The Michigan Business Tax: Conquering the Most Complex Challenges Anticipating and Resolving High-Level MBT Compliance Issues

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1 presents The Michigan Business Tax: Conquering the Most Complex Challenges Anticipating and Resolving High-Level MBT Compliance Issues A Live 125-Minute Teleconference/Webinar with Interactive Q&A Today's panel features: Sam Hodges, Managing Member, Sam Hodges & Associates, Southfield, Mich. Michael Bozimowski, Principal and Director of State and Local Tax Services, Rehmann Group, Farmington Hills, Mich. Lisa Pohl, Senior State and Local Tax Attorney, Miller Canfield, Grand Rapids, Mich. Edward Kisscorni, CPA, MBA, Grand Rapids, Mich. Tuesday, May 18, 2010 The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions ed to registrations. 1

2 For Continuing Education purposes, please let us know how many people are listening at your location by closing the notification box and typing in the chat box your company name and the number of attendees. Then click the blue icon beside the box to send. 2

3 If the sound quality is not satisfactory and you are listening via your computer speakers, please dial and enter your PIN when prompted. Otherwise,,please send us a chat or e- mail sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. For live event only. 3

4 The Michigan Business Tax: Conquering the Most Complex Challenges Webinar May 18, 2010 Lisa Pohl, Miller Canfield Michael Bozimowski, Rehmann Edward Kisscorni, CPA, MBA Sam Hodges, Sam Hodges & Assoc. g

5 Today s Program Modified Gross Receipts Tax Base (Lisa Pohl) Slides 6-23 Unitary Group Standard Slides (Michael Bozimowski) Nexus Issues Slides (Sam Hodges) Apportionment Basics Slides (Sam Hodges) Apportionment Sourcing Rules Slides (Edward Kisscorni) 5

6 Modified Gross Receipts Tax Base Lisa Pohl, Miller Canfield

7 Modified Gross Receipts Tax Computation Gross receipts Purchases from other firms = Modified gross receipts tax base X Michigan apportionment % X 0.8% = Modified gross receipts tax, plus surcharge 7

8 Modified Gross Receipts Gross receipts The ENTIRE amount received by the taxpayer from ANY activity, whether in intrastate, interstate or foreign commerce carried on for gain to the taxpayer or others All amounts received unless specifically excluded Not necessarily federal gross receipts 8

9 Modified Gross Receipts Exclusions A sample of exclusions Agency Amounts received in an agency capacity Amounts received as agent for another and expended on behalf of the agent Case law Stratton Chesseman Management Company v Dep t of Treasury, 159 Mich App 719; 407 NW2d 398 (1987) PM One Limited v Dep t of Treasury, 611 NW2d Mich App 255 (2000) 9

10 Modified Gross Receipts Exclusions (Cont.) Return of basis on property that is a capital asset under 1221(a) and land used in trade or business that qualifies under 1231(b) property Return on basis of hedging transactions that qualify under 1221 Interest, dividends and gains from personal investment activity of individuals, estates, and (if organized for estate or gift planning purposes) trusts and partnerships. 10

11 Modified Gross Receipts: The Proposed Rule And Other Issues Gross receipts modified by the deduction for purchases from other firms Statutorily defined phrase, MCL (6) that does not literally mean a purchase from another firm Does not mean the federal cost of goods sold calculation on Schedule A Does not mean purchases from Schedule A No comparable definition in other states 11

12 Purchases From Other Firms Inventoryacquired during thetaxyeartax including freight, shipping, delivery or engineering charges included in theoriginal contract price for that inventory Assets subject to depreciation, amortization or accelerated cost recovery Material and supplies including repair parts and fuel 12

13 Purchases From Other Firms (Cont.) Staffing companies compensation of personnel General contractors cost of subcontractors All film rental or royalty payments No deduction for labor costs 13

