THE MICHIGAN BUSINESS TAX

Transcription

1 THE MICHIGAN BUSINESS TAX (MGFOA 2010 Fall Institute) Lance Wilkinson, Michigan Department of Treasury 1 A Brief History of Michigan Business Taxes 1953 BAT-income-type VAT 1967 Corporate income tax 1975 SBT-modified VAT -initially based on benefits-received principle rather than an ability to pay principle -not income sensitive (stable revenue source) -additive VAT calculation method started with business income and added back labor and capital inputs 2008 MBT-modified gross receipts & business income tax 2

2 Demise of the SBT In 1999, rate cuts enacted to drop rate by 0.1 percentage points per year until rate was zero (23 years), but cuts stop if BSF < $250M. BSF falls below $250M in 2002, rate cuts stop. In 2002, legislation enacted to repeal SBT in December In the summer of 2006, legislature enacted voter initiated repeal effective December 31, In FY 07, SBT equaled 7.3% of state taxes and 19.5% of unrestricted revenues MBT enacted in July of 2007 to start in January of Why Was SBT Repealed? Additive method of VAT led to negative perceptions taxpayers used to subtracting from base, not adding to it. Tax or compensation criticized as job killer. Firms did not like having to pay in years they lost money. Michigan s economy was uniquely bad this decade and business tax was unique causality was assumed. Comparing SBT simply to other states corporate income taxes gave the false impression that business taxes were high in Michigan. 4

3 Michigan Business Tax The Michigan Business Tax (MBT) is actually four taxes in one Public Act. Two general imposition provisions that apply to most business entities, and Two special imposition provisions that apply to insurance companies and to financial organizations. 5 Michigan Business Tax New tax base of income and gross receipts less purchases shifts part of burden to ability to pay (i.e. income) while maintaining a stable base. Substantial personal property tax relief addresses a major business concern. Tax credits provide incentives to invest in Michigan, to employ Michigan residents, and to perform research and development in the state. Special provisions lower the tax burden for small businesses helping them to grow. SBT revenues fully replaced. 6

4 Michigan Business Tax A Business Income Tax at 4.95%. A Modified Gross Receipts Tax at 0.8%. A Surcharge Added at 21.99% Capped at $6 Million. A Special Premiums Tax For Insurance Companies at 1.25%. A Special Net Capital Tax For Financial Institutions at 0.235% with Added Surcharge at Higher Rates Than General Surcharge. 7 Michigan Business Tax 8 ENTITY TYPE Financial Institutions Insurance Companies Small Businesses, $20 million gross receipts All Other Business Taxpayers TAX RATE 0.235%, plus surcharge 1.25% 1.8% via credit 4.95%, plus surcharge 0.80%, plus surcharge Net capital TAX BASE Gross direct premiums on Michigan risks Federal taxable income (with some modifications) Federal taxable income (with some modifications) Gross receipts less purchases from other firms

5 SBT v MBT Tax Base Components Other 19% Income 30% Income 6% Compensation 75% Single Business Tax Sales 70% Michigan Business Tax 9 Source SBT: Exhibit 12, Michigan Single Business Tax Statistical Tables, , Michigan Department of Treasury Two out of Three Taxpayers Pay the Same or Less Under the MBT Tax Increase 44,761 Firms 28% No Change 13,894 Firms 9% Tax Cut 99,363 Firms 63% 10 Note: Estimates based on TY 2009 law using 2003 SBT data.

6 Three Out of Four MI Based Firms Pay The Same or Less Under the MBT Michigan Only Firms Multi-State Firms Tax Cut 85,187 Firms 67% No Change 8,916 Firms 7% Tax Cut 14,176 Firms 47% No Change 4,978 Firms 17% Tax Increase 33,882 Firms 26% Tax Increase 10,879 Firms 36% 11 Note: Estimates based on TY 2009 law using 2003 SBT data. 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 liability 12

7 Modified Gross Receipts Tax Gross Receipts Gross Receipts All amounts received unless specifically excluded Exclusions (non exhaustive) Amounts received in an agency capacity Transfers of accounts receivables Mortgage company sale of loans Personal investment income Basis of capital assets 13 Modified Gross Receipts Tax Gross Receipts Exclusions OID Refunds Discounts, whether cash or in-kind Tax refunds Security deposits Principal repayments Like-kind exchanges 14

