Michigan Changes Its Corporate Tax Structure Again

Most state and local tax practitioners can remember the calls for a simpler corporate taxation system in Michigan to replace the despised Single Business Tax (the "SBT"). Well, the result from the political process under former Governor Granholm was the Michigan Business Tax (the "MBT"). It did not take long for state and local tax practitioners to bemoan that the new MBT was not much better than the SBT, and might actually have been more complex. Well, just a few short years and an economic crisis later, and Michigan is changing systems again. Now the MBT is being replaced by a corporate income tax. Only time will tell if this new tax will actually achieve the lofty goal of tax simplification while managing to generate the kind of revenue needed for fiscal purposes.

On May 25, 2011, Governor Rick Snyder signed into law the three-bill package that forms the new Michigan corporate income tax. The tax goes into effect on January 1, 2012. The MBT is repealed as of that date for all taxpayers except those who have elected to claim certain certificated credits until such credits expire. There are numerous other changes made in the new law, and the scope and breadth of those changes are far beyond this blog. A few of the changes though do warrant highlighting:

• First, the tax applies only to C-corporations, so sole proprietorships and pass through entities are exempt from the tax. The different regimes that the MBT provided for financial institutions and insurance companies are largely retained. The tax applies to all members of a unitary group and numerous adjustments to federal taxable income are made.
• Also of note is that the new tax explicitly rejects and forbids apportionment of taxable income under the principles set forth in the multistate tax compact. While numerous states have migrated away from the traditional property, payroll and sales apportionment method, this direct rejection of the multistate tax compact is interesting and noteworthy.

Ultimately, only time will tell if the new tax regime in Michigan is better than either of its predecessors. If not, the SBT can always be dusted back off and re-enacted!

RELATED LINKS: For further insight into Michigan Business Tax dynamics, see:

• 1-6 Bender's State Taxation: Principles and Practice § 6.04 - Constitutional Issues - Nexus
• 1-3 Bender's State Taxation: Principles and Practice § 3.13 - Alternative Apportionment Formulas
• Under the Michigan Business Tax, Most Unitary Groups Are Required to File a Combined Return - A Michigan Tax Practice Insights Commentary
• Apportionment Formula May Benefit Some Michigan-Based Taxpayers, But Annual Surcharge Limits the Tax Benefits - A Michigan Tax Practice Insights Commentary

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