Michigan Business Tax Enacted!
SALT Tax Alert, July 2007

Eleven months after the Michigan Legislature approved the voters’ initiative to repeal the Single Business Tax (SBT), its replacement, the Michigan Business Tax (MBT), was signed into law on July 12, 2007 by Governor Granholm.¹ For taxpayers other than financial institutions and insurance companies, the MBT imposes two taxes — a modified gross receipts tax and a business income tax. Financial institutions and insurance companies are subject to industry-specific taxes, as discussed below. In addition, significant personal property tax relief is granted for Michigan commercial and industrial personal property.

Modified Gross Receipts Tax
The modified gross receipts tax (GRT) is imposed at 0.8% on a tax base composed of gross receipts less purchases from other firms. As under the SBT, “gross receipts” is defined as all receipts except those specifically excluded. The SBT gross receipts exclusions are carried over to the MBT, plus other exclusions have been added for specific industries or taxpayers, including mortgage companies and professional employer organizations.

The subtraction for “purchases from other firms” includes acquired inventory, depreciable and amortizable assets, and other materials and supplies, such as repair parts and fuel. As with the definition of gross receipts, industry-specific provisions are provided, including provisions for staffing companies and construction subcontractor costs.

For tax year 2008, a taxpayer may deduct 65% of unused SBT business losses that were incurred in tax years 2006 and 2007. Unused SBT business losses incurred before 2006 are not carried forward to the MBT.

Business Income Tax
The business income tax (BIT) is imposed at 4.95%. The tax base begins with federal taxable income related to business activity and is subject to specific adjustments. Additions to the tax base include, but are not limited to, municipal interest income from obligations of states other than Michigan, all income taxes deducted from federal taxable income, federal net operating loss carrybacks and carryforwards, and certain related-party expenses. Subtractions from the tax base include, but are not limited to, interest income from U.S. obligations, net earnings from self-employment, and MBT loss carryforward.

Nexus Standard
The MBT is imposed on taxpayers who meet either one of two nexus tests. The first test requires that the taxpayer have physical presence in Michigan for at least two days during the tax year. Physical presence can be established by a taxpayer’s employees, agents, or independent contractors. Under the second test, nexus is established if the taxpayer “actively solicits” sales in Michigan and has at least $350,000 of Michigan gross receipts. The second test is essentially an economic or market presence standard. Authority to define the term “actively solicits” is statutorily granted to the Michigan Department of Treasury, for which the term will be applied prospectively. For sellers of tangible personal property, nexus for the BIT is still subject to U.S. Public Law 86-272.

Taxpayer and Unitary Business Group Defined
“Taxpayer” is broadly defined as essentially all forms of legal business entities, individuals, estates, and trusts engaged in “business activity.” In addition, “taxpayer” includes multiple entities that are a “unitary business group.” For multiple entities to be considered a unitary business group (i.e., one taxpayer), one of the members must directly or indirectly own or control more than 50% of the other members, and there must be a flow of value or integrated business activities or operations between or among the members. Intercompany transactions are eliminated in determining the MBT bases.

Apportionment of the Tax Base
Both the GRT and BIT bases are apportioned to Michigan based on a single factor formula of Michigan sales to total sales. A taxpayer must establish the right to apportion by being subject to tax in another state, as defined within the act.

Sales are generally sourced to the market state. For example, sales of tangible personal property are sourced to the ultimate destination point of the goods sold. Sales from the performance of services are sourced to the location where the customer receives the benefit of the services. There are a number of provisions for specific industries or revenue sources.

For unitary business groups, all Michigan sales of the group are sourced to Michigan without regard to whether a particular group member has Michigan nexus. As with the tax base, intercompany transactions are eliminated in determining the apportionment sales factor for a unitary business group.

Small Business Exemption and Tax Phase-In
Taxpayers, other than financial institutions and insurance companies, with less than $350,000 of Michigan apportioned gross receipts, are exempt from the MBT. Taxpayers with at least $350,000 but less than $700,000 of Michigan apportioned gross receipts may claim a credit against the GRT and BIT that essentially phases in the tax based on the ratio of apportioned receipts in excess of $350,000 to $350,000.

Carryover of SBT Credits
Generally, unused carryforward credits established under the SBT may be applied against the MBT for tax years 2008 and 2009, including unused investment tax credits. SBT credits for historic preservation and Brownfield redevelopment are carried forward for the same period they would have been carried forward under the SBT. In addition, upon certification, Michigan Economic Growth Authority (MEGA) payroll credits may be claimed for the same period they could have been claimed under the SBT.

