Michigan Business TaxOverview

Robert J. Kleine, State Treasurer

Characteristics of High Quality Business Tax System

Goals

Uniformity Non-discrimination Good business climate

Criteria

A business tax system should be broad-based and should include some consideration of ability to pay.

The tax should be applicable to all forms of business organization.

It should provide an immediate write-off for capital investment and dispense with special tax inducements.

The number of separate taxes should be kept to a minimum. A stable tax base should be used. States should provide funding to local governments to allow

repeal of personal property taxes. Rates should be moderate for unemployment insurance and

workers compensation as well as for general business taxes.

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.

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.

Michigan’s SingleBusiness Tax (SBT)

Enacted in 1975, effective January 1, 1976. Replaced Michigan’s corporate income tax

and six other business taxes. Modified value added tax. Initially based on “benefits-received” principle

rather than an “ability to pay” principle. Tax calculation used an additive VAT

calculation method – started with business income and added back labor and capital inputs.

Taxes SBT Replaced Corporate Income (39.0% of total).

Financial Institution Income (2.3% of total).

Corporate Franchise (20.8% of total).

Business Intangibles (3.8% of total).

Local Property Tax On Inventory (33.4% of total).

Other (0.8% of total).

SBT Repeal 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 2009. In the summer of 2006, legislature enacted voter

initiated repeal effective December 31, 2007. 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

2008.

Why was the 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.

Three Earlier Proposals to Restructure or Replace SBT2005 – Restructure SBT by eliminating certain deductions and credits, double weighting profits, and reducing tax rate from 1.9% to 1.2%.

2006 – Replace SBT with broad-based tax on gross receipts (0.125%, assets (0.125%), and business income (1.875%). Including significant cuts in personal property taxes (46% cut).

2007 – Replace SBT with tax base similar to 2006 proposal but new tax raised $500 million less than SBT. Proposal included a 2% tax on services (including B to B) and raised $1.5 billion to cover a projected budget shortfall.

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.

Eliminated Payroll From Base Increased Reliance on Profits

Other19%

Income6%

Compensation75%

Sales70%

Income30%

Single Business Tax Michigan Business Tax

Source SBT: Exhibit 12, Michigan Single Business Tax Statistical Tables, 2002-2003 ,Michigan Department of Treasury

Components of Tax Base

Business Income Tax Base Starting point is federal taxable income from

business activity.

Includes non-corporate entities with deduction for net earnings from self-employment.

Unitary groups: File a combined return. Add tax bases of group members – apply combined

apportionment percent. Foreign operating entities, insurance companies, & financial

institutions cannot participate.

Business loss after 2007 may be carried forward ten years.

Modified Gross Receipts Base

Tax base is a taxpayer’s gross receipts less “purchases from other firms” before apportionment.

Purchases from other firms means Inventory acquired during the year. Depreciable assets acquired during the year. Materials and supplies, including repair, parts

and fuel.

Insurance Company Tax In lieu of modified gross receipts and business

income taxes.

1.25% of gross direct premiums written on property or risk located in Michigan.

No apportionment – only premiums on Michigan risks and property are taxed.

Retaliatory tax as described in insurance code is still in place (same as SBT provision).

Maintain credits for assessments paid to various shared-risk association/facilities.

Financial Institution Tax Financial institution tax limited to:

Banks, thrift banks, and savings and loans. Entity owned directly or indirectly by a

financial institution. A unitary business group of these entities.

Net capital defined as: The average of net capital for current tax

year and four prior years (computed per GAAP).

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.

Reduces burden on mobile capital.

Special Provisionsfor 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.

Raise alternate tax officer compensation disqualifier phase-out to $160,000 to $180,000.

Double gross receipts phase-out to $19-$20 million. Entrepreneurial credit to encourage hiring and

investment in Michigan.

Credits Provide Incentives to Do Business in Michigan

Compensation Credit – for 0.37% of Michigan compensation.

Investment Tax Credit – for 2.9% of Michigan investment.

R&D Credit – for 1.9% of Michigan research and development expenses.

Sum of compensation and investment credit cannot exceed 52% of MBT liability.

Sum of all three credits cannot exceed 65% of liability.

Credit provisions reduced for 2008.

Key SBT Credits Continued in MBT

SBT Credits Continued: MEGA Brownfield Historic Preservation Renaissance Zone Hybrid Technology R&D Credit

SBT Credits Continued and Expanded: Public Contribution and Community Foundation Alternate Credit Personal Property Tax Credit

Credits Expanded In MBT

Some SBT credits were retained but slightly expanded (two credits):

Public contribution (expanded to include the Michigan housing and community development fund as a public institution).