14 Purchases From Other Firms Inventory Inventory Stock of goods for resale Finished goods, goods in process, rawmaterials Motor vehicle floor plan interest Does NOT include Personal property held for lease Depreciable or depletion property 14

15 Purchases From Other Firms Capital Asset Assets, including the costs of fabrication and installation, i acquired dduring the tax year of a type that are, or under the Internal Revenue code will become, eligible for depreciation, amortization or accelerated capital cost recovery for federal income tax purposes 15

16 Purchases From Other Firms Capital Asset (Cont.) Are all assets that are subject to depreciation, amortization and accelerated cost recovery deductible, regardless of whether they are intangible? If a taxpayer elects to expense the asset, is the asset still eligible for deduction? Does the inclusion of the costs of fabrication and installation support the inclusion of all capitalized labor and services on self constructed assets or rebuilt assets? 16

17 Purchases From Other Firms Materials And Supplies MCL (6) (c) To the extent not included din inventory or depreciable property, materials and supplies, including repair parts and fuel 17

18 Material And Supplies Draft Rule To the extent not included in inventory or depreciable property, materials and supplies, including repair parts and fuel Tangiblepersonalproperty property, includingrepairparts parts and fuel, which meet all of the following: Are NOT inventory or depreciable property, AND Are acquired by the taxpayer during the tax year 18

19 Material And Supplies Draft Rule Tangible personal property, including repair parts and fuel, which meet all of the following: 1. Is NOT inventory or depreciable property, AND 2. Is acquired by the taxpayer during the tax year, AND 3. Is 1. Used or consumed in and directly connected to the production or management of the taxpayer s inventory 2. Used or consumed in and directly connected to the operation or maintenance of the taxpayer s depreciable property, or 3. Necessary in order for taxpayer s depreciable property to perform its intended function or purpose 19

20 Material And Supplies Draft Rule Requirement Of Ownership Taxpayer must have either title to or other indicia of ownership over the inventory or depreciable propertyforwhich thematerial and supplies acquired during the tax year are to be used or consumed; or, in the case of depreciable property, is able to depreciate or amortize such property on the taxpayer s books for federal income tax purposes. 20

21 Material And Supplies Draft Rule Definitions (b) Directly connected to means that the application or nexus between the use or consumption of the tangible property and the affected inventory or depreciable property is direct and not subject to any intermediary or indirect application to inventory or depreciable property. (c) Fuel means materials used and consumed to produce heat or power by burning. Fuel does not include electricity. 21

22 MBT Considerations In Purchase/Sale Of Assets Timing of large purchases and sales of assets to which a purchases from other firms deduction applies should be considered Immediatededuction deduction ofpurchases Reduces gross receipts immediately (can be good), but purchaser will have no MGRT basis in the assets after acquisition Impact on ITC credit Implications of the theory in the Kmart decision on MBT in a business purchase/sale situation ti 22

23 MBT Considerations In Purchase/Sale Of Assets (Cont.) Purchases Significant purchases result in large GR deduction. Negative MGRT base does not carry forward and creates Sales MGRT DTL (and no benefit offset provision similar to the ITC recapture). If is no MGRT basis (sell in different tax year than buy), you could have significant gross receipts If is sale of business assets and you close down business, company officers could get surprised later. Installment sales Use apportionment factor in year recognize income/receipts Different considerations for sales of Michigan vs. non Michigan property Alternative apportionment request likely uphill battle 23

24 Unitary Group Standard Michael Bozimowski, Rehmann

25 Process Starts With A Unitary Group Unitary business group defined RAB The first step is to identify what entities comprise the unitary business group. Unitary business group is statutorily defined by state. In Michigan, Sect. 117(6) of the MBTA is very broad and very inclusive. Ownership of greater than 50% Relationship tests RAB Flow of value and contribution tests Credits NOLs Tax-sharing agreements Michigan unitary nexus Finnigan 25

