The Michigan Department of Treasury (Treasury) has issued a release (Michigan Legal Policy Directive 2008-2, 07/29/2008) providing additional guidance for the administration of the credit against the former Single Business Tax.  The credit is equal to 15% of taxes paid on industrial personal property in tax years beginning in 2006 and 2007.  For the 2007 calendar year, the credit is available for a percentage of taxes paid in 2007.  Such taxes could include the 2007 summer and winter taxes paid in 2007 and taxes levied in 2006 but paid in the 2007 tax year. 

The release specifies the proof needed to substantiate the credit.  In addition, for taxes levied under the Industrial Facility Tax, the property must be situated on land classified as industrial property under Michigan law. [MCL 211.34c] Treasury will determine who qualifies for the credit in a leasing situation by using the same proofs required in a non-lease situation.  Treasury will look to the Summer and/or Winter Tax Statement, which will show to whom the property was assessed.  The person named by the local taxing jurisdiction in the bill as liable for the tax may claim the credit, provided all the other qualifiers are met.

Based on your current e-fxNews profile, below is an item you may find of interest.

PARTNERSHIP (1065), CORPORATION (1120), SCORPORATION (1120S)
Michigan Business Tax (MBT) forms, Draft Only – Do Not Use
Reported on: 07/30/2008

Description: CCH included draft Michigan Business Tax (MBT) forms on our ProSystem fx Tax Releases 2007.06000 and 2007.06010 for Corporate, Partnership, and S-corporate systems without authorization by the Michigan Department of Treasury. These draft forms are not final and have not been fully tested by the Michigan Department of Treasury. The draft MBT forms were provided to us by the Michigan Department of Treasury for internal use only in developing software and were not intended for public release. The draft MBT forms contain a “Preliminary Form – DO NOT FILE” watermark. Do not use these forms and do not file these forms under any circumstance. Please dispose of any copies of the forms that you have printed. Using these forms will result in the returns being rejected by the Michigan Department of Treasury. We will provide final versions of MBT forms when issued by the Michigan Department of Treasury.

At the Business Tax Advisory Group (BTAG) meeting in June, the Treasury announced that draft versions of the MBT forms will NOT be made available to tax practitioners, professional associations (MACPA, State Bar) or industry groups for review and comment before issuance of final forms. 

In the weeks leading up to November 1st, Treasury will be training their call center employees on the new tax forms.  Treasury plans to use a Webinar format to instruct tax practitioners and taxpayers on how to prepare the MBT forms.

Treasury is on pace for a timely roll-out of the MBT forms and instructions.  The only problem would be legislative amendments to the law. 

The software company is taking steps to remedy the unauthorized distribution of draft forms.  The Department of Treasury has posted the following on its web site:

Unbeknownst to the Michigan Department of Treasury, a software company recently released copies of an early draft version of Michigan Business Tax (MBT) forms. The drafts were provided to the software company for internal use only as it works to develop its software product.  The company is now notifying customers that the forms were not intended for public release and do not reflect either recently enacted legislation or legislation that is pending.  Department of Treasury representatives will not be answering any questions regarding these forms, as they are drafts and should not have been released publicly.

Previously, the credit was limited to 50% of the cash amount of contributions.  The bill also provides that the maximum credit allowed taxpayers ($100 for single taxpayers, $200 for those filing a joint return) includes the value of food items contributed. 

The amendment also provides that for a resident estate or trust, the credit is limited to 10% of the taxpayer's liability or $5,000, whichever less, for total cash contributions made and including the value of food items contributed.