8 Modified Gross Receipts Tax Purchases From Other Firms Inventory acquired during the year Depreciable assets acquired during the year Materials and supplies, including repair parts and fuel (items directly connected to the management of inventory or maintenance/operation of assets) Other, including for certain contractors payments to subcontractors building trades contractors cost of subcontractors for a construction project under a contract specific to that project 15 Modified Gross Receipts Tax Imposed on privilege of doing business In other words, not an income tax and not a property tax 16

9 Business Income Tax 17 Computation Business income +/- State additions and subtractions x Michigan apportionment % = Tax base apportioned to Michigan - Michigan business tax loss carryforward = State taxable income x 4.95% = Business income tax Business Income Tax Business Income Federal taxable income (FTI) Partnerships and S Corporation includes income and expenses separately reported to partners or shareholders Excludes personal investment income 18

10 Business Income Tax Additions Other state obligation interest and dividends deducted from FTI Other net income taxes deducted from FTI MBT (not SBT) deducted from FTI Federal NOL carryforward or carryback Loss from non-unitary pass-through entities 19 Business Income Tax Subtractions Income from non-unitary pass-through entities Foreign source dividends including foreign operating entities Interest from U.S. obligations Net self-employment earnings under IRC 1402 except to the extent earnings represent reasonable return on capital 20

11 Business Income Tax Addback for expenses incurred from non unitary related entities related to intangible assets. 21 Business Income Tax MBT Business Loss Carryforward Business loss incurred after 12/31/2007 Business loss carryforward ten years Deducted after applying current year apportionment 22

12 Nexus Jurisdiction to tax. The Due Process and Commerce Clauses of the U.S. Constitution define the constitutional limitations on state jurisdiction to tax. Due Process Clause requires economic or physical presence in state. 23 Nexus Commerce Clause requires satisfaction of 4- part Complete Auto test. Quill: Use tax case. Upheld National Bellas Hess. Bright line physical presence required. Supreme Court has never ruled on whether Quill applies to other taxes. [C]ontemporary Commerce Clause jurisprudence might not dictate the same result were the issue to arise for the first time today." 24

13 Nexus MBNA: [W]e believe that the Bellas Hess physical-presence test, articulated in 1967, makes little sense in today's world. In the previous almost forty years, business practices have changed dramatically. When Bellas Hess was decided, it was generally necessary that an entity have a physical presence of some sort, such as a warehouse, office, or salesperson, in a state in order to generate substantial business in that state. This is no longer true. The development and proliferation of communication technology exhibited, for example, by the growth of electronic commerce now makes it possible for an entity to have a significant economic presence in a state absent any physical presence there. For this reason, we believe that the mechanical application of a physical-presence standard to [taxes other than sales and use taxes] is a poor measuring stick of an entity's true nexus with a state. 25 Nexus Any person with physical presence in Michigan for more than one day (physical presence) Or That actively solicits sales in Michigan and has Michigan gross receipts $350,000 (economic presence) 26

14 Nexus Physical presence means any activity by the taxpayer or its employee, agent or independent contractor acting in a representative capacity Physical presence excludes activities of professionals or other service providers if activity does not establish and maintain in-state market PL does not apply to gross receipts tax 27 Nexus Actively Solicits defined by the Department as purposeful solicitation directed at or intended to reach persons within MI or the MI market. Revenue Administrative Bulletin Solicitation means speech or conduct that explicitly or implicitly invites an order, or is ancillary to a request for an order. 28

15 Nexus Active Solicitation includes: advertising, including print, radio, internet, television, and other media; the use of telephone, and ; maintenance of an internet site over which or through sales transactions occur with persons in Michigan. 29 Apportionment 100% Sales Factor Michigan Sales / Everywhere Sales Apportioned if taxed in another state or would be taxable in another state if state imposed tax similar to Michigan No separate apportionment formulas for specific industries (e.g., transportation) 30

16 Apportionment Sales: Ultimate destination. Sourced to where property comes to rest regardless of shipping terms. Leases: Sourced to where the property is utilized. Number MI rental days/rental days everywhere. Services: Sourced where recipient receives the benefit. Multistate use apportioned by recipient s Michigan benefit/benefit everywhere. Cost of performance sourcing no longer applicable. 31 Apportionment Financial Receipts Generally codifies MTC s financial sourcing rules as contained in SBT bulletin Royalties and income from using intangibles sourced to state of property use Interest from loans secured by real property looks to location of real property Interest from loans not secured by real property looks to location of the borrower 32

