I have added the Michigan Business Tax Unitary Questionnaire to EHTC’s State & Local Tax Resources website. Here is the direct link to this questionnaire: 

http://www.ehtc.com/ehtc/documents/salt/MBTUnitaryQuestionnaire.pdf.

Prior to a few days ago, I had not seen a Michigan unitary questionnaire, but as result of an MBT audit, this questionnaire was made available as part of the audit package received. The unitary questionnaire is 4 pages long, assumes the “Control Test” is passed, and therefore focuses on the “Relationship Test.” For an entity to be part of a unitary group it must pass both the “Control Test” and the “Relationship Test.” This may be a good time for a refresher on the law relating to unitary under the MBTA.

Recap:

Unitary Business Group, Defined Under the MBTA

The first step is to identify if a unitary business group exists and, if it does, what entities comprise the unitary business group. Unitary business group is defined in Section 117(6) of the MBTA to be very broad and very inclusive as follows:

                         Control Test 

           

1)    Unitary business group means a group of United States persons, other than a

                        foreign operating entity, 1 of which owns or controls, directly or indirectly, more

                        than 50% of the ownership interest with voting rights or ownership interests that

                        confer comparable rights to voting rights of the other United States persons, and

 

                         Relationship Test   (Unitary Questionnaire)

 

2)    Has business activities or operations which result in a flow of value between or among

                persons included in the unitary business group or has business activities or operations that

                are integrated with, are dependent upon, or contribute to each other. For purposes of this

                subsection, flow of value is determined by reviewing the totality of facts and circumstance

                s of business activities and operations [MCL 208.1117(6)].

 

The unitary questionnaire is used in to determine if there is a flow of value among entities that have passed the control test. Flow of value consists of something more than intercompany sales, and the Department of Treasury has stated they will rely on guidance provided by the United States Supreme Court in Container Corp. of America v. Franchise Tax Board (1983) 463 U.S. 159, affg 117 Cal. App. 3d 988. 

In “Container,” a prerequisite to a constitutionally acceptable finding of unitary business is flow of value, not flow of goods.  Contributions to income of a unitary group result from  functional integration, centralization of management and economies of scale.

Treasury has released RAB 2010-1 (MBT Unitary Group Control Test) and RAB 2010-2 (MBT Unitary Group Relationship Tests) that iterates Treasury’s interpretation of the MBTA as it relates to unitary and may be relied upon by taxpayers.  Both RAB's are on EHTC’s MBT Resources webpage:  http://www.ehtc.com/ehtc/saltmbtresources.htm.

        

Situation:

Consider a calendar year company who e-files their 2009 MBT return and owes money to the state. The company e-files the return on March 31, 2010 (before the April 30, 2010 due date), and pays the amount due on April 15, 2010 (after the filing of the return). Will the company be assessed a late payment penalty?

Unfortunately, the answer seems to be, “Yes.” The law, MCL 208.1505(1) (see below) indicates payment must be made when the return is filed.

The Law:

208.1505 Annual or final return; date of filing; extension.

Sec. 505.

(1) An annual or final return shall be filed with the department in the form and content prescribed by the department by the last day of the fourth month after the end of the taxpayer's tax year. Any final liability shall be remitted with this return. A taxpayer, other than a taxpayer subject to the tax imposed under chapter 2A or 2B, whose apportioned or allocated gross receipts are less than $350,000 does not need to file a return or pay the tax imposed under this act.

Discussion:

The plain wording of the law seems to indicate that when the return is filed payment is due, even if it’s filed before the due date. It also appears that treasury is enforcing this position. One FAQ exists on the topic of e-filing and payment, FAQ E12; however, this FAQ does not discuss the timing of payment, instead the FAQ provides information on payment options.

The payment options available for MBT e-file returns are:   Electronic Funds Transfer (EFT).  Online payments are now available for ACH Debit filers. Information on the EFT process as well as the EFT Debit Application (form 2248) and EFT Credit Application (form 2328) are available on Treasury's Web site at www.michigan.gov/biztaxpayments.  Fax your completed application to (517) 636-4378. Please allow 4 weeks for processing. Paper Payment Voucher.  Taxpayers who choose to mail their payment must include Form 4576, MBT-V, and MBT E-file Annual Return Payment Voucher with the payment.   Copies of federal and Michigan returns or schedules should not be mailed with form MBT-V

Conclusion:

Consider sending payment no later than the date the return e-file is accepted. In addition, send payment certified via the U.S. Postal Service to provide proof of timely payment of the amount due.  

