Michigan Service Use Tax Repealed, Replaced by Michigan Business Tax Surcharge
SALT Tax Alert, December 2007

The historic expansion of the use tax to 82 categories of services that was enacted October 1, 2007, as part of the State’s fiscal year budget negotiations went into effect at midnight on December 1, 2007. However, approximately 17 hours after the service use tax went into effect, Governor Granholm signed House Bill 5408 to immediately repeal the tax. The revenue originally estimated to be generated from the additional use tax has been replaced by a Michigan Business Tax (“MBT”) surcharge effective January 1, 2008, the inaugural date of the MBT. In addition, a number of other changes to the MBT were enacted by House Bill 5408 (Public Act 145 of 2007).

MBT Surcharge

The MBT surcharge is computed as a percentage of a taxpayer’s tax liability after apportionment and before credits. For taxpayers other than financial institutions and insurance companies, tax liability is the combination of the modified gross receipts tax and the business income tax. For such taxpayers, the surcharge rate is 21.99% and is capped for each tax year at $6,000,000.

Financial institutions are subject to a surcharge of 27.7% for tax years ending in 2008 and 23.4% for tax years ending after 2008. The $6,000,000 cap does not apply to financial institutions. Banks authorized to exercise only trust powers (i.e., trust banks) are not subject to the surcharge.

Insurance companies are exempt from the surcharge.

Pending MBT Surcharge Repeal

The MBT surcharge is repealed effective January 1, 2017, provided the “Michigan personal income” growth is greater than 0% in calendar year 2014, 2015, or 2016. “Michigan personal income” is personal income as defined by the United States Department of Commerce, Bureau of Economic Analysis.

Compensation and Investment Credits Amended

The MBT as originally enacted provides taxpayers with a credit equal to 0.37% of compensation paid to Michigan employees and a credit equal to 2.9% of costs incurred for investment in Michigan depreciable or amortizable tangible assets. The combination of these two credits was capped at 65% of a taxpayer’s tax liability.

For tax year 2008 only, the compensation credit percentage and investment credit percentage are reduced to 0.296% and 2.32%, respectively. In addition, the combined credit cap is reduced to 50% for tax year 2008 and 52% for tax year 2009 and after. The credit cap is calculated based on the tax liability computed before the MBT surcharge.

Financial institutions and all insurance companies are now eligible for the compensation credit.

Research and Development Credit Amended

Similar to the compensation and investment credits, the credit for Michigan research and development expenses is reduced for tax year 2008 from 1.9% to 1.52%. For tax year 2009 and after, the credit percentage is restored to 1.9%. The credit cap on the combination of the compensation, investment, and research and development credits is reduced from 75% to 65% for all tax years. The credit cap is calculated based on the tax liability computed before the MBT surcharge.

New Motor Vehicle Dealer Credit Amended

The credit provided for new motor vehicle dealers is reduced from 2% to 0.25% of the amount paid to acquire new motor vehicles and motor vehicle parts. However, the annual credit cap of $10,000 is eliminated.

Bottle Deposit Expense Credit Enacted

A distributor or manufacturer that originates a Michigan bottle deposit is eligible for a nonrefundable credit equal to 30.5% of the expenses incurred during the tax year to comply with the bottle deposit law. For tax years in which the MBT surcharge is not imposed, the credit percentage is reduced from 30.5% to 25%.

Other Credit Amendments

Amendments are also made to the motor sports complex credit and the compensation credit for large Michigan headquartered retailers that sell food and other items.

Personal Investment Activity and Disposition of Personal Assets Not Subject to MBT

“Business income” and “gross receipts” are the starting points for determining the business income tax base and the modified gross receipts tax base, respectively. For an individual, an estate, and a partnership or trust organized exclusively for estate or gift planning purposes, “business income” and “gross receipts” are amended to exclude (1) personal investment activity, including interest, dividends, and gains from a personal investment portfolio or retirement account and (2) income from the disposition of tangible, intangible, or real property held for personal use and enjoyment.

Tax Base Reduction for Theater Owners

The MBT modified gross receipts tax base is gross receipts less purchases from other firms. “Purchases from other firms” is amended for tax year 2009 to include 50% of film rental or royalty payments by a theater owner to a film distributor or film producer. For tax year 2010 and after, 100% of film rental or royalty payments paid to a film distributor or film producer are deductible as purchases from other firms.

Financial Institution Net Capital Tax Amended

The net capital tax base is amended to allow a subtraction for all goodwill; previously only goodwill for transactions occurring after July 1, 2007 was deductible. In addition, the tax base subtraction for United States and Michigan obligations is now based on the average daily book value, rather than the year-end book value.

Tax Rebate Provision Amended

The original enactment of the MBT provided a taxpayer rebate of 50% of tax revenue collections in excess of an amount that approximated state revenue neutrality compared to the Single Business Tax (“SBT”). The other 50% was earmarked for the Michigan countercyclical budget and economic stabilization fund (“rainy day fund”). The rebate was applicable only for the State of Michigan fiscal years 2008, 2009, and 2010.

The rebate trigger has been adjusted from the original enactment of the MBT due to the repeal of the service use tax. The rebate trigger is adjusted annually based on a formula tied to the United States consumer price index, and the rebate applies to all years.

The tax rebate provision is amended to provide a 60% refund to taxpayers of tax collections over the fiscal year trigger, with the 40% balance to be deposited in the rainy day fund. For Michigan fiscal year 2008, the rebate is distributed based on a taxpayer’s net cash payments under the MBT and SBT during the fiscal year to the total of all taxpayer net cash payments during the fiscal year. For Michigan fiscal years 2009 and after, the rebate is distributed based on a taxpayer’s claimed compensation, investment, and research and development credits to the total of all taxpayer claimed compensation, investment, and research and development credits.

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.