26 Who Is Included d In The Unitary Worldwide unitary groups California practice Water s edge elections Group? Michigan practice A foreign operating entity cannot be included in a unitary business group. [MCL (6)] Taxpayer means a person or a unitary business group. [MCL (5)] A U.S. person means that term as defined in Sect. 7701(a)(30) of the Internal Revenue Code. [MCL (7)] 26

27 Unitary Hurdles States adopting unitary taxation define a unitary business group by the satisfaction of both a control test, and in some states only one of two relationship tests. Ownership alone is not enough. 27

28 Control Test For Unity The control test is satisfied when one person owns or controls, directly or indirectly, more than 50% of the ownership interest with voting or comparable rights of the other person or persons. Generally, states apply indirect ownership as well as direct ownership in determining the control test. Some states go so far as to use IRC Sect. 318, but not Michigan. Attribution applies to all forms of ownership interests and persons. 28

29 Relationship Tests For Unity AND the group of persons must have business activities or operations that: (1) result in a flow of value between or among persons in the group, and/or (2) are aeintegrated with, are aedependent upon or contribute to each other 29

30 Control Through h Attribution ti RAB Michigan s Department of Treasury will use the term indirectly to mean constructive ownership. As guidance attribution ti rules expressed in IRC Sect. 318 or analogous authority to determine indirect or constructive ownership and control. While IRC Sect. 318 specifically pertains to corporate stock ownership, the Department of Treasury will apply its principles i to all forms of entities subject to the MBT. (Treasury FAQ U34) 30

31 Attribution The constructive ownership rules of IRC sections 318, 1563 and 414 can be used to apply to the following categories of related parties: Family members Partnerships and partners Estates and beneficiaries Trusts and beneficiaries Corporations and shareholders Holders of stock options 31

32 Attribution Limitations NO re-attribution NO double-inclusion NO family re-attribution No sidewise 32

33 Unitary Flow Of Value And Integration Functional integration Transfers of equipment used in the business Common advertising Centralized accounting, legal or personnel functions Common insurance policies, pension plans or employee benefits; and Inter-company financing, when such financing serves more than a mere investment function 33

34 Unitary Taxation: The Calculation Unitary business income is the sum of the business income of each person included in the unitary business group, less any items of income and related deductions arising from transactions including dividends between the persons included within the unitary business group. 34

35 Unitary Combined Return Michigan s unitary combined return Whether inclusion in a unitary business groupisadetrimentorabenefittothe group is still and unknown. Pro forma calculations must be developed to determine your facts and circumstances. 35

36 Example Of Unitary Group Filing M&S LLC Tax Return Review Michigan Business Tax UBG Elim Co 1 Co 2 Co 3 Michigan Sales 3,516,768 1,162,709 2,275,933 78,126 Total Sales 14,748, ,505, ,940, ,933 Gross Receipts 14,684,135 7,457,684 6,869, ,723 -Inventory Acquired (5,975,079) (2,529,380) (3,143,016) (302,683) -Depreciable Assets Acquired (1,127,000) (466,000) (632,000) (29,000) -Materials and Supplies (400,000) (200,000) (100,000) (100,000) -Staffing company - -Contractors 15, 16, Miscellaneous - Modified Gross Receipts 7,182,056-4,262,304 2,994,712 (74,960) Apportionment % % % % % Apportioned Gross Receipts 1,712, , ,063 (19,332) Prior Year SBT Loss C/F - Useable SBT Loss C/F (65%) Sub-Total 1,712, , ,063 (19,332) 13,700-5,282 7,857 (155) Watercraft/Vehicles GRT - Modified Gross Receipts Tax 13,700-5,282 7,857 (155) 36