The amendment would amend the Michigan Business Tax (MBT) Act to include in the definition of "purchases from other firms", for certain builders and contractors, payments for materials deducted as purchases in determining the cost of goods sold for the purpose of calculating total income on a taxpayer's federal income tax return.  Except as otherwise provided, the Act imposes a modified gross receipts tax on every taxpayer with nexus in the State.  The tax is imposed on the modified gross receipts tax base, after allocation or apportionment to the State at a rate of 0.8%. The tax base is a taxpayer's gross receipts less purchases from other firms before apportionment.  The definition of "purchases from other firms" includes, for a person included in Major Groups 15, 16, and 17 under the Standard Industrial Classification Code as compiled by the U.S.  Department of Labor that does not qualify for a credit under Section 417, payments to subcontractors for a construction project under a contract specific to that project.  Under the bill, "purchases from other firms" also would include payments for materials deducted as purchases in determining the cost of goods sold for the purpose of calculating total income on the taxpayer's Federal income tax return. This would apply to the extent the payments were not deducted under provisions allowing deductions for materials and supplies, including repair parts and fuel, and inventory acquired during the tax year, including freight, shipping, delivery, or engineering charges included in the original contract price for that inventory.  The bill would be retroactive and effective for taxes levied after December 31, 2007.  (Major Groups 15, 16, and 17 include general building contractors, heavy construction contractors, and construction special trade contractors.  Section 417 allows a credit against the MBT for any taxpayer with gross receipts that do not exceed $20.0 million and with adjusted business income minus the loss adjustment that does not exceed $1.3 million as adjusted annually for inflation.  [MCL 208.1113]

With the passage of PA 177, the construction industry could have moved from the looser category among MBT taxpayers to the winner circle.  Now a contractor can deduct all payments to subs specific to a job, all materials and supplies used or consumed on a job, the cost of asset acquisitions and the materials and supplies including repair parts and fuel to operate and maintain the construction equipment and other depreciable assets.

It might be expected that Treasury might also treat a “statutory employee” as subject to the MBT. In the definition of “business activity”, Section 105(1) [MCL 208.1105(1)] excludes “services rendered by an employee to his or her employer…” The Section 109(1) definition of “employee” and the Section 109 (2) definition of “employer” are identical to the SBTA definitions of “employee” and “employer”. [MCL 208.1109]

The MBT issue, though similar to the SBT issue, has a few different twists. If indeed, a ‘statutory employee” is subject to the MBT, then the taxpayer risks exposing income from personal investment activities (dividends, interest, royalties and capital gains) if the assets constitute an integral part of the trade or business or if the income is derived from the active conduct of a trade or business. Furthermore, the “unitary business group” provisions can complicate matters even more. If the “statutory employee” is included in a “unitary business group” by virtue of satisfying both the control test and one of the two relationship tests, then the personal portfolio items and the “statutory employee” wages could be included in a combined MBT return, even if less than $350,000.

The MBT issues for a statutory employee may be a significant reach or extension of the statutory provisions. However, it is possible. The “statutory employee” should make an effort now to segregate and separate the personal investment activity and assets from the “statutory employee” activities. Furthermore, the “statutory employee” should now collect documentation that they are indeed an employee.

Michigan has identified a cut-off date for submitting SBT Fed/State returns which will allow sufficient time for resubmissions of rejected returns and retrieval of acknowledgments: 

The last day to transmit a first time SBT Federal/State return for current and prior years will be December 15, 2008.

The last day to transmit a previously rejected SBT Federal/State return for current and prior years will be December 18, 2008.

SBT Federal/State returns that need to be filed after these dates will need to be paper filed either by mailing the returns to the address listed in the Single Business Tax Instruction Booklet, or by fax to the Alternative Filing Office's attention at (517) 636-4378.

We recommend the taxpayer retain the original invoice and attach it to the credit card statement from which payment is made.  The burden of proof is on the taxpayer to prove the tax was paid.

Treasury is within their statutory right to do the above.  They could go back to the start of business if the taxpayer is not licensed or registered. 

We recommend every taxpayer be licensed for sales tax and registered for use tax.

If the taxpayer fails to file a return or to maintain or preserve proper records, or the Department of Treasury has reason to believe that any records maintained or returns filed are inaccurate or incomplete and that additional taxes are due, the Department of Treasury may assess the amount of the tax due from the taxpayer based on information that is available or that may become available. (MCL 205.68(4))

Failure to produce and keep records for the purpose of examination by the Department of Treasury will be considered willful noncompliance and subject to penalties. In the absence of sufficient records the Department of Treasury may determine the amount of tax due the state by using any information available whether obtained at the taxpayer's place of business or from any other sources, and assess the taxpayer for any deficiencies, plus penalties. Section 17(1) provides: “That assessment is considered prima facie correct for the purpose of this act and the burden of proof of refuting the assessment is upon the taxpayer.” (Rule 205.23)

