxes levied after December 31, 2007, are considerably reduced: 24 mills on industrial personal property (roughly a 50% reduction) and 12 mills on commercial personal property. (1)

GRT Rate and Base

The new GILT is imposed at a rate of 0.80% on a taxpayer's apportioned modified gross receipts tax base. The MBT definition of gross receipts closely follows the definition of gross receipts under the SBT. (2) As was the case with the SBT, a long list of exclusions applies for revenues that are not considered gross receipts. However, a deduction is allowed for purchases from other firms. Deductible purchases include inventory, depreciable...