After nearly 60 years of experimentation with value added and gross receipts taxes, Michigan has now joined the rank-and-file corporate income tax states through its repeal of the Michigan Business Tax (MBT). Governor Snyder signed the tax package (H.B. 4361, H.B. 4362) into law on May 25, 2011. According to the Council on State Taxation, the legislation takes the state from 30th to 16th in the nation in terms of lowest state and local business tax burden.
The new 6% corporate income tax, effective January 1, 2012, retains many of the same features as the Business Income Tax component of the former MBT, including unitary combined reporting, single sales factor apportionment with market sourcing, a Finnigan apportionment rule, and the same tax rate. The MBT factor presence nexus standard is also retained, under which nexus is established if an out-of-state company has physical presence in Michigan for more than one day or actively solicits sales in the state and has Michigan gross receipts of $350,000 or more. The new tax also incorporates the same tax regimes for insurance companies and financial institutions that existed under the MBT. Insurance companies continue to be subject to the greater of a 1.25% tax on gross direct Michigan premiums or the retaliatory tax, and financial institutions will still be subject to tax based on 0.29% of net capital.
The new law introduces a number of changes from the MBT. Most importantly, the Modified Gross Receipts component of the MBT is eliminated. Also, flow-through entities are no longer subject to corporate income tax at the entity level, although new withholding obligations are imposed on flow-through entities with more than $200,000 of post-apportioned business income, and most credits are eliminated. Taxpayers with existing “certificated” credits (e.g., brownfield redevelopment, battery, film, and MEGA credits) may elect to remain subject to the MBT until those credits are fully utilized rather than losing the credits entirely.
While the change is generally favorable to taxpayers, several transition elements are unfair to taxpayers. Net operating loss carryforwards from the MBT, for example, cannot be carried into the new tax and are simply lost, as are many credits (unless a “certificated” credit election is made, as described above). Despite pleas by business groups, the final legislation does not provide any financial reporting transition relief similar to the FAS 109 provision included with the enactment of the MBT in 2007. Taxpayers, particularly those with significant Michigan deferred tax assets, may experience a significant, negative financial statement impact and should closely evaluate the impact of the law change. For calendar year taxpayers, the law’s enactment close to the June 30 quarter-end date does not provide much time to perform the analysis.
A final piece of the tax package (H.B. 4479) prospectively eliminates the Multistate Tax Compact (MTC) apportionment election “beginning January 1, 2011.” Although the Department has been challenging the MTC election claimed by many taxpayers under the MBT, this legislation arguably demonstrates an implicit acknowledgement that the election was valid in prior years (particularly given the Michigan legislature’s historic propensity to retroactively deny tax benefits). Taxpayers that did not make the election in prior years should evaluate the possibility of amending their returns to do so.