The Michigan Department of Revenue has recently defined "actively solicits" as:
 
"Actively solicits" means purposeful solicitation of persons within Michigan.
 
"Solicitation" means speech or conduct that explicitly or implicitly invites an order and activities that neither explicitly or implicitly invite an order, but are entirely ancillary to requests for an order. 
 
"Purposeful" means directed at or intended to reach persons within Michigan or the Michigan market. 
 
Active solicitation may include the use of mail, telephone, e-mail, advertising, and maintaining an internet site through which sales transactions occur with persons in Michigan.  Whether active solicitation has been met is determined on a facts and circumstances basis.  In addition, the same standards are used to determine if a taxpayer is taxable in another state for apportionment purposes.  (RAB 2007-6, Michigan Department of Treasury, 401-347).
 
With this broad definition, essentially all businesses with gross receipts greater than $350,000 attributable to Michigan will be subject to the MBT tax.
 
Taxpayers with an annual combined MBT liability expected to exceed $800 are required to file quarterly estimates.  The first quarter estimate due for calendar year taxpayers is April 15, 2008.  Failure to file quarterly estimates could result in a penalty of up to 25% of the tax due plus interest.
 

Overview of the Michigan MBT Tax

 

A comprehensive tax bill was signed by Michigan Governor Jennifer Granholm in July enacting a new tax on business income and modified gross receipts effective January 1, 2008.  The Michigan business tax (MBT) replaces the Single Business Tax (SBT) that was repealed on December 31, 2007. Except for financial institutions and insurance companies, this new tax law only applies to taxpayers with annual gross receipts of $350,000 or more attributable to Michigan.
 

Nexus Standards

Business income tax. The business income tax is imposed on every taxpayer with business activity in the state unless prohibited by P.L. 86-272. A company will have business activity in Michigan if it has property located in Michigan or if it has employees or independent contractors/representatives performing services in Michigan. Generally, sales solicitation within the state of Michigan is not considered business activity for the purposes of this business income tax if the order is approved outside of Michigan.

Modified gross receipts tax. Taxpayers subject to the modified gross receipts tax have nexus if:
  • the taxpayer has physical presence in Michigan for more than one day; or
  • the taxpayer actively solicits sales in Michigan and has $350,000 or more of gross receipts attributable to state sources.

Tax Rates

Business income tax. The income tax portion of the MBT is imposed at a rate of 4.95%.

Modified gross receipts tax. The modified gross receipts tax portion of the MBT is imposed at a rate of 0.8%.

Income Tax Computation

The business income tax base is federal taxable income subject to the following addition and subtraction adjustments:

  • interest and dividends from other states' obligations are added back;
  • taxes measured by net income are added back;
  • net operating loss carrybacks or carryovers are added back;
  • dividends and royalties received from persons other than U.S. persons and foreign operating entities may be deducted;
  • losses attributable to another entity subject to the business income tax must be added back or may be subtracted;
  • interest income from U.S. obligations may be subtracted;
  • net earnings from self-employment or a partner or a limited liability company member may be subtracted, except to the extent that those net earnings represent a reasonable return on capital; and
  • royalty, interest, or other expenses paid to a related person for use of an intangible asset if the person is not included in the taxpayer's unitary business group are added back.

The royalty and interest addback is not required if the taxpayer can show that the transaction has a nontax business purpose (other than tax avoidance), is conducted at arm's-length, and (1) is a pass through of another transaction between a third party and the related person with comparable rates and terms; (2) results in double taxation; or (3) is unreasonable as determined by the Department of Treasury.

After apportionment, the business income tax base may be adjusted by deducting any business loss incurred after December 31, 2007.

Gross Receipts Computation

The modified gross receipts tax is based on gross receipts less purchases from other firms. Purchases from other firms include inventory, assets, materials, and supplies. Gross receipts includes the entire amount received by the taxpayer from any activity in intrastate, interstate, or foreign commerce for the gain, benefit, or advantage to the taxpayer.

There are numerous exceptions to gross receipts, including:
  • proceeds from the taxpayer's transfer of an account receivable if the sale that generated the account receivable was included in gross receipts for federal income tax purposes;
  • proceeds from the original issue of stock or debt instruments;
  • refunds from returned merchandise;
  • trade discounts;
  • federal, state, or local tax refunds;
  • payment of the principal portion of loans; and
  • the value of property received in a like-kind exchange.

