The Michigan business tax: new developments.

• Author: Copping, B.D.

Since being enacted in July 2007, the Michigan Business Tax (MBT) has undergone constant legislative changes and administrative clarifications in the form of revenue administrative bulletins (RABs) and frequently asked questions (FAQs) issued by the Michigan Department of Treasury (see Treasury's website at www. michigan.gov/taxes under the Michigan Business Tax section for the latest RABs and FAQs). Following are summaries and excerpts from some of the more significant changes (for more details of the MBT as it was originally enacted, see Wright, "The Michigan Business Tax: Overview and Issues to Consider," 38 The Tax Adviser 750 (December 2007)). These changes include nexus defined for MBT purposes, unitary taxation under the MBT, small business provisions, the MBT surcharge, and an MBT credits update.

Note: Numerous additional changes are being proposed to the MBT as this item goes to press. A significant change that could affect many businesses is a proposal to modify the definition of gross receipts, which would permit a deduction from the modified gross receipts tax base for, among other things, bad debts and taxes collected on behalf of the state (see proposed S.B. 1038).

Nexus Defined for MBT Purposes

In its RAB 2007-6, issued on December 28, 2007, the department complied with its statutory mandate under Mich. Comp. Laws [section][section]208.1200(1) and (2) to define "actively solicits" for nexus standard purposes. A business taxpayer will have nexus under the MBT

[i]f the taxpayer has a physical presence in this state for a period of more than i day during the tax year or if the taxpayer actively solicits sales in this state and has gross receipts of $350,000.00 or more sourced to this state. In the RAB the department defines "actively solicits" to mean

purposeful solicitation of persons within this state. Solicitation means: (1) speech or conduct that explicitly or implicitly invites an order; and (2) activities that neither explicitly nor implicitly invite an order, but are entirely ancillary to requests for an order. In the RAB the department further explains that

solicitation is purposeful when it is directed at or intended to reach persons within Michigan or the Michigan market. Active solicitation includes, but is not limited to, solicitation through: (1) the use of mail, telephone, and e-mail; (2) advertising, including print, radio, internet, television, and other media; and (3) maintenance of an internet site over or through which sales transactions occur with persons within Michigan. Examples of active solicitation provided by the department include sending mail order catalogs; sending credit applications; maintaining an internet site offering online shopping, services, or subscriptions; and soliciting through media advertising, including internet advertisements. Probably the most controversial position taken by the department relates to its attempt to subject internet retailers to the modified gross receipts portion of the MBT. For this portion of the MBT the department claims that no physical presence in Michigan is required and that, as explained in Example 1 from their RAB, merely having $350,000 in Michigan gross receipts and having a website whereby Michigan residents can place orders is sufficient to create nexus for MBT purposes.

A retailer located outside Michigan maintains an internet site over and through which customers may browse products and place orders. The internet site is generally available to all persons throughout the country. Through maintenance of the interactive site, the retailer intends to reach all persons and markets, including persons within Michigan and the Michigan market. The retailer is actively soliciting sales in Michigan. Another controversial position that the department has now taken in a new draft RAB on nexus is how physical presence...