37 Example Of Unitary Group Filing (Cont.) M&S LLC Tax Return Review Michigan Business Tax UBG Elim Co 1 Co 2 Co 3 Business Income 818, ,459 25,969 51,900 +Muni Interest/Dividends - +Taxes Measured by Income - +MBT/SBT Taxes - +Federal NOL C/B C/F - +Loss from non UBG flowthru - +Non UBG Intangible Exp - -Fgn Div & Royalties - -Inc from non UBG flowthru - -US Interest Income- -Net Earnings from S/E - Business Income Tax Base 818, ,459 25,969 51,900 Apportionment % % % % % Apportioned Business Income 195, ,704 8,516 13,385 -MBT Loss C/F - -Affordable Housing Deduct - Business Income Tax Base 195, ,704 8,516 13,385 Income 4.95% 9,659-5, Total MBT Before Surcharge 23,359-10,960 8, % 5,137-2,410 1, Liability Before Credits 28,495-13, ,

38 Example Of Unitary Group Filing (Cont.) Tax Return Review Michigan Business Tax UBG Elim Co 1 Co 2 Co 3 Non-Refundable Credits -SBT Credit - -Compensation - -Investment t - -Research & Development- -Small Business - -Community Foundation - -Food Bank - -NASCAR - -Stadium - -Start-up - -Public Contribution - -Art & Culture - -Next Energy - -Ren Zone - -Historic Preservation - -Low Grade Hematite - -Entrepreneurial - -New Dealer Inventory - -Large Food Retailer - -Mid-Size Food Retailer - -Bottle Deposit - -Anchor Company - -Anchor Company Payroll - -MEGA - -Family Development Acct- -Brownfield Redevelopment - -Private Equity Fund - -Film Job Training - -Film Infrastructure - Tax After Non-Refundable Cr 28,495-13,370 10,

39 Example Of Unitary Group Filing (Cont.) M&S LLC Tax Return Review Michigan Business Tax UBG Elim Co 1 Co 2 Co 3 Refundable Credits +MEGA - +Personal Property Tax - +Worker Disability - +NEXT Energy Payroll - +MEGA Employment - +NASCAR Safety - +Hybrid Technology - +Farmland Preservation - +Anchor Company - +Anchor Company Payroll - +MEGA Federal Contract - +Brownfield Redevelopment- +Film Production Credit - Total Refundable Credits Prior Year Overpayment - Estimates - Extensions - Total Credits & Payments Tax Due / <Refund> 28,495-13,370 10,

40 Unitary Group Designated Member (DM) Issues DM selection: The member of the unitary business group that t has nexus with Michigan and that owns or controls the other members of the group. If two or more members qualify to be the DM, the taxpayer may choose the designated member. 40

41 Unitary Group Designated Member (DM) Issues (Cont.) The tax year of the MBT return follows that of the designated d member. The return only includes the tax year of each member whose tax year ends within the tax year of the DM (however, see later discussion on eliminations). 41

42 Unitary Group Designated Member (DM) Issues (Cont.) Example Corporation A, is the DM with a 9/30 tax year, and Corporations B and C have fiscal years ending 10/31. Taxpayer ABC s tax year is that of its DM, which is 9/30. The 9/30/09 return would be the first year to include the 10/31/08 year-end activity of Corporations B and C. 42

43 Unitary Group Designated Member (DM) Issues (Cont.) Different methods of accounting: Each member of the unitary group is required to follow the accounting method used to compute its own federal taxable income. Example - One member may use the cash method, and another may use the accrual method 43

44 Unitary Group Designated Member (DM) (Cont.) Eliminations Based on each member s respective accounting methods, and can be one-sided Ex. 9/30/08 year-end return, with 12/31/08 member. Even though the member is not included d in the 9/30/08 return, any intercompany transactions between the filer and the 12/31/08 member must be eliminated on the 9/30/08 return. 44

45 Nexus Issues Sam Hodges, Sam Hodges & Assoc.

46 Dual Nexus Standard SBT RAB days rebuttable presumption > 10 days nexus MBT Sect. 200 > One day physical presence, OR Actively solicits and MI receipts > $350k w/o any physical presence 46

