Friday, April 30 2010
Since the inception of the Michigan Business Tax Act and the Personal Property Tax Credit, a property tax classification has become increasingly important. Only tangible personal property located on property classified as "industrial" will qualify for the MBT Personal Property Tax Credit as well as other exemptions from the tax. Assessors have been reluctant to correct errors or to change a parcel classification to "industrial". Consequently taxpayers have filed appeals to the State Tax Commission. Current law provides that a property tax classification determination from the State Tax Commission is final.
Legislation introduced in the Michigan Senate would strike to prohibition of appeal from the State Tax Commission and allow an appeal to the Michigan Tax Tribunal.
(6) An owner of a property interest in any assessable property who disputes the classification of that parcel shall notify the assessor and may protest the assigned classification to the March board of review. An owner of a property interest or assessor may appeal the decision of the March board of review by filing a petition with the state tax commission not later than June 30 in that tax year. The state tax commission shall arbitrate the petition based on the written petition and the written recommendations of the assessor and the state tax commission staff.
An appeal may not be taken from the decision of the state tax commission regarding classification complaint petitions and the state tax commission's determination is final and binding for the year of the petition. An owner of a property interest or assessor may appeal the state tax commission's order regarding a classification dispute to the Michigan Tax Tribunal.
Friday, April 16 2010
Sales of Bus Parts, Remanufacturing Services were Sourced to Michigan Where the Service Was Performed
In Midwest Bus Corporation v. Department of Treasury, Michigan Court of Appeals, No. 288686, the Michigan Court of Appeals found that sales of bus parts and remanufacturing services were properly sourced to Michigan under the single business tax (SBT) for sales factor apportionment purposes. The issue in the case involved the determination as to whether the taxpayer was in the service business or in the business of selling tangible personal property. Different sourcing rules apply for the SBT.
The taxpayer argued that the contracts provided for the sales of tangible personal property so that the sales should be sourced to the destinations where they were shipped, outside of Michigan.
The Department of Treasury (Treasury) argued that the taxpayer provided the service of installing bus parts and that the service was not merely incidental to the sale of the parts themselves. Thus, according to Treasury, the sales should be sourced to Michigan where the services were performed.
The Single Business Tax Act (SBTA) provides that sales of tangible personal property were in Michigan if the property was shipped to a purchaser in Michigan. Sales, other than sales of tangible personal property, were in Michigan if the business activities were performed in Michigan.
A very interesting and noteworthy aspect of this case is the Court's reliance on a sales tax case which was decided by the Michigan Supreme Court. In Midwest Bus, the court looked at Catalina Marketing Sales Corp. v. Department of Treasury, 470 Mich. 13; 678 N.W.2d 619 (2004) to determine how to source sales that consisted of both tangible personal property and services.
Under the remanufacturing or rehabilitation contracts at issue, the buyer sought, and the contracts required, extensive servicing of the buses, including disassembling, removing, repairing, inspecting, reconditioning, rebuilding, replacing, restoring, painting, servicing, cleaning, testing, and reassembling various components of the buses. In the context of these contracts, the parts were merely a means to accomplish the objective of the contract. The services provided contributed a lot of value; the remanufacturing contracts could not have been performed without the services. Accordingly, the sales were properly sourced to Michigan and included in the sales factor numerator for apportionment purposes.
The Court in this case has provided a methodology to make the determination. The final determination is based on the facts and circumstances. In prior years, Treasury has allowed a proration of the sales where the sale included both the sale of property and the sale of services. Now it is all or none. This change in Treasury policy and the Court's decision may necessitate the review of filed SBT returns and possibly amended returns.
Thursday, April 15 2010
The Industrial Processing Exemption is applicable to a Conveyor System used to move Raw Material to the First Step in Industrial Processing
In a case that I handled at audit and at the informal conference, Rouge Steel Company v. Department of Treasury, (Rouge Steel) Michigan Tax Tribunal, No. 315388, November 30, 2009, released April 2010, a conveyor system used by Rouge Steel, a steel manufacturer, qualified for the industrial processing exemption from Michigan use tax because the exemption applies to production material handling. The very expensive and complicated conveyor system moved the raw material, iron ore pellets, from the in-ground storage to the first step in industrial processing where coke and other materials were added prior to movement to the blast furnace. The key issue in this case was: at what point does the industrial processing exemption start?