Tax Credits Retained
Many of the tax credit incentives provided under the SBT have been retained within the MBT. Generally, the qualification requirements and credit benefits remain the same. Credits retained within the MBT include:

• Brownfield credit
• Community foundation contribution credit
• Early stage venture credit
• Food bank and homeless shelter contribution credit
• Hematite ore credit
• Historic preservation credit
• Investment credit
• MEGA payroll credit
• Next energy authority credit
• Personal property tax credit
• Public contribution credit
• Renaissance zone credit
• Small business/alternate tax credit
• Startup business credit
• Workers disability compensation credit

Changes to the investment tax credit, personal property tax, and small business/alternate tax credit are noted below.

Compensation Credit and Investment Credit
The MBT creates a new credit equal to 0.37% of compensation, including benefits, paid to Michigan workers. Self-employment net earnings of proprietorships and partnerships are also eligible for the compensation credit.

The investment credit is similar to the investment credit under the SBT. Costs paid or incurred related to depreciable or amortizable tangible personal property placed in service in Michigan are eligible for a credit equal to 2.9% of such costs. Credit recapture provisions are imposed for Michigan property disposed of or transferred outside of the state.

The combined compensation credit and investment credit are capped at 65% of a taxpayer’s tax liability.

Research and Development Credit
A research and development credit is available equal to 1.9% of Michigan research and development costs. The research and development credit is applied after the compensation credit and investment credit, and the total of all three credits is capped at 75% of a taxpayer’s tax liability. Costs and expenses used to claim the compensation credit and investment credit cannot be used in claiming a research and development credit. Since compensation paid to engineers, scientists, and other staff represents the majority of research and development costs for many eligible businesses, the true value of the research and development credit may be limited.

Alternate Tax Credit
Eligible taxpayers are allowed a credit that results in a total MBT liability of 1.8% of adjusted business income. To qualify, a taxpayer must have less than $20 million of gross receipts, less than $1.3 million of adjusted business income, and no owner that has more than $180,000 of a distributive share of adjusted business income. The owner distributive share limitation also applies, with modification, to officers of C Corporations. Similar to the SBT small business credit, there are provisions that phase out the credit. If a taxpayer exceeds any one of the three eligibility caps, the credit value is reduced to zero.

Personal Property Tax Credit
The refundable SBT credit for Michigan personal property tax paid on industrial personal property is retained within the MBT, and the credit percentage is increased to 35% of tax paid on personal property assessed after 2007. Lesser personal property tax credits also apply for telephone companies and natural gas personal property.

Other New Credits
In addition to the credits discussed above, the MBT contains new credits as follows:

• Entrepreneurial credit
• Motor sports complex and sports facility credits
• Motor vehicle dealer credit
• Municipal and culture contribution credit
• Retailer (large) compensation credits
• Research and development contribution credit

Business Taxation of Financial Institutions
Financial institutions are exempt from the GRT and BIT. Instead, financial institutions are subject to a tax on net capital at a rate of 0.235%. The tax base is equity determined in accordance with generally accepted accounting principles less goodwill related to transactions occurring after July 1, 2007. A subtraction from the tax base is also provided for regulatory capital of an insurance company subsidiary subject to the insurance premiums tax discussed below. The net capital tax is determined on a unitary group basis and is subject to a single sales factor apportionment. Credits available to financial institutions are limited to the Brownfield credit, historic preservation credit, and MEGA payroll credit.

Business Taxation of Insurance Companies
Insurance companies, like financial institutions, are exempt from the GRT and BIT. Insurance companies are subject to a 1.25% tax on gross direct premiums written on property or risk located or residing in Michigan. The SBT credits specific to insurance companies are generally applicable under the MBT.

Insurance companies are precluded from the credits applicable to other taxpayers, except for the MEGA payroll credit, the brownfield credit, and for life and health insurance companies, the compensation credit.

Direct Personal Property Tax Reduction²
Personal property tax on industrial personal property is reduced by 24 mills (6 mill state education tax and 18 mill local school tax) for taxes levied after 2007. The 24-mill reduction combined with the industrial personal property tax credit discussed above results in an average annual industrial personal property tax reduction of 65%, assuming approximately 52 mills before the reduction.

Personal property tax on commercial personal property is reduced by 12 mills (related to local school tax) for taxes levied after 2007. The average annual savings on commercial personal property is approximately 23%.

Taxpayers in a jurisdiction that imposes more than 52 mills will see a lesser percentage savings. Conversely, taxpayers in a jurisdiction that levies less than 52 mills will see a greater percentage of savings.

¹ Public Act 36 of 2007, formerly Senate Bill 94.
² Public Acts 37 through 40 of 2007, formerly House Bills 4369 through 4372, respectively.


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.