Michigan Tax Law

Two components of the Michigan Business Tax apply to most businesses, the Business Income Tax and the Modified Gross Receipts Tax. The first test for whether a business is subject to the Michigan Business Tax applies to both components, that test being whether the company has sufficient contact with Michigan to be subject to its jurisdiction. A second test applies to the taxpayer to determine whether it must file a tax return: If the business’s receipts are less than $350,000 for a 12 month period, it is exempt from filing the tax. A third test applies to the Business Income Tax, being whether the income tax is prohibited by the federal Interstate Commerce Tax Act.

I. Nexus

Businesses that have physical presence in Michigan for more than one day, or that actively solicit sales in Michigan, and have gross receipts sourced to Michigan in excess of $350,000, are subject to the Michigan Business Tax. States are prohibited by the federal Interstate Commerce Tax Act from imposing income taxes on out-of-state businesses whose only activity in the state is to solicit orders, which are accepted and filled from outside the state.

Note that the exemption from the Business Income Tax provided by the federal interstate Commerce Tax Act is an all or nothing test. A non-Michigan person or company having substantial sales in Michigan who only solicits orders in Michigan, which orders are accepted and filled outside of Michigan is exempt from all of the Business Income Tax. If the person or company adds any activity in Michigan besides the solicitation of orders, all of its Michigan sales are subject to the Business Income Tax as well as the Modified Gross Receipts Tax.

Businesses having no physical presence in Michigan, but having sales in Michigan in excess of $350,000, are not subject to the Michigan Business Tax unless they actively solicit sales in Michigan. Active solicitation has been defined by the Department of Treasury to mean “purposeful solicitation”, explicitly or implicitly inviting an order, or activities that are entirely ancillary to requests for an order intended to reach the Michigan market. Purposeful solicitation can be by print, audio or video advertisement, or by internet advertisement or web site.

The Modified Gross Receipts Tax is imposed on all businesses having a “substantial nexus” in Michigan. Substantial nexus means that the taxpayer either has a physical presence in Michigan for more than one day during the year, or “actively solicits” sales in Michigan and has Michigan gross receipts of at least $350,000. Physical presence is any activity conducted in Michigan by a taxpayer directly, on behalf of the taxpayer through its employee, agent, or independent contractor. It does not include activities of professionals or other service providers if the activity is not significantly associated with the taxpayer’s ability to establish and maintain a market in Michigan.

If a company has related entities which must be combined in Michigan Business Tax’s Unitary Tax Reporting, the activities of all members of the Unified Business Group and the sum of all receipts by all members of the Unified Business Group are measured against the filing requirements.

A non-Michigan taxpayer whose only activity in Michigan is solicitation of sales is exempt from the Business Income Tax under the federal Interstate Commerce Tax Act restricting the ability of states to impose income taxes on out-of-state corporations, but such a taxpayer would be subject to the Modified Gross Receipts Tax.

II. Unitary Tax

Michigan’s tax is a “Unitary Tax”, that is, income and receipts of all of a business’s branches, subsidiaries and other related companies, wherever located, are reported on a single return, A Unified Business Group is two or more Unite States persons that satisfy both a control test and one of two relationship tests under Mich. Compiled Laws Section 208.1117(6):

• The control test is satisfied when one person owns or controls, directly or indirectly, more than 50% of the ownership interests, with voting or comparable rights, of another person. Generally, indirect ownership is determined by applying the constructive stock ownership rules of Internal Revenue Code Section 318; Section 318 attributes all of the ownership of one person to another who is his spouse, his child or his parents, and attributes ownership by a corporation to anyone owning more than 50% of the corporation. The Treasury Department will apply the rules from Section 318 to all forms of ownership interests.

• The relationship test is satisfied if the Unified Business Group has business activities or operations (a) which result in a flow of value between or among persons included in the group, or (b) has business activities or operations that are integrated with, are dependent upon, or contribute to each other. Flow of value is determined by reviewing the totality of facts and circumstances of business activities and operations. Flow of value is established when members of the group demonstrate one or more of functional integration, centralized management, and economies of scale. Examples of functional integration include common programs or systems and shared information or property. Examples of centralized management include common management or directors, shared staff functions, and business decisions made for the group rather than separately by each member. Examples of economies of scale include centralized business functions and pooled benefits or insurance. Groups that commonly exhibit a flow of value include vertically or horizontally integrated businesses, conglomerates, parent companies with their wholly owned subsidiaries, and entities in the same general line of business. Flow of value must be more than the mere flow of funds arising out of passive investment. Businesses are integrated with, are dependent upon, or contribute to each other under many of the same circumstances that establish flow of value. However, this alternate relationship test is also commonly satisfied when one entity finances the operations of another or when there exists intercompany transactions, including financing.

III. Exempt Persons

The following persons are exempt from the Michigan Business Tax:
1. The United States, any state and their agencies and political subdivisions.
2. Persons exempt from federal income tax under most provisions of Internal Revenue Code Section 501(c), and subsidiary entities.
3. Nonprofit cooperative housing corporations for housing activities.
4. Persons whose primary activity is the “production of agricultural goods” to the extent of the tax base attributable to the production of agricultural goods (not including the retail marketing of agricultural goods).
5. Certain farmers’ cooperative organizations where the purchase of commodities from non-producers is less than 5% of purchases.
6. Farmers’ cooperative corporations to the extent of specified direct and indirect marketing activities.

References:

Michigan Compiled Laws:

Section 208.1101 et. seq.—Michigan Business Tax Act

Michigan Department of Treasury Revenue Administrative Bulletins:

Bulletin 2007-6—Michigan Business Tax—“Actively Solicits” Defined
Bulletin 2008-4—Michigan Business Tax—Nexus Standards

Michigan Business Tax Forms:

Form 4600—Michigan Department of Treasury, Michigan Business Tax Instruction Booklet for Standard Taxpayers

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