Though the industrial processing statute during the audit period was ambiguous, it was subsequently amended to clarify that production material handling falls within the definition of industrial processing. Further, a rule promulgated by the Department of Treasury (RAB 2000-4) prior to the audit period had specifically cited production material handling as an example of an industrial processing activity. Once the transportation of raw materials was set in motion by the initial movement of the pellets from storage onto the hopper conveyors, the process of moving the pellets to the blast furnaces was continuous and part of the industrial process.
Sales and Use Tax Seminars
I will be leading a discussion of the Industrial Processing Exemption as well as other relevant sales and use tax issues at a series of seminars sponsored by the Michigan Association of certified Public Accountants (MACPA).
Tuesday, May 25, 2010 - Troy
Wednesday, June 2, 2010 - Grand Rapids
Wednesday, September 29, 2010 - Grand Rapids
Thursday, October 7, 2010 - Livonia
Industry Specific Seminars
Construction Industry: On Friday, October 8, 2010 in Troy, Dave Barrons and I will be presenting a seminar titled: Michigan State and Local Tax for a Contractor. Along with coverage of the Michigan Business Tax, the seminar will cover the very complicated sales and use tax issues that construction contractors face.
Manufacturing Industry: On Wednesday, October 20, 2010 in Plymouth, Mike Lewakowski and I will be presenting a seminar titled: Michigan State and Local Tax for a Manufacturer. In addition to coverage of the Michigan Business Tax, the seminar will devote a substantial amount of time to the industrial processing exemption.
Tuesday, April 13 2010
In the wake of passage of the so called Kmart fix last month, the Michigan Department of Treasury (Department) has rescinded their notice to taxpayers which would have required all former disregarded entities to file tax returns for all applicable years. RAB 99-1, which promulgated the state's position in regard to disregarded entities, was effective January 1, 1097. A significant administrative burden and tax burden was lifted from Michigan taxpayers.
The Michigan Department of Treasury issued guidance in the wake of the Supreme Court rejection of its appeal of the Court of Appeals decision in Kmart Michigan Property Services. The Court of Appeals ruled that there is no language in the Single Business Tax Act that requires a taxpayer to file the same way as it did for federal income tax purposes. The Department of Treasury had issued Revenue Administration Bulletin 1999-9 (RAB 99-9) which stated its position that they would follow the federal check-the-box rules. The Court of Appeals in stating that RABs do not have the force and effect of law allowed a single member Limited Liability Company (LLC) to file a separate single business tax return.
Previously disregarded entities would have been required to file returns under the former Michigan Single Business Tax (SBT) if they had gross receipts in excess of $350,000.
The Department's Notice reads as follows:
2010 PA 38 was signed into law on March 31, 2010. 2010 PA 38 is "curative, shall be retroactively applied, and is intended to correct any misinterpretation concerning the treatment of an entity disregarded for federal income tax purposes . . . under [the SBT] that may have been caused by the [Kmart decision]." In other words, 2010 PA 38 reinstates the law governing disregarded entities under the SBT in effect prior to Kmart.
Therefore, the Department rescinds Notice to Taxpayer Regarding Kmart Michigan Property Services LLC v Dep't of Treasury, the Single Business Tax, RAB 1999-9, and RAB 2000-5. Furthermore, the Department concludes that RAB 1999-9 and RAB 2000-5 reflect the correct interpretation of the law regarding the treatment of disregarded entities under the SBT. Returns, assessments, refunds, and voluntary disclosure agreements involving disregarded entities will be administered consistent with 2010 PA 38, RAB 1999-9, and RAB 2000-5.
This Notice was issued on April 12, 2010.
The downside to the K-Mart fix legislation, is that taxpayers entitled to a refund under the K-Mart ruling would no longer be entitled to the refund. Initially the Department of Treasury refused to refund amended returns based on the Kmart case. However, after the above guidance was promulgated, they started to issue refunds. To complicate matters more, there is litigation on the issue of legislative reversal of judicial decisions. It is anticipated that the Michigan Supreme Court and maybe the US Supreme Court may have an opportunity to review this issue.