Licensees are required to keep complete and accurate daily records of all sales, whether for cash or credit, bartered or traded, irrespective of whether the seller regards the receipts from the sales as taxable or exempt. The taxpayer is also required to keep a complete and accurate record of beginning and ending inventories, purchase records, daily sales records, receipts, invoices, bills of lading, and all other pertinent documents pertaining to the business. (Rule 205.23)

If the seller claims sales for exemption on certain sales, it shall be required that he will keep a record of the name and address of the person to whom the sale is made, the date of the sale, the article purchased, the type of exemption claimed, and the amount of the sale. If exemption is claimed by reason of a sale for resale, the taxpayer shall obtain the sales tax license number of the purchaser. (Rule 205.23)

In the past, Treasury has allowed the taxpayer to report on either the cash basis or the accrual basis as long as the taxpayer was consistent.  However, in recent audits, the auditors have stuck to the cash basis.  Furthermore, they have computed the addback based on the cash wages paid from the Form 941, Form 940 or from the accrual to cash reconciliation; whichever is higher.

The taxpayer does not have to accept the auditors determination.  The taxpayer should do a reconciliation of cash wages paid as reported on the Form 941, the Form 940 and prove it against the accrual to cash reconciliation.  After identifying the differences, the taxpayer should only agree to the actual cash payment of wages.  This is what the law requires.

Does anyone have any experience with this situation? 

How do you argue it with Treasury? 

Please send a comment.

The EHTC SALT Newsletter for Monday, June 30, 2008 discusses the issues relating to brother-sister types of entities and when they may pass the control test.

In the final version, House Democrats stripped out language to exclude gross proceeds from the sale of a business.  The stripped out language was a business interest provision which clarified the exclusion of items that were never intended to be included in gross receipts (e.g., capital contributions) and ensured that only the net gain on a taxable disposition of  a business interest would be included in gross receipts.

In addition, House Democrats "tie-barred" the bill to two un-related issues; "Kreiner" legislation which would lower the bar on what legally qualifies as "serious Impairment of body function" under Michigan's no-fault auto insurance system, and labor legislation that includes campaign check-offs for payroll deductions to go to unions.  Tie-bars mean that all bills must be signed into law in order for any of them to be effective.  Business groups are opposed to both of these "tie-bar" bills. 

As passed by the House, SB 1038 would do the following:

1.Specify that the method of accounting used for federal income tax purposes would be used to determine "gross receipts".

2.Provides that 'gross receipts" does not include bad debt  and previously recognized income relation to proceeds on contingent sales.

3.Provides an exclusion from "gross receipts" for proceeds from hedging transactions, specifying that only the gain from hedging transactions are to be included in "gross receipts'.

4.Provides an exclusion from "gross receipts" for proceeds from treasury functions, specifying that only the gain from hedging transactions are to be included in "gross receipts".

5.Clarify the exclusion for an individual, estate or other person organized for estate and gift purposes when the amount received is not from the active conduct of a trade or business. The term "exclusively" was omitted.

6.Provides an exclusion from "gross receipts" for proceeds from investment activity of an individual and related person.

7.Provides an exclusion from "gross receipts" for interest income and dividends from the US Government, the State of Michigan or other political subdivision.

8.Provides an exclusion from "gross receipts" for foreign dividend and royalty income.

9.Provides an exclusion from "gross receipts" for taxes and other governmental fees collected in an agency capacity and paid to a governmental entity.

10.Provides an exclusion from "gross receipts" for proceeds from a pass-through entity.

The above listing is brief summary of the legislation.  The actual legislation should be read to obtain all the details. 

SB 1038 can be found on the Michigan Legislature's website at:
http://www.legislature.mi.gov/documents/2007-2008/billengrossed/Senate/pdf/2008-SEBH-1038.pdf

Throughout the morning the various speakers discussed some of the major changes in the MBT as opposed to the SBT.  It seemed after each presentation I added "these provisions are designed to aid or assist a Michigan based business activity".  Then, during the Question and Answer session, someone asked:  How does the MBT provide incentive for service industries to locate in Michigan?