47 47

48 48

49 Application Of P.L Protection applies to sale of TPP, not intangibles no change from SBT. If activities are protected, taxpayer still subject to MGRT. If Internet-based business sells TPP of $500k into MI, if no physical presence, then no income tax base expect correspondence. 49

50 Seemingly Routine Nexus Move from physical presence standard to economic presence standard SBT did not tax Internet-based business. MBT does tax Internet-based t business if product is destined/sourced d/ d to MI > $350k. 50

51 Protective Refund Claims Constitutional issues If economic presence is ruled unconstitutional Protective refund claims must be filed no later than 90 days after due date including extensions Non-constitutional issues Definition of purchases from others MI statute of limitations is four years after due date, including extensions 51

52 Statute Of Limitations - Suspended MCL a(3) suspends the running of the statute of limitations when notice of intent to audit is received until notice of final assessment plus 1 year. RAB restates law. 52

53 Apportionment Basics Sam Hodges, Sam Hodges & Assoc.

54 Apportionment Financial institutions One factor Sect. 269 gross business is defined as: (a) Receipts from credit card receivables based on billing address (c) Receipts from merchant discounts based on commercial domicile of merchant (d)l Loan servicing i based on location of real property location 54

55 Apportionment (Cont.) Financial institutions (e) Receipts from services based in proportion to the extent the recipient receives the benefit of the services in this state. (f) Investment receipts based on the domicile of the customer (i) Interest from loans not secured by real property based on domicile of the customer 55

56 Apportionment (Cont.) Sect. 301 If confined solely within Michigan 100% If multi-state one factor sales Special apportionment Financial - Telecommunications Transportation - Spun-off corporations Securities 56

57 Apportionment Sourcing Rules Edward Kisscorni, CPA, MBA

58 Apportionment Sourcing Rules Sourcing of tangible personal property (1) Sales of the taxpayer in this state are determined as follows: Sales of tangible personal property are in this state if the property is shipped or delivered, or, in the case of electricity and gas, the contract requires the property to be shipped or delivered, to any purchaser within this state based on the ultimate destination at the point that the property comes to rest regardless of the free on board point or other conditions of the sales. [MCL ] EdKisscorni.com Michigan State and Local Tax 58

59 Apportionment Sourcing Rules (Cont.) Sourcing of tangible personal property (Cont.) For purposes of the MBT apportionment formula numerator, sales of tangible personal property are sourced to the location of the purchaser or the purchaser's designee using the destination test, without regard of the free-on-board point or other conditions of the sale. Under this test, sales are sourced to the state where the shipment comes to rest. EdKisscorni.com Michigan State and Local Tax 59

60 Apportionment Sourcing Rules (Cont.) Sourcing of tangible personal property (Cont.) A shipment comes to rest upon delivery of tangible personal property to the place where the goods are ultimately received by the initial purchaser or the initial purchaser s designee, even if the purchaser subsequently transfers the property p to another state. EdKisscorni.com Michigan State and Local Tax 60

61 Apportionment Sourcing Rules (Cont.) Sourcing of tangible personal property (Cont.) The Department shall presume that a shipment comes to rest in the shipping state if the goods are not immediately shipped or picked up; if the goods are warehoused; or if the goods undergo additional valueadded services in the shipping state. EdKisscorni.com Michigan State and Local Tax 61

62 Apportionment Sourcing Rules (Cont.) Sourcing of tangible personal property (Cont.) Destination sales Destination i sales generally refer to thesaleof tangible personal property in which the seller is located in one state but the purchaser is located in another. Destination i sales include sales in which h the seller arranges for the shipment or delivery of the goods to the purchaser, as well as dock sales and drop shipments. EdKisscorni.com Michigan State and Local Tax 62

