Monday, January 31 2011
Business Tax Proposal Creates Reaction from Business Community
The following is from MIRS Weekly Report. I am providing it in the interest of transparency. The future business tax system for Michigan is of upmost importance to Michigan CPAs and their clients.
Gov. Rick SNYDER's administration gave business groups a peek of its vision of a stripped-down six-percent corporate income tax that eliminates the MEGA, brownfield, film and every other state business tax credit outside of one small business tax credit.
The proposed "Michigan Corporate Income Tax" would replace the Michigan's Business Tax's (MBT) 4.95 income tax rate, .8 percent gross receipts tax and 21.99 percent surcharge. The tax would apply to any in-state company with sales over $350,000, the same floor set by the MBT, which represents roughly a quarter of Michigan businesses.
One source told MIRS that under the Snyder proposal "all lobbyists would be starting from scratch in getting their credits back."
However, it also is consistent with Snyder's campaign pledge to create a simplified corporate income tax. Only 29-pages long, the proposal eliminates the current situation where certain companies are given massive credits against the comparatively large MBT.
Also, as promised, the proposed Michigan Corporate Income Tax would bring in the ballpark of the $1.5 billion less than the MBT brings in.
"The Governor said during the campaign that he wanted to create a much more simple tax," the source said. "He does that with this."
The proposal's lone tax credit is for small business with receipts lower than $20 million and adjusted (income minus allowed deductions) of less than $1.3 million. If Snyder did not create this tax credit these particular small businesses would be see their income tax tripled.
According to Rich STUDLEY, president of the Michigan Chamber of Commerce, the group met with the administration regarding the tax.
"Our understanding is, it's a preliminary or rough draft," Studley said. "I think it's an encouraging sign that the new administration is really trying to flush out the details of their proposal in writing and is circulating a draft to taxpayers."
Studley said the Chamber will be reviewing the proposal with its tax committee but that at first blush the proposal does attempt "to accomplish all they said they were going to do."
"Our new governor was a CPA and a business man, every meeting of ours with the Governor has shown he has a really high level of personal knowledge," Studley added. "It's really very impressive."
Chuck HADDEN of the Michigan Manufacturers Association (MMA) said his group's members are also reviewing the draft proposal to its members.
As written, the tax does not touch the personal property tax on business or the current credit written into that law, leaving that aspect of business tax with the property tax portion of state law.
That means the School Aid Fund isn't specifically reimbursed for the personal property tax exemptions under this draft proposal.
One of the industry sectors always wary of business tax rewrites is the state's insurance industry.
The proposal mimics nearly word for word the treatment insurance companies in Michigan receive under the current Michigan Business Tax (MBT) that protects them from a "retaliatory tax."
Under a retaliatory tax, if Michigan's business tax on insurance companies goes up, companies domiciled here must pay the same higher tax rate to other states. Under the 29-page draft tax proposal being circulated, those companies would be subject to the same 1.25 percent tax on gross premiums they currently pay under the MBT.
Some in the insurance industry also were looking to see if long-standing credits for industry contributions to so-called "guarantee" funds were included. Under existing law, when an insurance company goes under -- other companies must stand in and cover the policies and obligations of the failed firm.
Under the current MBT, when that happens companies are allowed to write off the contributions they make to those guarantee funds. In some years, without those credits, insurance companies could see a fairly substantial tax increase.
As drafted, the tax applies to corporations that:
- Have $350,000 in sales sourced to the state of Michigan
- Has a physical presence (any activity conducted by the taxpayer or on the taxpayers behalf) in the state more than one day a year
- The proposal would apply a financial institutions franchise tax for qualifying entities however the rate of the franchise tax is left blank in the draft proposal.
Sunday, January 30 2011
A Lessor Could Not Claim an Exemption Based on the Subsidiary's Exempt Status
In AeroGenesis Inc. v. Department of Treasury, Michigan Tax Tribunal, No. 272692, August 25, 2010, released January 26, 2011 the Michigan use tax was assessed on an aircraft that was leased to the taxpayer's subsidiary because the taxpayer could not claim an exemption based on the subsidiary's exempt status.
The statute applicable to the 1996 purchase contained an exemption for the "storage, use, or consumption of an aircraft by a domestic air carrier. . . for use solely in the transport of air cargo, passengers, or a combination. . . that has a maximum certificated takeoff weight of at least 6,000 pounds." The taxpayer did not qualify as a "domestic air carrier" as it was not primarily engaged in the commercial transport for hire of air cargo and passengers as a business activity. Furthermore, unlike its subsidiary, the taxpayer did not hold a federal air carrier certificate.