Other options include extending the MBT by no later than the last day of the 4^th month and make payment with the extension or, as discussed in FAQ E12 use the Electronic funds transfer option.

        

Beginning with the 2010 tax year, Michigan will have an enforced Michigan Business Tax (MBT) e-file mandate. 

 

Developers producing MBT tax preparation software and computer-generated forms must support e-file for all eligible Michigan forms that are included in their software package.  All eligible MBT returns prepared using tax preparation software or computer-generated forms must be e-filed.

 

Treasury will not process computer-generated paper returns that are eligible to be e-filed.  A notice will be mailed to the taxpayer indicating that their return was not filed in the proper form and content and must be e-filed.

 

Additional information will be published on Treasury's Web sites www.michigan.gov/taxes and www.MIfastfile.org as it becomes available.

        

We are pleased to announce the following resources are available on EHTC's, State and Local Tax Website:  http://www.ehtc.com/ehtc/saltmbtresources.htm.  Please follow the link to access these resources.

The Michigan Business Tax Act, as Amended (January 2010)

The Michigan Business Tax Revenue Administrative Bulletins:

• RAB 2007-5  SBT - Final Return of Fiscal Year Taxpayer
• RAB 2007-6  MBT - "Actively Solicits" Defined
• RAB 2008-4  MBT - Nexus Standards
• RAB 2010-1  MBT - Unitary Business Group Control Test
• RAB 2010-2  MBT - Unitary Business Group Relationship Tests
• RAB 2010-5  MBT - Where Benefit of Services is Received

The Michigan Business Tax Treasury Frequently Asked Questions (May 2010)

Michigan Department of Treasury MBT Website

MBT Credits Worksheet (November 2009)

Unitary Business Group Worksheet

Federal Public Law 86-272, 15 U.S.C. 381-384

Unitary Questionnaire

        

The sunset for the Michigan International Speedway credit available against the Michigan business tax has been extended to tax years ending before January 1, 2017. Previously, the credit was available through tax years ending before January 1, 2013. For the 2012 tax year, the credit is capped at the lesser of $1.58 million (previously, $1.05 million) or the taxpayer’s tax liability. For tax years that begin on or after December 1, 2012, and end before January 1, 2017, the amount of the credit is equal to the amount of capital expenditures in Michigan on infield renovation, grandstand and infrastructure upgrades, and any other construction and upgrades. During this extended availability, the credit is capped at the lesser of $1.58 million or the taxpayer’s tax liability before the calculation of the credit for professional fees, additional police officers and traffic management devices to ensure traffic and pedestrian safety while hosting motorsports events. To be eligible for the extended credit, the taxpayer must spend at least $32 million on capital expenditures after 2010 and before 2016.

Act 103 (H.B. 6235), Laws 2010, effective June 29, 2010

        

 The Michigan Department of Treasury (department) issued on June 22, 2010, a notice discussing the film production expenditures credit available against the Michigan Business Tax.  The notice appears consistent with and refers in detail to FAQ #Fi1.  For a copy of the notice, click on the link provided below.

1) Qualified Vendors

 

The Michigan Department of Treasury (“Department”), and the Michigan Film Office (“Film Office”), do not make determinations or issue letters designating who is, or is not, a qualified vendor for purposes of the Michigan Business Tax (“MBT”) film production credit authorized by MCL 208.1455. The statute does not utilize or define the term “qualified vendor”.

The Department, and the Film Office, will however address the factors the State of Michigan will consider when evaluating whether a specific transaction is a qualified “direct production expenditure” that is eligible for the film production credit. That analysis follows:

2) Direct Production Expenditures

The MBT film production credit is available to an “eligible production company” at specified percentages of “direct production expenditure[s]” and “qualified personnel expenditure[s]”. MBT Section 455(12) (c) defines the term “direct production expenditure”. MCL 208.1455(12) (c). While the definition includes a number of specifically enumerated expenditures, the core definition requires that, to qualify for credit, direct production expenditure be:

1.	a development, preproduction, production, or postproduction expenditure,
2.	an expenditure made in this state,
3.	an expenditure that is not a qualified personnel expenditure,
4.	an expenditure that is directly attributable to the production or distribution of a “qualified production”, and
5.	an expenditure that is subject to taxation in this state.

