The New Michigan Business Tax on Financial Institutions
Community Bank Tax Alert, August 2007

After months of debate in Lansing and waiting by taxpayers, on June 28, 2007, the state Legislature passed a replacement for the Single Business Tax (SBT) known as the Michigan Business Tax (MBT).Along with the passage of the MBT, the state Legislature passed four bills providing personal property tax relief.The bills were signed by Governor Granholm on July 12, 2007.

Under the new MBT, financial institutions are subject to a net capital tax instead of the modified gross receipts tax and the business income tax imposed on other businesses. The net capital tax is imposed at a rate of 0.235 percent.

The definition of “financial institution” includes a bank holding company, national bank, state-chartered bank,thrift-charted bank or institution, and certain savings and loan holding companies. Entities owned by one of the named institutions are also taxed as a financial institution, provided the entities are part of a financial institution unitary business group.

A unitary business group requires one member (e.g., bank holding company) to directly or indirectly own more than 50 percent of the ownership interest with voting rights of the other members, and the members must have business activities or operations that result in a flow of value among the members or that are integrated with,dependent upon, or contribute to each other. However, insurance company subsidiaries are specifically excluded from a financial institution unitary business group.

“Net capital” is defined as equity capital computed in accordance with generally accepted accounting principles less goodwill arising from transactions that occur after July 1, 2007 and less the book value of U.S. and Michigan obligations.In addition, net capital excludes 125 percent of the minimum regulatory capitalization requirement of insurance company subsidiaries. The tax base is computed by averaging net capital for a rolling five-year period.

Financial institutions subject to tax both within and outside Michigan are allowed to apportion their net capital based on a gross business factor where the numerator represents gross business in Michigan and the denominator represents gross business everywhere. The SBT revenue sourcing rules under Revenue Administrative Bulletin2002-14 have been substantially incorporated into the MBT Act.

The MBT is imposed on business activity beginning January 1, 2008. Taxpayers with fiscal years beginning in2007 and ending in 2008 will be required to file an SBT return and a MBT return for the fiscal year, subject to rules to eliminate or minimize the same activity being subject to both taxes.

Estimated tax payments are due on the fifteenth day of the month following the end of the quarter. For example,a calendar year taxpayer will have estimated tax payments due on April 15, July 15, October 15, and January 15.

While banks in Michigan are not subject to personal property tax, personal property owned by related entities such as mortgage and brokerage companies is subject to tax. These companies will realize some personal property tax relief. For taxes levied after December 31, 2007, commercial personal property will be exempted from 12 of the 18 school operating mills.

Please call your Plante & Moran advisor for more information on the new Michigan Business Tax and business personal property tax relief.

The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC is not rendering legal, tax, accounting, or other professional advice or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.