My Answer:  If a service business provides services in Michigan for customers located outside of Michigan, the changes in the nexus standard will make it easier to qualify for apportionment of tax base.  The changes in the apportionment rules for sourcing sales from services will allow the service business to exclude from the numerator of the sales factor those sales where the customer receives the benefit outside of Michigan.  In theory, if all the customers of a service business were located outside of Michigan, they would pay no MBT even if all the service work was performed in Michigan, assuming nexus was established in at least one state other than Michigan.

Also, the Michigan based service business could claim credits for compensation paid in Michigan, investments of tangible property made in Michigan and research and development done in Michigan.  These credits are only available if the business activity was conducted in Michigan.

Representative Steven Bieda (D-Warren) makes it clear that he is not proposing that, he is merely looking at it. "I am not saying yes to anything and not saying no to anything," according to MIRS.

Representative Bieda and others in Michigan, specifically the Michigan State Chamber of Commerce and the Michigan Manufacturers Association (MMA), want to give businesses some relief from the newly enacted 21.99 percent MBT surcharge.  Representative Bieda said he never supported the surcharge in the first place.  If the governor does not get her plan to use prison reform savings for the tax cut, Bieda wants an alternative.

He is thinking about upping the sales tax rate, which he contends could bring in enough revenue to eliminate the surcharge, perhaps grant some gas tax relief, along with a property tax cut.  In other words, he's looking at what he terms "comprehensive reforms that broaden the base of the sales tax."  "There is some merit to that argument …" he explains.  Having said that, Bieda concedes that all of this would be "relatively difficult" since a two-thirds legislative vote is required to place this before Michigan voters.  But he adds a one-penny increase would not be "out of whack" with neighboring states, which have higher sales tax rates.

Increasing the sales tax rate does not broaden the sales tax base.  The tax base would be the same with a higher tax rate.  The now dead use tax on services would have broadened the tax base by adding services.  The governor's old two penny tax on services would have broadened the tax base.  Both of these proposals died.  Why?  maybe because both former proposals to expand the tax to services was loaded with exemptions and exclusions.  The legislature was picking winners and losers.

If the legislature wants to expand the sales and use tax base, they should read the Michigan Association of Certified Public Accountants (MACPA) whitepaper titled  Technical Observations on the Possible Imposition of a Sales Tax on Services.  The whitepaper is available on the MACPA website or on the EHTC website.  (See below)

Characteristics of an Effective Sales Tax on Services - (From the MACPA Whitepaper Technical Observations on the Possible Imposition of a Sales Tax on Services)

Single Rate – The rate of tax applied to tangible personal property and all services should be the same. A single rate provides for ease in administration, compliance and audit and eliminates any potential conflict with membership in the Streamlines Sales Tax Agreement. The Agreement, of which Michigan is a member, contains a prohibition against the imposition of multiple rates of tax by members seeking to participate in the sales tax registration and collection program. The program is designed to require out of state sellers to collect sales tax on mail order and internet transactions, which is clearly a growing segment of our economy. Being barred from participation in the
program would frustrate efforts to create a level playing field for Michigan based retailers relative to their out of state competitors.

Limited Exemptions – Exemptions for designated services (as opposed to categories of consumers like government, nonprofit) politicize the tax and create significant equity and competitive issues, as well as increase the administrative complexity. Some exempt service providers compete directly with other taxable service providers for the same consumers and these providers would be competitively disadvantaged. The administrative burden created by exemptions is particularly high given the relative lack of precedent for sales taxes on services in other states. The lack of guidance and experience in defining and interpreting exemptions in other states increases the complexity, uncertainty, and controversy around such exemptions.

Input Exemption – Any sales tax on services proposal should provide an input exemption for items of tangible personal property and/or purchased services consumed in rendering a taxable service. The input exemption would be similar to the resale and industrial processing exemptions currently in the Sales and Use Tax Acts In addition, an exemption comparable to the agricultural production exemption should be allowed. The theory of the sales tax is that the tax is imposed on the final buyer, user or consumer. As such, a sales tax on services should provide an exemption not only for services resold such as payments by a general contractor to a subcontractor, but also for items consumed in rendering a taxable service consistent with the current industrial processing exemption applicable to producers of tangible personal property.