Apportionment

All tax bases are apportioned using a 100% sales factor. The following are deemed to be Michigan sales:

  • sales of tangible personal property if the property is shipped to a purchaser in the state;
  • receipts from the sale or lease of real property if the property is located in Michigan;
  • receipts from the lease or rental of tangible personal property to the extent that the property is used in Michigan;
  • receipts from the performance of services if the recipient of the services receives all of the benefit in Michigan;
  • receipts from the origination of a loan secured by residential real property if the real property is in Michigan, or more than 50% of the fair market value of the property is in Michigan, or the borrower is located in Michigan;
  • interest from a loan not secured by real property if the borrower is located in Michigan;
  • receipts from credit card receivables if the billing address of the card holder is in Michigan; and
  • loan servicing fees derived from loans of another person that are secured by real property if the real property is in Michigan, or more than 50% of the fair market value of the property is in Michigan, or the borrower is located in Michigan.

All other receipts are sourced depending on where the benefit to the customer is received or, if this cannot be determined, to the customer's location.

Combined Returns

Unitary business groups are required to file combined tax returns. All transactions between taxpayers in a unitary business group must be eliminated from the business income tax base, the modified gross receipts tax base, and the apportionment formula. A unitary business group is a group of U.S. persons, other than a foreign operating entity, one of which owns or controls more than 50% of the ownership interest of the other U.S. persons and has business activities which result in a flow of value between the persons in the group. The business activities may also be integrated with, dependent upon, or contribute to the other persons in the group.

Credits

In general, the credits do not apply to insurance companies or to financial institutions. Also, any unused carryforward from single business tax credits may be used for the 2008 and 2009 tax years.

Compensation. Taxpayers may claim a credit equal to 0.37% of the taxpayer's compensation in Michigan. Insurance companies are eligible for this credit. The credit is capped at 65% of the total tax liability.

Investment. Taxpayers may claim a credit equal to 2.9% multiplied by the result of the total cost of their depreciable tangible assets minus the proceeds from any sales of the assets. The credit is capped at 65% of the total tax liability.

Research and development. Taxpayers may claim a credit equal to 1.9% of their research and development expenses in Michigan. The credit combined with the credit for compensation and investment is capped at 75% of the total tax liability. In addition, taxpayers may claim a credit equal to 30% of a minimum contribution of $350,000 to an eligible business. An eligible business is engaged in research and development with fewer than 50 full-time employees or has gross receipts of less than $10 million. The credit is capped at $300,000.

Small businesses. Taxpayers with apportioned gross receipts between $350,000 and $700,000 may claim a credit equal to the tax liability multiplied by a fraction. The numerator of the fraction is the difference between the taxpayer's apportioned gross receipts and $700,000 and the fraction's denominator is $350,000. In addition, taxpayers with gross receipts that do not exceed $20 million and with adjusted business income that does not exceed $1.3 million may claim a credit equal to the amount by which the tax exceeds 1.8% of adjusted business income.

Entrepreneurial credit. Taxpayers meeting certain criteria may claim a credit equal to 100% of the taxpayer's tax liability attributable to increased employment in the state.

Personal property tax. Taxpayers may claim a credit for varying percentages of personal property taxes paid.

Arts. Taxpayers that make charitable contributions of $50,000 or more may claim a credit equal to 50% of the amount that the donation exceeds $50,000. The contribution must be made to an art, historical, or zoological institute or an institution devoted to the care, study, and display of objects of lasting interest or value. The credit is capped at $100,000.

SBT credits. The MBT retains the following credits from the SBT:
  • start-up businesses;
  • venture capital investment;
  • charitable contributions;
  • worker's compensation;
  • community foundations;
  • homeless shelters;
  • alternate energy;
  • Michigan Economic Growth Authority;
  • Renaissance Zones;
  • historic preservation;
  • brownfield development; and
  • low-grade hematite.

Other credits. The owner of a motorsports entertainment complex may claim a credit equal to the amount of capital expenditures on infield renovation, grandstand and infrastructure upgrades, subject to certain limitations. The owner of a stadium or facility with a capacity of at least 14,000 patrons may claim a credit equal to 65% of the total tax liability for the 2008, 2009, and 2010 tax years. This credit is capped at $1.7 million. New motor vehicle dealers may claim a credit equal to 2% of the amount paid for inventory, capped at $10,000. Grocery stores headquartered in Michigan may claim a credit of either 0.535% or 0.125% of compensation in Michigan, depending on meeting other criteria.

Other Tax Changes

Insurance companies. Insurance companies are subject to a tax at the rate of 1.25% on gross direct premiums. Direct premiums do not include premiums on policies not taken, returned premiums on canceled policies, and receipts from the sale of annuities.

Financial institutions. Financial institutions are subject to a franchise tax at a 0.235% rate. This is in lieu of the business income tax and the modified gross receipts tax. The tax base is the financial institution's net capital, which is equity capital as computed in accordance with generally accepted accounting principles.
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