63 Apportionment Sourcing Rules (Cont.) Sourcing of tangible personal property (Cont.) The destination test is used when sourcing dock sales and drop shipments. It is the destination where the goods come to rest, rather than the method of delivery that determines whether the sale is included in the numerator of the apportionment formula. EdKisscorni.com Michigan State and Local Tax 63

64 Apportionment Sourcing Rules (Cont.) Sourcing of ftangible personal property (Cont.) t) Dock sales are characterized by a purchaser that uses its own or rented vehicles, or makes arrangements with a common carrier, to pickupthe property at the seller's shipping dock. Simply put, the purchaser provides the shipping means and picks up the property. A dock sale involves one seller and one purchaser. EdKisscorni.com Michigan State and Local Tax 64

65 Apportionment Sourcing Rules (Cont.) Sourcing of tangible personal property (Cont.) A drop shipment is characterized by a seller that ships the property directly to the purchaser's customer at the direction of the purchaser. The purchaser never takes possession. A drop shipment involves three parties: The (1) seller, (2) purchaser and (3) the purchaser s customer. EdKisscorni.com Michigan State and Local Tax 65

66 Apportionment Sourcing Rules (Cont.) Sourcing of tangible personal property (Cont.) Under MCL , a sale is in Michigan if the property is shipped or delivered to a purchaser within Michigan based on the ultimate destination at the point the property comes to rest, regardless of the shipping terms or other conditions of the sale. Based on the ultimate destination means that through MCL the MBT has expressly adopted the delivery test for sourcing of tangible personal property, as opposed to contrary rules such as the place-of-origin origin or place-of-delivery rules. EdKisscorni.com Michigan State and Local Tax 66

67 Apportionment Sourcing Rules (Cont.) Sourcing of tangible personal property (Cont.) Goods come to rest in Michigan when the goods reach a destination and are not immediately shipped or picked up, are warehoused, or undergo additional value-added services in Michigan. If property is immediately delivered or shipped to a purchaser in another state, the sale is not a Michigan sale. Put another way, the sale is assigned to the state where the tangible personal property comes to rest and is received by a purchaser or the purchaser s designee, regardless of the conditions of the sale. EdKisscorni.com Michigan State and Local Tax 67

68 Apportionment Sourcing Rules (Cont.) Sourcing of tangible personal property (Cont.) The Department will apply the destination test consistent with the following interpretation t ti of MCL : (1) Destination sales shall be assigned to the state in which the shipment comes to rest. (2) A shipment comes to rest upon delivery of tangible personal property ("goods") by common carrier or by other means of transportation, including transportation by the purchaser, to the place where the goods are ultimately t l received by the initialiti purchaser or the initialiti purchaser's designee, even if the purchaser subsequently transfers the property to another state. The location of the final consumer after resale is irrelevant. EdKisscorni.com Michigan State and Local Tax 68

69 Apportionment Sourcing Rules (Cont.) Sourcing of tangible personal property (Cont.) (3) The Department shall presume that a shipment comes to rest in the shipping state if the goods are not immediately shipped or picked up; if the goods are warehoused; or if the goods undergo additional valueadded services in the shipping state. EdKisscorni.com Michigan State and Local Tax 69

70 Apportionment Sourcing Rules (Cont.) Sourcing of tangible personal property (Cont.) (4) The Department shall presume that a dock sale made in Michigan comes to rest in this state if the purchaser or the purchaser s designee takes possession or control of the goods in Michigan, unless the vendor can substantiate, to the satisfaction of the Department that, (a) the purchaser immediately removed the property from the state, and (b) no use of the property p was made in Michigan other than the exercise of control for the purpose of shipment. EdKisscorni.com Michigan State and Local Tax 70

71 Apportionment Sourcing Rules (Cont.) Sourcing of tangible personal property (Cont.) (4) Cont.: The vendor must maintain records showing that the actual destination of the goods is outside of Michigan, such as a purchaser s affidavit provided at the time of sale and accepted by the vendor in good faith; a bill of lading or other shipping document designating the destination location, regardless of the FOB point or other conditions of the sale; or a purchase invoice designating g the destination location outside of Michigan. EdKisscorni.com Michigan State and Local Tax 71