17 Unitary Business Groups Under the unitary business principle, if a taxpayer is carrying on a single unitary business within and without the state, the state has the requisite connection to the out-of-state activities of the business to justify inclusion in the taxpayer's apportionable tax base of all the property, income, or receipts attributable to the combined effect of the out-of-state and in-state activities. Hellerstein & Hellerstein, State Taxation, Early example: 19 th century railroad unit rule. It may well be doubted whether any better mode of determining the value of that portion of the track within any one county has been devised than to ascertain the value of the whole road, and apportion the value within the county by its relative length to the whole. Taylor v. Secor, 92 US 575, 608 (1875) 33 Unitary Business Group Definition U.S. persons, other than foreign operating entity One of which Owns or controls >50% ownership interest with voting rights, and Flow of value or contribution and dependency between or among the persons in the unitary business group 34

18 Unitary Business Group Filing Implications Must file a combined return. Add tax bases of group members, but apply combined apportionment factor. Foreign entities and foreign operating entities with nexus must file on stand-alone basis. Intercompany eliminations eliminated. 35 Unitary Business Groups Finnigan Rule All Michigan sales of unitary business group included in apportionment numerator regardless of whether the person has nexus with Michigan 36

19 Special Provisions for Small Businesses Firms with less than $350,000 in gross receipts exempt. Full tax liability phased-in for $350,000 to $700,000 in gross receipts through a credit. Allow qualifying firms to pay 1.8% on adjusted business income. aka small business alternative credit Limited to businesses with gross receipts of less than $20 million, adjusted business income of less than $1.3 million, and officer compensation not exceeding $180, Credits Compensation and Investment Compensation paid in Michigan 0.37% (.296 for 2008) Investment in net tangible capital assets (excluding land) in Michigan 2.90% (2.32% for 2008) These credits are taken first and together are capped at 52% of tax liability before the surcharge (50% cap for 2008) 38

20 Credits Research & Development Credit equal 1.90% (1.52% for 2008) of Michigan research and development expenses Combination of R&D credit and compensation and investment credits capped at 65% of taxpayer liability before the surcharge 39 Credits Retained from SBT Michigan Economic Growth Authority Renaissance zones Historic preservation Brownfield development Venture Capital Investment Start-up business 40

21 Credits Retained from SBT Public contributions Homeless shelter/food banks contributions Community & educational foundations Alternative energy Worker s compensation Low-grade hematite 41 Credits MBT New Private equity fund management Motor sports complex capital investment Sports/entertainment facility capital investment Motor vehicle dealer inventory acquisition Large Michigan retail establishments 42

22 Credits MBT New Research and Development Contribution Anchor Business Payroll Tax Credits Anchor Business Property Tax Credit Entrepreneurial Credit ( ) Bottle deposit law compliance expenses 43 Credits MBT New Culture contribution: municipal or nonprofit art, historical or zoological institution Film Production Tax Credit Film Investment Tax Credit Film Job Training Tax Credit 44

23 SBT Credit Carryforwards Any unused SBT credit carryforward may be used against the MBT in 2008 and 2009 Exception Brownfield, historic preservation, and MEGA payroll credits carried over for the same years as if the SBT had not been repealed 45 Personal Property Tax Relief Commercial personal property exempt from 12 of 24 education mills (average 23% cut). Industrial property exempt from 24 education mills and firms receive 35% refundable credit for remaining industrial personal property tax. Provides a personal property tax cut of 65% on average for industrial property. Schools protected by dedicating a portion of the MBT to the School Aid Fund. No cuts to city, village, townships, and county property taxes. 46

24 Insurance Company Gross Premiums Tax Gross premiums tax at 1.25% Retaliatory tax applicable Premiums allocated, not apportioned 47 Bank Net Capital Tax Tax on five year average of net capital at 0.235%, plus surcharge Tax base is apportioned based on gross business Unitary filing is required generally will be bank holding company and subsidiaries, except for insurance companies 48

25 MBT Surcharge Enacted on December 1, 2007 as the solution to replace revenue originally estimated to be generated by the repealed use tax on services that was scheduled to go into effect on December 1 Effective January 1, % of combined modified gross receipts tax and business income tax before credits 49 MBT Surcharge Maximum surcharge is $6 million Banks subject to separate surcharge of: 27.7% for tax years ending in % for tax years ending after 2008 Surcharge cap is not applicable Trust banks are exempt Insurance companies are exempt Contingent repeal effective January 1,

26 Websites Michigan Department of Treasury website: MBT website: 51 Michigan Business Tax Questions? 52