Michigan Business Tax Definitions of Business Activity and Person
On Friday in Traverse City, Dr. Steve Dilley and I complete our tour of Michigan speaking on the Michigan Business Tax. At every stop the most controversial topic has been the definition of "business activity" and "person" These definitions are critical in determining who is subject to the tax and what activities are taxable. The answer is everyone and everything. That may sound like an exaggeration; but read on.
"Person" as defined in Section 113 "... means an individual, firm, bank, financial institution, insurance company, limited partnership, limited liability partnership, copartnership, partnership, joint venture, association, corporation, subchapter S corporation, limited liability company, receiver, estate, trust, or any other group or combination of groups acting as a unit." [MCL 208.1113(3)]
"Business activity" as defined in Section 105 "... means a transfer of legal or equitable title to or rental of property, whether real, personal, or mixed, tangible or intangible, or the performance of services, or a combination thereof, made or engaged in, or caused to be made or engaged in, whether in intrastate, interstate, or foreign commerce, with the object of gain, benefit, or advantage, whether direct or indirect, to the taxpayer or to others, but does not include the services rendered by an employee to his or her employer or services as a director of a corporation. Although an activity of a taxpayer may be incidental to another or to other of his or her business activities, each activity shall be considered to be business engaged in within the meaning of this act." [MCL 208.1105(1)]
A "person" subject to the Michigan Business Tax can include any form of entity and can be an individual, estate or trust. However, its what's missing from the definition of "business activity" that sends off alarms. The only exception is "services rendered by an employee to his or her employer". There is no "casual transaction" exclusion as is found in the Single Business Tax Act. There is no "isolated transaction" exclusion as is contained in the Sales Tax Act. There is no "non-business income" exclusion as is found in most state income tax statutes. Finally, there is no "investment activity" exclusion.
What this means is: interest, dividends, royalty and capital gain income would be subject to the Michigan Business Tax if greater than $350,000. Further complications exist when an individual is included in a "unitary business group". We'll save that issue for another day.
Are we to expect some clarification on this matter, or do you anticipate that it will remain as it now stands?
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The current definition of "business activity" is in the law in Section 105(1) of the Michigan Business Tax Act. Therefore, it's there for now. Any clarification will have to come from the legislature because it would require an amendment to the law. I don't see it happening this year. However, it could happen as more and more taxpayers realize what the law says.
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Under the BIT, is their any exemption or exclusion for capital gains income derived from a one-time sale of a business's assets, such as when a one business is acquired by another business?
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Mark,
Before the Governor signed PA 145 this weekend, there was no exclusion or exemption for a one-time sale of business assets. There still isn't. However, PA 145 amended the definition of "business income" and added an exclusion to "gross receipts" for an individual, estate, trust or partnership organized exclusively for estate or gift planning purposes. Business income and gross receipts is limited to that part of federal taxable income or gross receipts derived from transactions, activities, and sources in the regular course of the taxpayer’s trade or business.
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