72 Apportionment Sourcing Rules (Cont.) Sourcing of tangible personal property (5) For purposes of defining immediate in the context of destination sales, the Department adopts a facts-and-circumstancesand circumstances test. The Department recognizes that what is immediate may vary by the nature of the goods sold and industry practices, and is highly factual. EdKisscorni.com Michigan State and Local Tax 72

73 Apportionment Sourcing Rules (Cont.) Sourcing of tangible personal property (Cont.) Example 7: Seller transfers title to widgets to purchaser in Michigan, while the widgets remain in Michigan. Purchaser directs seller or third party to add accessories to the widgets, or purchaser adds accessories on its own while the widgets remain in Michigan. Widgets are then either shipped to purchaser in State X via common carrier, or purchaser transports the widgets to State X. Ruling: Because the purchaser or purchaser s designee performed value- added services on goods in Michigan, the shipment comes to rest in Michigan. The sale is sourced to Michigan. EdKisscorni.com Michigan State and Local Tax 73

74 Apportionment Sourcing Rules (Cont.) Sourcing of tangible personal property (Cont.) Example 8: Seller, a Michigan manufacturer, sells widgets to purchaser and stages widgets in seller s warehouse. Purchaser then sells widgets to customers in State X and directs seller to ship widgets from its warehouse to State X. Ruling: Two sales have occurred. The first sale was between seller and purchaser. In this sale, the goods were delivered to the seller s s warehouse the purchaser s designee. The second sale was between purchaser and its customers. This sale was delivered to State X. The first sale is sourced to Michigan, the second to State X. EdKisscorni.com Michigan State and Local Tax 74

75 Apportionment Sourcing Rules (Cont.) Sourcing of tangible personal property (Cont.) While the preceding examples, which describe general destination sales and dock sales, are distinguishable from the typical facts of a drop shipment, the analysis for sourcing a drop shipment sale is also made under the destination test. The controlling factor in sourcing the sale is where the seller, at the direction of its purchaser, ships or delivers the goods. EdKisscorni.com Michigan State and Local Tax 75

76 Apportionment Sourcing Rules (Cont.) Sourcing of services (2) Sales from the performance of services are in this state and attributable to this state as follows: (a) Except as otherwise provided in this section, all receipts from the performance of services are included in the numerator of the apportionment factor if the recipient of the services receives all of the benefit of the services in this state. [MCL (2)(a)] EdKisscorni.com Michigan State and Local Tax 76

77 Apportionment Sourcing Rules (Cont.) Sourcing of services (Cont.) If the recipient of the services receives some of the benefit of the services in this state, the receipts are included in the numerator of the apportionment factor in proportion to the extent that the recipient receives [the] benefit of the services in this state. [MCL (2)(a)] EdKisscorni.com Michigan State and Local Tax 77

78 Apportionment Sourcing Rules (Cont.) Sourcing of services (Cont.) The sourcing of sales derived from certain specific types of services, such as securities brokerage services and telecommunications services, are addressed separately in Sect. 305, but the general rule set forth in Sect. 1305(2)(a) applies to receipts received from the performance of all other services. EdKisscorni.com Michigan State and Local Tax 78

79 Apportionment Sourcing Rules (Cont.) Sourcing of services (Cont.) The sourcing of sales derived from certain specific types of services, such as securities brokerage services and telecommunications services, are addressed separately in Sect. 305, but the general rule set forth in Sect. 1305(2)(a) applies to receipts received from the performance of all other services. EdKisscorni.com Michigan State and Local Tax 79