Community foundation credit (expanded to include education foundations).

SBT Credits Expanded in MBT Alternate Credit

Qualifying thresholds have been increased: Adjusted business income (ABI) limit was increased

from $475,000 to $1.3 million. Gross receipts limit increased to $19-$20 million from

$9-$10 million. Allocated income limit increased to $160,000-$180,000

from $95,000-$115,000.

Only the adjusted business income threshold is indexed to inflation.

Alternate tax rate is reduced to 1.8% from 2.0%.

SBT Credits Expanded in MBT Alternate Credit

Deals with the cliff introduced by the $350,000 filing threshold alone.

The credit is equal to the amount by which the allocated or apportioned gross receipts are less than $700,000 divided by $350,000 times MBT liability.

The credit declines linearly (and tax liability increases linearly) as gross receipts increase -- instead of an all or nothing cliff.

SBT Credits Expanded in MBT Personal Property Tax Credit

The 15% SBT industrial personal property tax credit is increased to 35%.

Two new personal property tax credits are added: 23% for State Utility personal property taxes

(telephone property). Reduced to 13.5% after 2008.

10% natural gas pipeline utility personal property tax credit.

Credits are refundable.

New MBT Credits When Enacted

Some new credits (nine credits): Research and Development MEGA Credit Two NASCAR Speedway Credits Stadium Credit Arts and Culture Credit Michigan Entrepreneurial Credit New Motor Vehicle Dealer Credit Two Michigan Headquartered Food

Retailer Credits

Transition Provisions

Unused SBT credit carry-forwards may be claimed on 2008 and 2009 MBT returns.

SBT Brownfield and Historic Preservation credits may be carried forward for ten years after claim.

65% of any SBT business loss incurred in 2006 or 2007 may be deducted against 2008 modified gross receipts base.

MBT Revenue Trigger

MBT has a trigger to ensure that it does not represent a large tax increase.

If revenues exceed trigger, 60% of excess refunded to taxpayers and 40% deposited into BSF.

Triggers if revenues grow faster than inflation, plus ¾%.

MBT Surcharge PA 145 of 2007 repealed service tax and

replaced revenue with an MBT surcharge. Surcharge is 21.99% of tax before credits. Major credits are lowered. For financial institutions, surcharge is

27.7% for 2008 and 23.4% thereafter. No surcharge on insurance company tax. Surcharge expires in 2017.

MBT Changes to Credit Provisions

After PA 145MBT Provision Original 2008 2009

Compensation Credit 0.370% 0.296% 0.370%

Investment Tax Credit 2.900% 2.320% 2.900%

Research & Dev. Credit 1.900% 1.520% 1.900%

Max of Comp and ITC Credits 65.0% 50.0% 52.0%

Max of Comp, ITC, R&D Credits 75.0% 65.0% 65.0%

In addition to the 21.99% surcharge, the followingchanges were made to the MBT credit provisions:

Two Out of Three Taxpayers Pay the Same or Less Under the MBT

Tax Cut 99,363 Firms

63%

No Change 13,894 Firms

9%

Tax Increase 44,761 Firms

28%

Note: Estimates based on TY 2009 law using 2003 SBT data.

Three Out of Four MI Based FirmsPay The Same or Less Under the MBT

Tax Cut 85,187 Firms

67% No Change 8,916 Firms

7%

Tax Increase 33,882 Firms

26%

Tax Increase 10,879 Firms

36%

No Change 4,978 Firms

17%

Tax Cut 14,176 Firms

47%

Michigan Only Firms Multi-State Firms

Note: Estimates based on TY 2009 law using 2003 SBT data.

Most Firms In Every Industry See A Tax Cut

2,105

11,647

10,014

2,873

25,403

10,116

32,331

4,874

99,363

594

2,823

3,654

2,003

10,991

7,648

13,208

3,840

44,761

Ag/Mining

Construction

Manufacturing

Trans, Comm, Utility

Wholesale/Retail Trade

Fin, Insur, Real Estate

Services

N.E.C.

Total

Tax Cut Tax Increase

Note: Estimates based on TY 2009 law using 2003 SBT data.