Finally, both the original Kmart Michigan Properties, the legislative fix and the Departments rescission notice all were in reference to the now repealed Single Business Tax. it is unknown what the effect, if any, will be on the Michigan Business Tax.
Friday, April 09 2010
In One's Travel Ltd. v. Department of Treasury, Michigan Court of Appeals, No. 287254, April 6, 2010, the Michigan Court of Appeals held that a taxpayer failed to meet the statutory requirements to qualify for the small business credit against the single business tax (SBT).
The taxpayer satisfied all the statutory requirements to qualify for the credit when considering their separate return. However, the single business tax act in section 36 requires that all members of an affiliated group must consolidate their business activities for purposes of the credit disqualifiers. The credit was disallowed because the taxpayer was required to consolidate its gross receipts with the other members in the affiliated group, including the parent company, which was a state chartered credit union exempt from the SBT.
To qualify for the credit, the statute required that a taxpayer's gross receipts not exceed $10 million per year and officer or shareholder compensation not exceed $115,000 per year. There was no dispute that the taxpayer met these requirements on its own. However, the law also required an affiliated group to consolidate the business activities of the entities. Looking at the SBT's definition of "affiliated group," the court determined that the parent credit union was a U.S. corporation, which can include associations, and therefore, the credit union formed part of an affiliated group. There is no requirement that the credit union be subject to the SBT in order to have its business activities consolidated with its subsidiaries for the credit calculation. Accordingly, with the consolidation, the taxpayer no longer qualified for the credit.
Friday, April 02 2010
My March 19th post addressed some filing and compliance issues relating to Michigan Business Tax returns. Although this is the second filing season, problems still exist. Following are the responses received from Treasury.
Treasury advises that they are receiving far more paper returns than expected. They have asked us for input. Practitioners have cited problems with their software. Maybe the law is too complicated or maybe the forms are not clear. I think its a combination of both combined with limited resources at Treasury.
Treasury responses to MACPA members:
In response to problems with extension requests, Treasury said:
The postmark date is used for determining if an extension has been received timely. We had identified the problem related to extension requests from fiscal year returns and are in the process of remedying the problem. Let us know about situations where your members filed what they believed to be their timely filed extension requests for fiscal year returns and were denied incorrectly and we will review them. We expect the problem to be resolved in the next couple of weeks and apologize for the difficulty the problem caused your membership.
In response to MBT notices and appeal rights, Treasury said:
We have two different letters. One is for changes to returns that continue to be entitled to a refund credit forward or have no additional tax due and the other is for tax returns resulting in additional tax due. The tax due letters do not include the appeal rights because taxpayers will get their appeal rights if an intent to assess is issued.
Letters on returns not resulting in additional tax due include appeal rights because the taxpayers will not be receiving a separate notice with their appeal rights. Both letters tell them to contact Customer Contact, but the one with appeal rights, says: "If you do not want an informal conference or to make an appeal...contact Customer Contact" (paraphrase). The reason for this is that we do not want taxpayers to lose their appeal rights if they call Customer Contact (this is the same as it was under SBT and is currently under IT). However, in no cases do Customer Contact representatives refuse to discuss returns with taxpayers, once the identity of the taxpayer has been verified.
In response to thousands of MBT notices being mailed, Treasury said:
We have deployed additional resources to look at our backlog of correspondence to see what can be done to resolve it as quickly as possible.
In regard to penalty waiver requests, Treasury said:
Treasury addresses all penalty waiver requests received. Unfortunately, when we attempt to address penalty waiver requests over the phone, the facts quite often change. We have advised taxpayers in writing that, "The taxpayer does have the right to send a written request for penalty waiver. Their request should include an explanation." All penalty waiver requests are evaluated based on the reasonable request guidelines for penalty waiver.
More on penalties and penalty waivers:
There are more lenient safeguards in place with MBT for the 2008 tax year. Penalty and interest are assessed in accordance with the statute and written requests for waiver will be evaluated based on reasonable cause guidelines. If one of your constituents has facts and circumstances that meet the reasonable cause guidelines, I encourage them to submit a written request for waiver that includes all the facts.