80 Apportionment Sourcing Rules (Cont.) Sourcing of services (Cont.) The Department has determined that all the benefit of a service is received in this state if any of the following guidelines apply: 1) The service relates to real property that is located entirely in this state. 2) The service relates to tangible personal property p that (a) () is owned or leased by the purchaser and located in this state at the time that the service is received, or (b) is delivered to the purchaser or the purchaser s designee(s) in this state. EdKisscorni.com Michigan State and Local Tax 80

81 Apportionment Sourcing Rules (Cont.) Sourcing of services (Cont.) 3) The services are provided to a purchaser who is an individual physically present in this state at the time that the service is received. 4) The services are received in this state and are in the nature of personal services such as consulting, counseling, training, speaking and providing entertainment that are typically conducted or performed first-hand on a direct, one-to-one or one-to-many basis. EdKisscorni.com Michigan State and Local Tax 81

82 Apportionment Sourcing Rules (Cont.) Sourcing of services (Cont.) 5) The service is provided to a purchaser that is engaged in a trade or business in this state and relates only to the trade or business of that purchaser in this state. 6) The service relates to the use of intangible property such as computer software (other than prewritten computer software), licenses, designs, processes, patents and copyrights, which is used entirely in this state. EdKisscorni.com Michigan State and Local Tax 82

83 Apportionment Sourcing Rules (Cont.) Sourcing of services (Cont.) 7) The services provided are professional in nature, such as legal or accounting services, and are provided to a purchaser that is an individual domiciled in this state, or to a purchaser with business operations only in Michigan. 8) If the service relates to real property p that is located in this state and in one or more other states, the benefit of the service is received in Michigan to the extent that the real property is located in Michigan. EdKisscorni.com Michigan State and Local Tax 83

84 Apportionment Sourcing Rules (Cont.) Sourcing of services (Cont.) 9) If the service relates to tangible personal property that (a) is owned or leased by the purchaser and located in this state and in one or more other states at the time that the service is received, or (b) () is delivered to the purchaser or the purchaser s designee(s) in this state and in one or more other states, the benefit of the service is received in Michigan to the extent that the tangible personal property is located in Michigan, or is delivered to the purchaser or the purchaser s designee(s) in Michigan. EdKisscorni.com Michigan State and Local Tax 84

85 Apportionment Sourcing Rules (Cont.) Sourcing of services (Cont.) 10) If the service is provided to a purchaser that is engaged in a trade or business in this state and in one or more other states, and the service relates to the trade or business of that purchaser in this state and in one or more other states, the benefit of the service is received in Michigan to the extent that it relates to the trade or business of the purchaser in Michigan. EdKisscorni.com Michigan State and Local Tax 85

86 Apportionment Sourcing Rules (Cont.) Sourcing of services (Cont.) 11) If the service relates to the use of intangible property such as computer software (other than pre-written computer software), licenses, designs, processes, patents and copyrights, which is used in this state and in one or more other states, the benefit of the service is received in Michigan to the extent that the intangible property is used in Michigan. EdKisscorni.com Michigan State and Local Tax 86

87 Apportionment Sourcing Rules (Cont.) Sourcing of services (Cont.) 12) If the services provided are professional in nature, such as legal or accounting services, and are provided to a purchaser with business operations in Michigan and one or more other states, and the services relate to the purchaser s operations both in Michigan and in one or more other states, the benefit of the services is received in Michigan to the extent that the services relate to the purchaser s Michigan operations. EdKisscorni.com Michigan State and Local Tax 87

88 Apportionment Sourcing Rules (Cont.) Sourcing of services (Cont.) t) Example E. A corporation situated in Michigan performs mail services for a customer located in State X. The mail activities consist of the mailing of materials provided d by the customer to householdsh located throughout the U.S. The corporation situated in Michigan performs some of the activities related to the mail contract in State X. 5% of the mailings are sent to addresses within Michigan. 5% of the gross receipts related to the services covered by the mail contract t are attributable t bl to Michigan and included d in the numerator of the apportionment factor. EdKisscorni.com Michigan State and Local Tax 88