Most Manufacturing Firms Pay Less

Number of SBT MBT Change in Liability PayingSector Firms Liability Liability Dollars Percent Less

Other Durable Mfr. 5,826 $101.7 $67.6 ($34.0) -33.5% 62.5%

Nondurable Mfr. 3,374 $111.8 $87.4 ($24.4) -21.9% 68.2%

Primary Metals 536 $18.1 $16.5 ($1.6) -8.7% 69.6%

Fabricated Metals 2,130 $37.9 $9.5 ($28.3) -74.8% 77.3%

Machinery 2,006 $34.8 $11.0 ($23.7) -68.2% 77.6%

Trans. Equip 708 $56.7 ($81.1) ($137.8) -243.2% 70.3%

Total Manufacturing 14,580 $360.9 $111.0 ($249.9) -69.2% 68.7%

Note: Estimates based on TY 2009 law using 2003 SBT data.

Small Businesses Pay Less Even After Surcharge

MBT PlusGross Receipts SBT Surcharge Amount %

Less Than $500,000 $33.4 $13.0 -$20.4 -61%

$500,000 to $5 Million $348.9 $417.6 $68.6 19%

$5 Million to $50 Million $576.5 $715.4 $138.9 24%

Over $50 Million $672.0 $1,180.1 $508.2 76%

Total $1,630.8 $2,326.1 $695.3 43%

Change

Note: Estimates based on TY 2009 law using 2003 SBT data.

Who Will Pay Less Manufacturing firms.

Small businesses between $10 and $20 million of gross receipts.

Small businesses under $10 million with income to owners over $115,000.

Michigan multi-state firms.

Who Will Pay More

Finance Insurance and Real Estate.

Profitable firms.

Firms without much personal property.

Firms that operate in Michigan but have little payroll or property here.

Recent MBT Credit Changes Film Credits Anchor Credit Brownfield Credit Expansion Stadium Credit Expansion Affordable Housing Credit Bonus Depreciation Credit Historic Preservation Credit Expansion Individual/Family Development Account Act Credit Exhibition Facility Credit Ethanol Credit Bottle Deposit Administration Credit MEGA Credit Expansions

Department of Defense Contracts Polycrystalline Silicon Battery Credits Photovoltaic Technology

Significant Tax Changes Enacted Recently

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Eliminating MBT Surcharge Eliminated in Tax Year 2017 ($715 million)

MBT Battery Credits $0.0 $0.0 $0.0 ($40.0) ($108.0) ($103.0)

MBT Film Credits & Infrastructure ($107.5) ($160.0) ($160.0) ($160.0) ($160.0) ($160.0)Polycrystalline Manufacturing Credit $0.0 $0.0 $0.0 $0.0 ($25.0) ($25.0)MBT Gross Receipt Changes ($115.8) ($80.5) ($93.4) ($117.8) ($129.9) ($132.7)Decouple from depr/prod activities $172.5 $23.4 $19.2 $45.3 $52.3 $60.0Historic preservation credits $0.0 $0.0 ($5.0) ($8.6) ($9.6) ($10.6)

Apportionment Single Sales Factor (100% Sales):

Michigan sales/Sales everywhere. Apportion if taxed, or would be taxed, in another state:

Sales are sourced to another state if that state has jurisdiction to tax even if that state does not do so.

“Nexus” under Michigan Law. When at least one firm in a “unitary business group”

has nexus, Michigan sales by all persons in the group are included in the sales factor’s numerator.

No Special Apportionment Formulas for specific industries.

No Throwback Sales.

Substantial Nexus

Taxpayer has a physical presence for more than 1 day per tax year,

OR

Taxpayer actively solicits sales and has Michigan gross receipts of $350,000 or more.

Substantial Nexus Physical presence means “any activity”

by: A taxpayer, or its independent contractor, or its representative.

Active solicitation includes, but is not limited to: Use of mail, telephone and e-mail. Advertising, including print, radio, internet,

television and other media. Maintenance of an Internet site over or

through which sales transactions occur with persons within Michigan.

Substantial Nexus

Physical presence exclusion for: Professionals providing services in a

professional capacity, or

Other service providers if the activity is NOT associated with establishing a MI market.

Restrictions on Imposition of MBT Business Income Tax

Tangible personal property (TPP) sales are subject to the narrower PL 86-272 federal statutory jurisdictional standards.

Mere solicitation of TPP sales is insufficient to establish nexus.

PL 86-272 is not applicable to receipts on “services” or “intangibles” which are subject to same nexus standard as for modified gross receipts.