The Tax Tribunal ruled the taxpayer could not claim an exemption based on the use of the aircraft by its subsidiary because the taxpayer did not demonstrate that it was wholly owned and controlled by the subsidiary such that they constituted one entity for tax purposes.
As the taxpayer was not registered for sales or use tax in Michigan before the time of the aircraft's purchase, it could not make a Rule 82 election to pay tax on rental receipts. Therefore, the taxpayer was liable for use tax based on the purchase price of the aircraft. Though the Department of Treasury's assessment was upheld, the amount was reduced due to stipulation by the parties of a lower purchase price.
Saturday, January 29 2011
Michigan Tax Tribunal Reverses Long Standing Policy on Agricultural Exemption
In Sietsema Farms Feeds LLC v. Department of Treasury, Michigan Tax Tribunal, No. 355649, September 21, 2010, released January 26, 2011 the Michigan Tax tribunal determined that a taxpayer engaged in the business of operating a feed mill for the production of farm animal feed was subject to Michigan use tax on certain equipment, including truck scales and storage/processing tanks, because the taxpayer's activities were not part of agricultural production for purposes of the agricultural exemption.
Both the sales tax act and the use tax act exempts property used and consumed in the "tilling, planting, caring for, or harvesting of the things of the soil or in the breeding, raising, or caring for livestock, poultry, or horticultural products for further growth." Though feeding was found to be part of the activity of raising and caring for animals, the taxpayer did not use its equipment to feed livestock. Rather, it used the equipment in its business operations and wholesale sales to farmers. Further, the mixing of grain is not a direct part of the raising or caring for livestock. It was not the Legislature's intent to extend the exemption to all business activities that support agriculture.
Though the taxpayer also contended that it was entitled to the exemption based on its relationship with entities engaged in qualifying activities, the exemption cannot be based on the activities of separate legal entities. The taxpayer claimed that it was part of a group of entities comprising a "unitary business group" as defined in the Michigan Business Tax Act; however, this terminology is not applicable for purposes of the use tax. An industrial processing exemption was also asserted for truck scales and an inventory monitoring system, but the taxpayer failed to present evidence supporting an exempt use.
Friday, January 28 2011
Penalty Waived as Taxpayer Had Reasonable Cause
In The Lane Company, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 294456, January 25, 2011, the Michigan Court of Appeals affirmed the waiver of a penalty for a taxpayer's failure to make payments for the former single business tax (SBT).
A Virginia corporation, the taxpayer hired independent representatives to solicit requests for sales and had the requests approved outside of Michigan. In the late 1980s, the taxpayer contacted the Department of Treasury to ask about nexus. The department stated that P.L. 86-272 provided protection and, based on the taxpayer's Michigan business activities, the taxpayer did not have nexus for the SBT.
Later, based on court cases and policy changes, it was determined that P.L. 86-272 no longer provided protection from nexus under the SBT. The court presumed without deciding that the taxpayer was obligated to file SBT returns and remit payments for the 1998 and 1999 tax years; however, the taxpayer did not do so.
The taxpayer argued that it was unaware of the policy changes, in particular Revenue Administrative Bulletin 1998-1, and that it had relied on the earlier letter from the department stating that it did not have nexus. According to the taxpayer, these facts constituted reasonable cause so that the penalty should be waived. The court agreed.
Tuesday, January 25 2011
Due Process Rights Were Not Violated in Action for Title to Property
In Wolverton v. Cass County Treasurer, Michigan Court of Appeals, No. 296002, January 18, 2011which was an action for title to real property that was foreclosed for unpaid local Michigan property taxes, the Court of Claims, not the county circuit court, had original and exclusive jurisdiction to hear and decide a party's claim that she did not have notice of the foreclosure when she purchased the property and was unsuccessful in recording the deed. The Court of Claims had exclusive and original jurisdiction for any action to recover money damages for lack of notice, and the exclusive statutory remedy for a failure to receive notice in a tax foreclosure action was an action to recover money damages. Accordingly, the circuit court properly concluded that there was no due process violation that the purchaser of the property could argue and denied the purchaser's motion for reconsideration.
Furthermore, the property purchaser's due process rights were not violated when she was prevented from paying all delinquent property taxes in order for her to record the deed to the property and obtain clear title to the property. There was no evidence that the county treasurer unlawfully prevented the purchaser from paying the outstanding taxes and fees in violation of her due process rights. The purchaser of the property had an opportunity to pay the outstanding taxes and take advantage of the redemption period but did not do so before the statutorily imposed deadline.
