Michigan Business Tax small help for retailers

After months of hard-fought negotiations and countless delays, Michigan’s new business tax was finally signed into law in early July.

The new tax is considered by many analysts and business organizations to be a modest improvement over the Single Business Tax (SBT) it replaces. It is designed to bring in the same amount of revenue as the SBT.

“Most of our members will see very little change in their taxes, and some are likely to see a slight decrease as a result of the restructuring,” said Eric Rule, MRA’s director of governmental affairs.

The new Michigan Business Tax (MBT) is not, however, much simpler than the SBT, cautioned Rule.

“We had hoped SBT’s replacement would simplify the state’s business tax law. But because the MBT was a result of meshing two distinct plans—the one proposed by House Democrats in concert with Gov. Granholm’s office and the Republicans’ BEST plan—those hopes were unlikely to be realized,” said Rule.

In contrast to the value-added SBT, the MBT is based two-thirds on a business’s gross receipts (less purchases from other businesses) and is set at 0.8 percent after various modifications. The remaining one-third is a business income tax, set at 4.95 percent, also subject to various adjustments.

As in the past, a business with gross receipts of $350,000 or less does not have to file a tax return or pay any tax.

Qualifying small businesses will have the option to pay an alternative tax of 1.8 percent of adjusted business income.

Personal property taxes are reduced by 12 mills for commercial property, which helps retailers and other non-manufacturing businesses, but the bulk of the personal property tax advantages in the MBT falls to industrial property, which will see a 24-mill reduction, with a refundable credit of 35 percent.

The governor’s office claims the new structure provides tax cuts for more than seven of 10 Michigan businesses and provides tax cuts to both small businesses and Michigan’s major manufacturers. Rule believes it is too soon to say whether this assessment is accurate.

However, one of the state’s most prominent business groups, the Michigan Chamber of Commerce, opposed the MBT, stating none of the chamber’s proposed changes (more than 30) was addressed in the final version.

Chamber officials also said the MBT will result in double taxation for some companies and that many unsuspecting companies are going to get hit with a tax increase.

Senate Majority Leader Mike Bishop (R-Rochester) described the MBT as a “fair, equitable tax that will allow companies to expand and encourage new economic development and growth in Michigan.”

Credits
The MBT provides a number of tax credits that qualifying taxpayers could claim to reduce their combined tax liability under the income and net worth taxes. Some of these credits are new and some are currently available under the SBT.

New credits that may ease the burden of business owners include a new compensation credit of 0.37 percent of compensation paid in Michigan and a revision to the existing investment tax credit, which will now be 2.9 percent of the cost of net new capital assets located in Michigan.

Another credit eliminates a “tax cliff”—a dramatic jump in taxes that existed for businesses that crossed the threshold of $350,000 in gross receipts. In the past, a business with gross receipts of $350,001 filed a return and paid the tax on its taxable business activity, not just the portion related to gross receipts in excess of $350,000.

The MBT retains the current filing threshold, but a new tax credit eases the tax burden gradually between $350,000 and $700,000, so that only at $700,000 in gross receipts will the business pay its full tax liability.

Other new credits include Research and Development credits and a Michigan Entrepreneurial Credit for 2008 through 2010. Because of the way the latter is structured, it is not expected to benefit retailers.

In addition, there are several new special sector credits, including one for very large retailers headquartered in Michigan. Spartan Stores and Meijer lobbied for and won these credits, which will not be available to similar large retailers not headquartered in Michigan.

Many existing tax credits will be retained, including the Investment Tax Credit (which has been modified as explained above), the Startup Business Credit, the Renaissance Zone Credit, the Historic Preservation Credit, and several credits related to making public or community contributions.

The amount of revenue the Michigan Business Tax could generate in its first three fiscal years is limited. If revenue were to exceed the limit in any of these three years, half the excess would be refunded to taxpayers and the remainder would go into the Budget Stabilization Fund. If the limit is exceeded by less than $5 million, then all of the excess over the limit would be deposited into the fund.

Winners and losers
As with many business issues, the MBT is a mixed bag for members of Michigan Retailers Association, depending on their size, their presence in Michigan and other factors.

Although revenue neutral, the bill would change the distribution of tax liabilities, according to a report by the Senate Fiscal Agency.

Manufacturing firms will see their tax liabilities reduced by a total of several hundred million dollars. Non-manufacturing firms will experience increases, mostly falling upon the insurance, real estate and financial industries. Under the new system, insurance companies are subject to sales and use taxes, among other changes in that industry’s tax liability.

Similarly, while Michigan-only firms and multi-state firms based outside of Michigan will generally see increases in their tax liability, Michigan-based multi-state firms will generally experience liability reductions.

“It appears manufacturers and the ‘Big Three’ automakers had a strong hand in this deal,” said Rule. “In addition, some emerging industries such as high tech may be attracted to the state. However, other growing industries such as banking, real estate and insurance will not find it appealing.”

Michigan Retailers Association followed the discussions and arguments closely as the MBT was hammered out and solicited input from members regarding their concerns.

“With only broad strokes made available until the final version was revealed, however, it was difficult to evaluate which of the competing plans would benefit individual businesses, much less the broad range of retailers represented by MRA,” said Rule.

“Overall, this is probably neither the answer to Michigan’s economic woes, nor the horrible, rushed deal that its opponents argues it is.

“With the exception of very large retailers based outside Michigan, most retailers will fare about the same, and possibly somewhat better due to the reduction in property taxes and the removal of the tax cliff.”