The answers to two questions are especially important to qualifying a transaction as“direct production expenditure”. They are: 1) what is a “source within Michigan”, and 2) what is the “nature of qualifying transactions”. The following discussion provides some answers to those two questions:

(a) “Source Within Michigan”

The second requirement noted above insists that the expenditure be made in this state. On August 28, 2008, the Department of Treasury issued its FAQ #Fi1 which provided guidance and focused on when expenditure would be considered to be made in this state. Chief among the FAQ's guidance is that property and services must be acquired from a “source within Michigan”. A “source within Michigan” was deemed to require that a vendor of property or services must have a non-temporary established level of physical presence in Michigan. The FAQ expressed that a minimum level of physical presence would include at least one year presence in Michigan of a bricks and mortar storefront, and one year presence in Michigan of at least one full time employee. (Please refer to FAQ #Fi1 for a full discussion.)

This second requirement was further explained in FAQ #Fi1 as requiring a connection of the transaction constituting the expenditure with the physical presence in Michigan. Pass through transactions were specifically identified as not qualifying, and a minimum standard of an added industry norm markup was expressed as possible evidence that a given transaction has economic substance. Such a markup also gives evidence of the nature of the transaction itself.

The Department, and Film Office, has received requests for determinations and letters from the State of Michigan designating persons as “qualified vendors”. The State will not issue such letters.

(b) Nature of Qualifying Transactions

As stated in FAQ #Fi1, tangible personal property and services must be acquired by the production company from a source within Michigan for the expenditure to qualify for credit. A qualifying transaction, on the whole, must demonstrate it has a substantial economic benefit to the State of Michigan. That benefit must go beyond a mere pass through activity and represent a true purchase and resale procurement type of activity by the vendor qualified as a “source within Michigan”. The following discussion illustrates some of the distinguishing characteristics of such transactions:

While all five criteria enumerated in the statutory definition of “direct production expenditures” must be met, common characteristics of a transaction that qualifies for the credit (in order to distinguish such a transaction from an unqualified pass through transaction) would include the following:

The characteristics noted above are not intended to be all inclusive, and the presence or absence of any of the criteria is not determinative of eligibility for the credit in and of itself. In its review, the Department and Film Office will evaluate each individual transaction by taking into consideration the totality of the related facts, circumstances, and supporting documentation.

For a copy of the notice click on the link provided: 

http://www.michigan.gov/documents/taxes/Notice_To_Taxpayers_-_Film_Credit_Qualified_Vendors_325370_7.pdf

There are numerous examples in the sourcing and nature and quality of transactions section of this notice.

        

In an unpublished opinion, an appeal involving a real property tax dispute, the Michigan Court of Appeals held that the Tax Tribunal did not err in determining the true cash value of the taxpayer’s property. The taxpayer argued that the tribunal’s determination was wrong because upgrades to comparable properties affected those properties’ true cash value when the cost approach was used for valuation. However, the tribunal rejected the cost approach and used the market approach, and deference must be given to the tribunal regarding the appropriate method of valuation and the interpretation of statutes pertaining to valuation because these were matters within the tribunal’s area of expertise.

In this case, the tribunal found that the market approach was the only reliable evidence of true cash value. Under the market approach, as outlined in the assessor’s manual, the presence of upgrades in comparables and the cost of those upgrades did not necessarily mean that the comparables were more valuable than the subject property that lacked the same upgrades. Moreover, the taxpayer could not cite any provision in the assessor’s manual indicating that, when using the market approach, the cost of improvements to comparables had to be considered.

The taxpayer also argued that the tribunal erred in determining the true cash value of his property because it held that market trend did not affect the property’s true cash value. However, the taxpayer did not cite any authority from the law or the appraisal literature to suggest that the tribunal’s determination that market trend was not evidence of a particular property’s true cash value was a wrong principle.

Lin v. Southfield Township, Michigan Court of Appeals, No. 289276, June 1, 2010.

        

One's Travel Ltd. v. Department of Treasury, Michigan Court of Appeals, No. 287254, April 6, 2010, ¶401-491

 

The Michigan Court of Appeals held that a taxpayer failed to meet the statutory requirements to qualify for the small business credit against the former single business tax (SBT) because the taxpayer was required to consolidate its gross receipts and business activities with the other members in the affiliated group, including the parent company, which was a state chartered credit union exempt from the SBT.
 
To qualify for the credit, the statute required that a taxpayer's gross receipts not exceed $10 million per year and officer or shareholder compensation not exceed $115,000 per year. There was no dispute that the taxpayer met these requirements on its own.

However, the law also required an affiliated group to consolidate the business activities of the entities. Looking at the SBT's definition of affiliated group, the court determined that the parent credit union was a U.S. corporation, which can include associations, and therefore, the credit union formed part of an affiliated group.

There is no requirement that the credit union be subject to the SBT in order to have its business activities consolidated with its subsidiaries for the credit calculation. Accordingly, with the consolidation, the taxpayer no longer qualified for the credit.

