Legislation Advocated by the MACPA Sent to the House
In a very significant development, a major piece of legislation originally developed by the Michigan Association of Certified Public Accountants (MACPA) has passed out of the Michigan Senate and has been sent to the House Tax Policy Committee.
The MACPA says the amendments are needed to eliminate ambiguities, problems and misinterpretations of the tax. The four-year life of the MBT ended January 1, 2012 when it was replaced by Michigan's new corporate income tax.
Others are saying: Why amend a repealed tax? The MBT is far from gone and the items targeted in Senate Bill 1037 will affect returns that have been filed and are still being filed. The Department of Treasury (Treasury) has four years to audit MBT returns. Many of the ambiguities addresses in Senate Bill 1037 will undoubtedly become issues in the audits.
On several issues, there is major disagreement with Treasury's interpretation of what can be deducted as a "purchase from other firms". If Senate Bill 1037 doesn't become law, appeals and lawsuits are inevitable.
The MACPA began an analysis of the MBT shortly after its 2007 passage and identified areas where the law was unclear or where it did not appear that Treasury's interpretation was consistent with the statute or its intent. The group, which presented the issues first to the Granholm administration and then the Snyder administration, has seen a few items addressed, but the bulk still lingers.
The issue with the widest implications has to do with the MBT deduction for materials and supplies; part of the MBT is a modified gross receipts tax based on a business' gross receipts minus purchases from other firms. Under current law, those purchases include inventory, depreciable assets, and materials and supplies to the extent they are not included in inventory or assets. But by Treasury's interpretation, a host of purchases are excluded. For example, office supplies bought by a service business and used at its headquarters would not be deductible because they do not fall under the prescribed connection with inventory or assets, Treasury says. The Department of Treasury imposes a very rigid restriction on the scope of what would be deductible. It goes against the commonly understood meaning that a material or supply is simply a tangible item that is purchased and listed as an expense on a company's books.
Service businesses, because they don't produce goods, are affected the most by the issue. But, it affects all businesses to some degree, because all businesses will have some amount of materials and supplies that are related to their general or administrative activities, or overhead.
The new legislation, which would be retroactive to the January 2008 start of the MBT, clarifies that materials and supplies are all tangible items consumed. The Department of Treasury estimates the legislation would reduce state revenue by as much as $110 million a year and could add up to as much as $440 million over four years of tax returns.
A number of businesses will file amended returns and seek refunds if the legislation passes, others may not see the financial impact of the materials and supplies change as substantial enough to do so. The magnitude of refunds may not be as large as what Treasury estimates many businesses may have filed their returns consistent with the legislation's proposed language. Thus, no refunds would be due.
Following is a list of key provisions in Senate Bill 1037:
1. COD Income - Clarify the ability to exclude COD income and discharge of nonrecourse debt from the MGR tax base to avoid a "deemed receipt" where no actual receipt exists.
2. Clarify Definition of "Officer" - Further define officer to include "major decision making duties and responsibilities" or by clarifying "with similar duties."
3. Self-constructed Assets - Clarify that self constructed assets (including the cost of labor and services), were intended to be included in the definition of depreciable assets for modified gross receipts purposes.
4. Materials and Supplies - Clarify that "materials and supplies" has the plain meaning of tangible items consumed and not otherwise deducted as a component of purchases from other firms MGR deduction.
5. Reasonable Return of Capital - Clarify the income tax treatment of a partner's self-employment income. For purposes of the deduction from business income a partner's self-employment income should be the amount reported as the partner's self-employment income on his or her K-1. Further, the reference to excluding earnings that represent a reasonable return on capital should be eliminated from the statute because such amounts are not included in self-employment income.
6. Income Base NOL Successorship - Clarify that former SBT policy allowing loss carry-forwards to survive corporate reorganizations also applies to the MBT.
7. Clarify Ultimate Destination - Clarify the phrase "ultimate destination" in the sourcing rule for tangible personal property ensure temporary storage of goods does not constitute coming to rest.
8. Credit Ordering - Clarify that Section 403 and 405 credits are claimed first before carryovers of former SBT credits.
9. ITC Recapture - Establish "to extent used" requirement in MBT ITC recapture provision (which exists in SBT ITC recapture provision) to prevent double tax effect of recapturing a credit which was never utilized.
10. Local Classification of Industrial Property - Clarify impact of local classification on industrial property tax credit by specifying that misclassifications do not control for purposes of the credit.
11. Renaissance Zone Credit - Revise credit calculation to eliminate arbitrary limit based on prior SBT credit amount and give effect to intended elimination of all MBT liability on activity within the zone.
12. Expand Intercompany Eliminations for a Unitary Business Group - Clarify that intercompany eliminations for a unitary business group filing a combined return include exemptions, deductions, subtractions and credits.