A firm having nexus under the MBT for whom PL 86-272 disallows the imposition of the MBT business income tax is still subject to the MBT modified gross receipts tax.

Unitary And Sourcing Provisions

Unitary Business Principle

If a taxpayer is carrying on a single unitary business inside a state and outside a state, the State has the justification to include in the taxpayer’s apportionable tax base all of property, income or receipts attributable to the combined effect of the in-state and out-of-state activities.

Unitary in the MBT “Unitary business group” means:

A group of U.S. persons other than a foreign operating entity,

One of whom owns/controls, directly or indirectly, more than 50% of the ownership interest of the other U.S. persons, and

Business activities or operations that either: Result in a “flow of value” within the

business group, or Are integrated with, dependent upon or

contribute to each other.

Unitary Group Filing A unitary business group must file a

combined return. Must include each U.S. person other than foreign

operating entities.

All transactions between persons included in the unitary business group must be eliminated from the business income tax base, the modified gross receipts tax base, and the apportionment formula.

Persons subject to the MBT as insurance companies or financial institutions are excluded from the combined return.

Unitary: Flow of Value Tests

Functional Integration Same line of business or steps in a

vertically integrated process, or

Centralized Management Centralized departments or

functions, or

Economies of Scale A function is enhanced through the

sharing of the group’s resources.

Unitary: Integrated, Dependent, and Contribute Test

A taxpayer is engaged in a unitary business when its activities in Michigan contribute to or are dependent upon its activities outside Michigan.

Sourcing:Tangible Personal Property

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.

Sourcing: Services Service income is sourced where

recipient receives the benefit.

Multistate use apportioned by recipient’s Michigan benefit/benefit everywhere.

“Cost of performance” sourcing no longer applicable.

Sourcing: Some Other Cases

Real property is sourced where the property is located.

Leased mobile transportation property is sourced where property is used.

Aircraft use is determined by MI landings/landings everywhere.

Royalties and intangibles are sourced where the property is used by the purchaser.

Multistate use apportioned by MI use/use everywhere. Securities brokerage service receipts are

sourced to customer’s address. Regulated investment companies receipts are

based on shareholders domicile/mailing address.

Other Proposals To Replace The Single

Business Tax

The Michigan Jobs And Investment Act 2005

A plan to modify to restructure the Single Business Tax as follows:

Broaden the existing SBT tax base and reduce the existing tax rate.

Reduce the tax rate from 1.9% to 1.2% - a 37% reduction.

Expand the tax base by: Reducing reliance on labor compensation

by double-weighting profits, Eliminating certain special deductions and

credits.

Reduce the small business alternative tax rate from 2.0% to 1.2%.

Create a 35% personal property tax credit for manufacturing and R&D activity.

Adopt a 100% sales apportionment factor.

Create R&D credit equal to 1.2% of the compensation paid to workers engaged in R&D.

Michigan Business Tax - 2006

A plan to replace SBT. Major features include:

Broad tax base includes gross receipts, assets, and profit.

Low tax rate of 0.125% on gross receipts and assets.

Tax rate on profit 1.875%. Commercial and industrial personal

property exempt from 24 education mills: 46% cut

Tax cut for small businesses: Firms with less than $350,000 in

gross receipts are exempt from tax. Eliminate “tax cliff” by phasing in tax

for businesses with gross receipts between $350,000 and $700,000.

Firms with less than $10 million in gross receipts can pay alternative tax equal to 1.8% of income.

Adopt a 100% sales apportionment factor to remove incentive for businesses to create jobs outside of Michigan.

Michigan Business Tax with Modifications - 2007

Same as proposed in 2006 with the following changes: Michigan Business Tax would result in a net tax cut of $0.5 billion

relative to the SBT. This business tax proposal was part of an overall tax

restructuring plan that included a 2% tax on services. Businesses would have paid about $1.0 billion of the estimated $1.5 billion this new service tax would have generated.

Other Changes: Change definition of financial organizations. Subtract sales of intangible assets from gross receipts. Eliminate double taxation of corporate partnerships. Subtract inter-company sales among affiliates from gross

receipts. Exclude foreign assets and tax deferred assets from the tax

base. Provide a credit for high paying jobs provided at corporate

headquarters.

Treasury Resources Available

Department web page has resources for taxpayers: MBT estimator. FAQs posted to explain various aspects of

MBT (questions can be submitted). Presentations and Webinars provide

additional detail on tax.

Information can be found at: www.michigan.gov/taxes