 

 

        

I will be traveling around the state a bit in May. Listed below are the dates and descriptions of a seminar offered through the MACPA where I will be your discussion leader. Click on the links below for more information and to register for the course.

Tuesday May 11, 2010 – Grand Traverse Resort & Spa, Acme

http://www.michcpa.org/Public/Catalog/CourseDetails.aspx?courseID=10MBTE

Wednesday May 19, 2010 – Radisson Detroit, Livonia

http://www.michcpa.org/Public/Catalog/CourseDetails.aspx?courseID=10MBTE1

What the Course Includes:

New Pronouncements - The Michigan Business Tax Act is constantly evolving with new legislation, FAQs and RABs.  The new and updated Michigan Business Tax seminar will cover all the amendments to the law, new FAQs, RABs and other pertinent information.  
 

MBT Forms – The 2010 version of the Michigan Business Tax seminar will include the MBT forms that will be used to prepare and file the 2009 returns. The seminar content has been reorganized to follow the layout of the forms in a manner to make a complicated tax easier to understand.  Ron Kaley will take participants through the preparation of the MBT forms and will provide comments on problem areas, errors or mistakes in the forms and/or instructions as well as computer software problems.  

 

Tax Planning – The more complicated a tax, the greater the opportunity for tax planning. Because of the intense complexity of the MBT, there is a necessity as well as opportunity for tax planning.  Tax planning for the MBT takes on two forms.  First, defensive tax planning includes documentation and recordkeeping to secure exclusions, deductions, subtractions and credits provided for in the law.  Second, proactive tax planning includes arranging business and financial affairs in a manner to qualify for exclusions, deductions, subtractions and credits provided for in the law.  Proactive tax planning may include restructuring to achieve desirable results.

 

Who Should Attend - Tax practitioners and business executives with Michigan Business Tax responsibilities who need to stay current with the ever-changing tax.

 

Prerequisite – Basic knowledge of federal income taxation of business enterprises and a general understanding of the Michigan Business Tax.

 

Handouts - All participants will receive a handout including the PowerPoint slides from the seminar including Standard MBT forms.  Other materials will be made available to participants through the Internet.

 

        

As discussed in the previous blog entry dated, March 26, 2010 (michiganstateandlocaltax.com/2010/03/23/followup-to-disregarded-entities-maybe-required-to-file-single-business-tax-returns.aspx), the Michigan Department of Treasury had issued guidance in the wake of the Supreme Court rejection of its appeal of the Court of Appeals decision in Kmart Michigan Property Services. 

The guidance originally issued by treasury indicated that previously disregarded entities may be required to file returns under the former Michigan Single Business Tax (SBT) if they had gross receipts in excess of $350,000. SBT returns as far back as 1997 may need to filed (the effective date from RAB 99-9). Also noted was that the decision could have an impact on nexus and apportionment provisions of the SBT.

Resolution:

On March 31, 2010 at 1:23 pm the governor approved House Bill 5937, now Public Act 38 of 2010. The bill amends MCL 205.27a. by adding the following:

MCL 205.27a. (8) & (9)

(8) Notwithstanding any other provision in this act, for a taxpayer that filed a tax return under former 1975 PA 228 (Single Business Tax Act) that included in the tax return an entity disregarded for federal income tax purposes under the internal revenue code, both of the following shall apply:

(a) The department shall not assess the taxpayer an additional tax or reduce an overpayment because the taxpayer included an entity disregarded for federal income tax purposes on its tax return filed under former 1975 PA 228.

(b) The department shall not require the entity disregarded for federal income tax purposes on the taxpayer’s tax return filed under former 1975 PA 228 to file a separate tax return.

(9) Notwithstanding any other provision in this act, if a taxpayer filed a tax return under former 1975 PA 228 that included in the tax return an entity disregarded for federal income tax purposes under the internal revenue code, then the taxpayer shall not claim a refund based on the entity disregarded for federal income tax purposes under the internal revenue code filing a separate return as a distinct taxpayer.

Enacting section 1. This amendatory act is curative, shall be retroactively applied, and is intended to correct any misinterpretation concerning the treatment of an entity disregarded for federal income tax purposes under the internal revenue code under former 1975 PA 228 that may have been caused by the decision of the Michigan court of appeals in Kmart Michigan Property Services v Michigan Department of Treasury, No. 282058, May 12, 2009. However, this amendatory act is not intended to affect a refund resulting from a final order of a court of competent jurisdiction for which all rights of appeal have been exhausted prior to February 12, 2010 to a taxpayer who is a party to that proceeding.

This act is ordered to take immediate effect.