Monday, January 24 2011
Bills Introduced in the Michigan State House and Michigan Senate will Repeal the MBT and MBT Surcharge Right Away
Both the State House and Michigan Senate got off to a fast start by immediately introducing bills to repeal both the overly-complicated Michigan Business Tax (MBT) and the burdensome MBT surcharge. There is some question as to whether the tax will be repealed prior to passage of the replacement as was the case of the repeal of the Single Business tax. Some in the Rick Snyder administration prefer having a replacement in place before repealing the MBT. Also, some see a phase out of the MBT. A lot of the questions shopuld be answered in mid february when the administration submits their two year budget to the legislature.
Key Bills Introduced:
House Bill 4001 and Senate Bill 6 - to repeal the MBT Surcharge
House Bill 4047 and Senate Bill 1 - to repeal the MBT
Wednesday, January 19 2011
Michigan Senator David Hildenbrand to Introduce Senate Bill 1 to Repeal the Michigan Business Tax
The repeal would be immediate after it passes the Legislature and is signed by the Governor. Senator Hildenbrand said he hopes the process moves quickly. The bill is Senate Bill 0001, traditionally symbolizing the Senate's top priority. For the 2009-10 session, SB 0001 was a phase-out of the MBT sponsored by Senator Mark Jansen. Both Senator Hildenbrand from lowell and Senator Jansen from Gaines Township hail from the Grand Rapids area.
The Grand Rapids Chamber of Commerce has long been opposed to the Michigan Business Tax as well as the Single Business Tax. They officially support a tax on gross receipts.
Senator Hildenbrand said "We want to declare war on the Michigan Business Tax and put it behind us so we can create jobs in Michigan" Hildenbrand acknowledged that his bill will blow about a $2.2 billion hole in the state's budget which already is $1.8 billion in the red. However, he said the Senate will be working on a new business tax structure more favorable to job creators.
Governor Rick Snyder has proposed a flat, 6-percent corporate income tax and Hildenbrand and other lawmakers are awaiting details. He said he likes the concept of a lower rate and broad base.
It appears the Michigan Business Tax is dead, the only question is when and what will the replacement look like. We'll know more after the Governor's State of the State message tonight and the details to come next month when the Governor's budget proposal is presented to the legislature.
Wednesday, January 19 2011
Ford Motor Credit Loses Its Bid to Have the U. S. Supreme Court Rule on the Retroactive Fix to the Bad Debt Deduction
In Ford Motor Credit Co. v. Department of Treasury (U.S. Supreme Court, Docket 10-481, Petition for certiorari denied January 18, 2011) the U.S. Supreme Court has denied the request of a motor vehicle financing company to decide whether a retroactive change in a Michigan sales tax refund statute for bad debts satisfied due process when applied to deny refunds for the preceding five-year period.
In DaimlerChrysler Services North America LLC v. Department of Treasury, 723 N.W.2d 569 (2006), the Michigan Court of Appeals held that a motor vehicle financing company was a "taxpayer"entitled to refunds of sales tax paid and remitted by dealerships on installment sales when the purchasers subsequently defaulted on their obligation to repay the amount financed, including the sales tax previously remitted. In response, the Michigan Legislature retroactively amended the bad debt sales tax statute to overturn the effect of the decision in DaimlerChrysler.
The taxpayer in the current case filed a refund action asserting that the amendments violated the Due Process Clause of the U.S. Constitution because they imposed an indefinite period of retroactivity and were applied to a five-year period in the taxpayer's case. However, the Court of Appeals affirmed the dismissal of the taxpayer's action for the reasons stated in the contemporaneously argued case of GMAC, LLC v. Dep't of Treasury, 781 N.W.2d 310 (Mich. Ct. of App. 2009). In GMAC, the court held that a seven-year retroactive application of the amendments did not violate due process or the requirement that such legislation be limited to a modest period of retroactivity. The Michigan Supreme Court denied review.
Tuesday, January 18 2011
State Tax Commission Issued Property Tax Rules
Michigan State Tax Commission (STC) property tax rules have been amended and new rules have been adopted. The amendments pertain to general STC provisions, the industrial facilities exemption certificate, hearings, the water pollution control exemption certificate, the air pollution control exemption certificate, the obsolete property rehabilitation exemption certificate, the new personal property exemption, and the commercial rehabilitation exemption certificate. The new rules pertain to the neighborhood enterprise zone exemption certificate, the commercial facilities exemption certificate, training programs and education, and rating and certification. Numerous STC rules were also rescinded.