Michigan Developments
Eric Rule,
Director of Governmental Affairs

Following the legislature’s recent overhaul in Michigan’s business taxes and the passage and repeal of a services tax, MRA asked the Lansing office of the Dykema law firm to provide an analysis of the current tax climate. The following overview addresses the MBT, the Services Tax and the recently passed MBT surcharge.

The Michigan Business Tax (MBT) was enacted July 12, 2007, to replace the much-maligned Michigan Single Business Tax (SBT). The MBT took effect on January 1, 2008. The MBT is a single tax statute that contains four separate taxes:

• 4.95-percent Business Income Tax (BIT);
• 0.8-percent Modified Gross Receipts Tax (MGRT);
• 0.235-percent franchise tax imposed only on financial institutions; and
• a premiums tax imposed only on insurance companies.

The BIT and the MGRT both apply to Michigan retailers. The sum of these two taxes equals a Michigan retailer’s total MBT liability before credits (and before the new MBT surcharge, which is discussed below).

The franchise tax and premiums tax are not applicable to retail businesses that are not financial institutions or insurance companies.

The MBT is imposed on all Michigan businesses that have more than $350,000 in Michigan gross receipts.

A. The Business Income Tax
The Business Income Tax is imposed on a taxpayer’s “business income,” which in most cases will equal the taxpayer’s federal taxable income (the amount reported to the Internal Revenue Service in the federal income tax return), with certain adjustments.

There are potential complexities associated with some of these adjustments, and complexities will arise if a taxpayer is a member of a unitary group that must file a combined return. Unitary filing is discussed briefly below.

B. The Modified Gross Receipts Tax
The MGRT is a tax based on modified gross receipts, which generally are equal to total sales for a retailer. If Michigan had adopted a pure gross receipts tax, retailers would have been subject to a tax on their total sales and would have been faced with significant tax increases.

However, Michigan’s MGRT is a modified gross receipts tax. The modification allowed under the modified gross receipts tax is a deduction for “purchases from other firms.”

The deduction for “purchases from other firms” is possibly the most important element of the MBT for Michigan retailers, because this deduction includes inventory and effectively converts the tax to a tax on a retailer’s gross margin rather than its total sales.

A retailer generally will calculate its modified gross receipts by starting with gross receipts (i.e., total sales) and deducting from this amount the amount of its purchases of inventory during the tax year. The deduction for inventory prevents retailers from being taxed on their full sales revenues and recognizes, at least in part, that the retail industry may operate at thin margins.

The MGRT’s allowance of a deduction for inventory will not determine, however, whether the MBT will result in a tax increase to retailers. That determination can only be made by considering each retailer’s business and its sales and income estimates for 2008.

Retailers should prepare these types of pro-forma tax calculations as soon as possible to avoid surprises when the 2008 Michigan tax returns are prepared.

C. The unitary filing requirement
Groups of entities that are under common ownership, including individuals, corporations, partnerships, LLCs and trusts, are required to file combined returns if there is a flow of value among the separate entities. This unitary combined filing requirement prevents taxpayers from using the $350,000 gross receipts threshold to plan around the tax.

For retailers, the unitary filing requirement may complicate tax return filings if the retailer currently operates using an employee leasing company, an equipment leasing company or an affiliated wholesaler or manufacturer.

There are also potential complexities associated with family members involved in related businesses. These are some of the types of issues that should be reviewed with experienced tax counsel.

D. Personal property tax relief
A significant portion of the MBT is dedicated to personal property tax relief and tax credits. The personal property tax relief is most beneficial to industrial capital-intensive businesses and may not prove to be extremely beneficial to many retailers.

However, it is important for all taxpayers to know that the personal property tax exemption of 12 mills is available for commercial personal property in Michigan.

Personal property tax credits are allowed for industrial and certain specific types of personal property. There are no personal property tax credits available for commercial personal property, which is the type of property that most retailers will own.

The determination of whether personal property is industrial, commercial or another classification is made under Section 27a of the Michigan General Property Tax Act, and this classification must be reflected accurately in the local assessor’s records.

E. MBT tax credits
In addition to personal property tax credits, many additional tax credits are allowed under the MBT. The tax credits that will be relevant to many retailers include:

• a compensation credit equal to 0.37 percent of compensation paid to Michigan employees;

• an investment credit equal to 2.9 percent of the cost of capital assets located and used in Michigan;

• a small-business credit for businesses with $350,000 to $700,000 in gross receipts;

• a small-business credit for businesses with less than $20 million in gross receipts and less than $180,000 in officer/shareholder compensation.

The list above is only a very small sample of the tax credits available under the MBT. Each taxpayer should consider the numerous MBT credit provisions carefully to ensure that all available credits are being utilized.

II. The rise and fall of the Michigan Services Tax
After the MBT was enacted in July, the Michigan Legislature recognized that the state’s budget deficit was approximately $750 million. To make up this deficit, the legislature passed Public Act 93 of 2007 to expand Michigan’s 6-percent use tax (similar to a sales tax) to apply to a list of 45 specific services that had not previously been taxed in Michigan (the Services Tax).

