Profit Split Methodology Used in Federal Tax Law Used to Determine SBT Royalties
In Pfizer, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 301632, February 14, 2012, the court determined a taxpayer's submitted affidavits showed that all of the subtracted income was attributable to royalty payments and, thus, was subtracted properly in the calculation of the Michigan single business tax (SBT) liability.
Under the SBT law, a subtraction from the tax base was allowed for royalty income. The taxpayer figured its royalty income using the profit split methodology used in federal tax law. Under that method, half of the subsidiary's profits were deemed to be the intangible property income to the parent company (the taxpayer here). Under federal tax law, intangible property income may arise from types of intangible property in addition to royalties, such as invention and know-how. Although the SBT did not define "royalties," the state supreme court has stated that royalties are "payments received by the transferor in patent, copyright, mineral and oil and gas transactions." Even though it was possible that intangible property income included items that were not royalties, according to the taxpayer's affidavits, only true royalties were subtracted, as permitted under the SBT. Thus, the grant of summary disposition to the Department of Treasury was reversed.