The long, contentious debate over the Single Business TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. (SBT) in Michigan is over. Just after noon today, Governor Jennifer Granholm signed legislation that would replace the SBT with the Michigan Business Tax (MBT).
The House Legislative Analysis Section of the Michigan Legislature has a nice summary of Michigan’s new business tax system. Here are the highlights:
- Replacement taxes: lawmakers replaced the SBT with a tax on business income and a tax on modified gross receipts
- Tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. of replacement taxes: the tax base for the business income tax is federal taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. ; the tax base for the modified gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. is gross receipts less purchases from other firms
- Tax rates: business income is taxed at a rate of 4.96%; modified gross receipts are taxed at a rate of .8%
- Nexus: sales into the state alone would not trigger nexus for either tax; rather, the business income component follows the nexus rules in P.L. 86-272, while the modified gross receipts tax imposes nexus if a company has physical presence for one day or actively solicits sales in Michigan
- ApportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. : both the business income and the modified gross receipts tax would require businesses to apportion taxable activity to Michigan based on their sales in Michigan compared to their sales elsewhere
- Filing status: taxpayers would have to file both taxes based on the unitary business principle, i.e. inter-company transactions would be ignored for purposes of calculating the company’s tax base under the MBT
- Tax incentives: the MBT would retain most tax incentives that were granted under the SBT, and created new incentives for sports venues, compensation and investment, research and development, the arts, entrepreneurial activity, automobile inventory, and grocery store operators
- Other tax credits: two other important tax credits provided are a small business credit that essentially caps the business income tax at 1.8% for companies with less than $20 million in gross receipts, and a personal property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. credit for industrial and utility personal property
- Revenue limit: the bill limits the growth of the MBT by requiring growth above a certain threshold to be split between the state’s rainy day fund and taxpayer refunds; the limits apply for only two years and ratchet up allowable growth until 2010 when the revenue limits expire
It should be noted that these are just the highlights. Detailed analysis will have to wait until a later date, but on the surface this looks like a mild improvement on the old SBT. It is definitely not a “home run” for the state, and the fact that the Michigan Chamber of Commerce ultimately opposed the MBT confirms this assessment. Thus, while the debate over the SBT is over, it looks like the debate over the MBT is just beginning.
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