Taxable services included tattooing, massage, lawn service, skiing, consulting, copying and other services that the Legislature classified as “discretionary” services.

The enactment of the Services Tax was met with immediate and intense opposition from businesses and individuals throughout Michigan.

As a result of the extensive public outcry for repeal of this new tax, on December 1, 2007, Governor Granholm signed into law Public Act 145 of 2007, which repealed the Services Tax approximately four hours after it had become effective. The primary focus of PA 145 was to accomplish two political tasks:

1) Repeal the very unpopular Services Tax;

2) Replace 100 percent of the revenue that would be lost due to the services tax repeal by means of a surcharge on the MBT.

III. The MBT Surcharge
To replace the revenue lost by the Services Tax, PA 145 imposes a surcharge of 21.99 percent on each Michigan taxpayer’s MBT liability. This means that after a taxpayer calculates its total 2008 MBT liability, before credits, that total tax amount must be increased by 21.99 percent before tax credits are applied.

The amount of the surcharge in any tax year is limited to $6,000,000 per taxpayer. When pro-forma tax calculations are prepared, taxpayers should consider carefully this surcharge in their evaluation.

PA 145 also included a limited number of amendments to the MBT that generally can be classified as technical corrections. These amendments relate primarily to investment income and “business income,” credits, revenue sharing and similar topics that are beyond the scope of this analysis.

The MBT surcharge has been described as a “temporary” tax because PA 145 provides that this surcharge will not apply after 2017. Taxpayers should decide for themselves whether this expiration date renders the surcharge “temporary.”

For more information contact MRA’s Eric Rule at 800.366.3699 or errule@retailers.com. For assistance with tax planning, consult a tax attorney with experience in business tax law.

Update from Washington
James Goldberg,
MRA Washington Counsel

New year brings new laws, new mandates
The new year is a time for new laws and new mandates to take effect, and 2008 is no different.

For instance, the Social Security wage base is rising to $102,000, a $4,500 increase. In effect, that’s an extra $279 tax bill for high-paid workers and their employers.

Tax rates stay the same: 6.2 percent for FICA and 1.45 percent for Medicare. Self-employed individuals will pay 15.3 percent on the first $102,000 of their net earnings and 2.9 percent above that.

And, for the first time in 16 years, the federal government has changed the I-9 immigration form. All employers are required to fill out the form for each new employee hired, and the 2007 version must be used. It’s available at www.ice.gov, the website of the U.S. Immigration and Customs Enforcement agency.

The I-9 form, when properly completed, shows that an employer has examined the documents necessary to determine that people being hired are who they say they are and are eligible to lawfully work. The most common such documents are state-issued driver’s licenses and Social Security cards.

At the same time, the Department of Homeland Security is still trying to strengthen regulations that prohibit hiring individuals who are not lawfully able to work in the U.S. The department wanted to implement tougher processes when employers receive a “no match” letter from the Social Security Administration (SSA) but was rebuffed by the courts in its initial effort.

A “no match” letter is sent when SSA determines that the Social Security number submitted by an employer for a new employee does not match with the name and number in its file. Homeland Security had wanted to impose strict timelines for employer review and possible correction of such mismatches.

Also in the new year, many employers are considering the desirability of providing more information to workers than what is contained in the typical W-2 form, which shows income received and taxes withheld.

A growing number of companies are voluntarily providing employees with such additional information as the employer contribution to Social Security, health insurance, pension or retirement plans and other benefits. The disclosure is designed to show individuals how much their employment really costs a company, since most employees look at compensation only in terms of salary received.

IRS and states team up on payroll taxes
The Internal Revenue Service has joined with more than two dozen states, including Michigan, in an intensified effort to crack down on employment-tax violations. Among the key issues is whether a worker should be classified as an employee or an “independent contractor,” a difference with significant tax implications for both businesses and employees.

The IRS recently signed information-sharing agreements with state labor agencies in Michigan and 28 other states. The initiative goes well beyond worker-classification issues, aiming to detect businesses attempting to avoid tax obligations by making cash payments to workers and not reporting them to either the IRS or state agencies.

The information sharing could be an important factor in narrowing the so-called “tax gap,” or taxes which are owed each year but not paid. IRS officials have estimated the overall U. S. tax gap at $290 billion.

Regulator declines to cut truck driving limit
A federal regulator has kept existing limits on truck drivers’ hours, rather than endorse a court order sought by consumer advocates that would require one less hour a day of driving.

The Federal Motor Carrier Safety Administration issued an interim rule that maintains an 11-hour driving limit, under which truckers are required to rest for 10 hours. Public comment will be open until mid-February.

In September, a federal appeals court had delayed until December 27 a requirement that would reduce the continuous-driving limit to 10 hours with eight hours of rest. In standing by the old rule, Administrator John Hill said that data show that the number of crashes involving fatigued drivers has remained constant in recent years and that crashes in the eleventh hour of driving have been negligible.