On June 28, 2007 the Legislature passed the new Michigan Business Tax (MBT) that dramatically changes the way businesses are taxed in Michigan.

The five-bill package, signed by Governor Jennifer Granholm on July 5, 2007, replaces the previously repealed Single Business Tax with a unique double levy of a net income tax and a modified gross receipts tax, while providing some personal property tax relief and enhancing the number of available tax credits. While the bills are highly detailed, some issues were left undefined and may cause implications for many taxpayers.

Although the bills are revenue neutral after application of the credits (total collections estimated at $3.4B and value of credits estimated at $1.8B), the distribution of tax liability is significantly changed.

Manufacturing enterprises will experience net tax reductions, while non-manufacturing enterprises will experience net tax increases, with limited credits applicable to their activities. In addition, a delineated goal of the new tax was to transfer the tax burden to non-Michigan multistate businesses, which will also experience a net overall increase in their Michigan liability.

Highlights
• The new MBT is levied on all forms of business enterprises with business activity in Michigan.

• A broader nexus standard than that imposed under the SBT.
• Mandatory unitary group reporting at a greater than 50% ownership interest level.
• Use of 100% sales factor for apportionment for both the net income and gross receipts levy.
• An in lieu of franchise tax for insurance companies (at 1.25%) and financial institutions (at .235%). Net capital is averaged over a five-year period.
• Market based sourcing for intangibles and services – no more cost of performance. Sales of tangible personal property continue to use destination sourcing.
• Unused SBT carryforwards are limited to 65% of existing balances for 2006 and 2007 years, and may only be applied against MBT liability for 2008 and 2009.
• No filing or payment requirements for businesses with receipts less than $350,000. Phase-in liability (via a credit) for receipts between $350,000 and $700,000.
• Refund trigger for net cash collections that exceed certain specified levels of prior SBT collections, adjusted for inflation.

Net Income Tax
• Base begins with federal taxable income.
• Rate of 4.8%.
• P.L. 86-272 protections, however, "substantial nexus" is defined as a period of more than one day.
• Intercompany transactions between members of the same unitary group are eliminated.
• Expenses paid to affiliates are added back to the net income base unless the taxpayer can demonstrate that the payments have a non-tax purpose, are at arm's length pricing, and are either a pass-through of another transaction with an unrelated third party or result in double taxation.

Gross Receipts Tax
• Rate of .8% on a modified gross receipts base.
• Gross receipts less purchases of inventory and assets subject to depreciation or amortization. Some additional deductions allowed for specific activities, such as construction contractors.
• Intercompany transactions between members of the same unitary group are eliminated.
• Tax is levied on businesses with active solicitation and receipts from sales sourced to Michigan greater than $350,000. The term "active solicitation" will be defined by Treasury in future guidance.

Personal Property Tax Relief
Tie-barred to S.B. 94 are H.B. 4369, H.B. 4370, H.B. 4371 and H.B. 4372, which together provide property tax relief for commercial and industrial personal property.
• Industrial personal property is exempted from the 18-mill local school property tax and the 6-mill State education tax.
• Commercial personal property is exempted from 12 mills of the local school property tax and the 6-mill State education tax.
• Property taxed under the industrial facilities tax would also be exempt from the 18-mill local school property tax and the 6-mill State education tax.

New Tax Credits
• Compensation Credit – equal to .37% of compensation paid in Michigan.
• Investment Credit – equal to 2.9% of the cost of net new capital assets located in Michigan.
• Research and Development Credit – equal to 1.9% of the amount spent on R&D in Michigan, as well as 30% of contributions made to small businesses to assist in their R&D activities. The 30% contribution credit is limited to $300,000, and must be approved by the Michigan Economic Growth Authority.
• Michigan Entrepreneurial Credit (for 2008 – 2010) – credit equal to the personal income tax paid on increased employment (current personal income tax rate in Michigan is 3.9%, but an increase has been proposed to fix the 2008-2009 budget gap). To qualify, taxpayer must have had gross receipts of less than $25M in the prior year, created at least 20 new jobs during the preceding tax year and invested at least $1.25M in capital investments in the State in the preceding year. Retail facilities will generally not qualify.
• Motor Sports Entertainment Complex Credit – for a complex that seats at least 70,000 and has at least six days of motor sports events annually.
• Sports/Entertainment Facility Credit – for owners of a facility or stadium that seats at least 14,000, and is used primarily for sporting or other entertainment events that has not received any State or local government financial assistance.
• Special Compensation Credits for Large Retail Establishments – that have headquarters in Michigan and meet certain requirements regarding retail and warehouse space.
• Culture Credit – equal to 50% of business contributions in excess of $50,000, to a municipal or nonprofit art, historical or zoological institute. Capped at $100,000.
• Existing credit programs are retained.

Issues to Watch
• Language was omitted at the Conference Committee that would have provided a credit for deferred tax liabilities required to be reported under FAS 109. The lack of any such provision may have significant reporting consequences if a correcting amendment cannot be passed prior to September 30, 2007.
• Finnigan unitary rules (includes sales of members in the unitary group regardless of the member's nexus with the state).
• Instant unitary.
• Unitary combination is required under a very broad standard that determines "flow of value between or among persons included in the unitary business group" by reviewing the totality of the facts and circumstances of the business activities and operations of the members.
• It is not clear which methodology is used to calculate the intended "combined" liability. Current thought is that the methodology will be consolidated filing, not true combined.
• No distinction is made for non-business income or casual sales, increasing the likelihood of double taxation for revenue that is required to be allocated to a particular jurisdiction under another states' law.
• Significant potential for pyramiding of the MBT is likely due to the lack of any exclusion from the definition of "gross receipts" for tax collected, amounts "deemed received" under the IRS, as well as for rebilled expenses for businesses other than construction contractors.
• Use of SRLY rules to limit utilization of limited loss carryforwards and credits.
• Inclusion of receipts from Treasury functions which would be eliminated if housed in a separate entity that is part of the unitary group. Inclusion at gross rather than net.
• Lack of penalty relief for estimated payment requirements during transition period.

We will continue to monitor efforts regarding the implementation of the tax, preparation of necessary forms and taxpayer information, as well as efforts to prepare technical amendments which are expected to be passed prior to year end.

If you have any questions regarding this alert, please contact any of our SALT tax experts: Samuel J. McKim, III at 313.496.7546; Joanne B. Faycurry at 313.496.7678, or Jackie J. Cook at 313.496.8468.