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By Patrick R. Van Tiflin, -- Honigman Miller Schwartz and Cohn LLPGeneral Editor, Patrick R. Van Tiflin, -- Honigman Miller Schwartz and Cohn LLP
Legislation enacted in 2011 provides that, effective for tax years beginning on or after January 1, 2012, the Michigan Business Tax is repealed (except with respect to certain qualifying credit recipients), and is replaced by a straightforward corporate income tax. Although many of the provisions of the law differ from the now-repealed MBT, there are still separate tax base provisions that apply to financial institutions. The tax that applies to financial institutions is still in the nature of a franchise tax.INSIGHT The Michigan Business Tax provisions impose both a business income tax and a modified gross receipts tax on most taxpayers. Financial institutions that are Michigan taxpayers are subject to a special tax imposed by Chapter 2B of the Michigan Business Tax Act at the rate of 0.235 percent of the financial institution's net capital. The law defines net capital as equity capital computed in accordance with generally accepted accounting principles, less goodwill and the average daily book value of U.S. and Michigan obligations.ANALYSIS A financial institution is defined by statute to include bank holding companies, national banks, state chartered banks, office of thrift supervision chartered banks or thrift institutions, and savings and loan holding companies other than diversified savings and loan holding companies as defined in 12 U.S.C § 1467a(a)(F). The term includes any person directly or indirectly owned by any such entity that is a member of a Unitary Business Group. It also includes a Unitary Business Group containing any of the entities mentioned.The nature of the financial institutions tax is as a franchise tax.
The Michigan financial institutions tax is characterized in the statute as a franchise tax. The apportionable tax base of a financial institution whose business activities are subject to tax both within Michigan and outside of Michigan is computed by multiplying the tax base by the gross business factor, which is a fraction. The numerator of the fraction is the total gross business of a financial institution in the state during the tax year, and the denominator is the total gross business of the financial institution everywhere during the tax year. For a financial institution that is included in a Unitary Business Group, gross business includes the gross business in Michigan of every financial institution included in the Unitary Business Group without regard to whether that individual financial institution has nexus in Michigan. Gross business conducted between financial institutions that are included in the Unitary Business Group is eliminated in calculating the gross business factor.The individual components that are used in calculating the gross business factor are specified in MCLS § 208.1269. Some of the principal types of includable receipts that a financial institution will have include credit card receivables (considered Michigan receipts if the billing address of the credit card holder is located within Michigan), receipts from merchant discounts if the commercial domicile of the merchant is Michigan, loan servicing fees for a loan secured by real property if the real property securing the loan is located within Michigan (for property located in one or more states, more than 50 percent of the fair market value of the real property must be located in Michigan for the receipts to be considered Michigan receipts; if more than 50 percent of the fair market value of the real property is not located in any one state but the borrower is located in Michigan, the receipts are considered Michigan receipts). For a loan that is not secured by real property, the receipts are Michigan receipts if the borrower is located in Michigan. Receipts from services are sourced based upon where the recipient of the service receives the benefit of the services. If the benefit is received in more than one state, then the receipts included in the numerator are in proportion to the extent of the benefit received in the state. Receipts from investment assets and activities and trading assets and activities, including interest and dividends, are in the numerator of the factor if the financial institution's customer is in Michigan. Interest from loans secured by real property are sourced using the same rules described above for loan servicing fees. Gains from the sales of loans secured by real property are attributed to Michigan using the same concept. Leasing receipts from real property are in the state if the property is located in the state, whereas receipts from tangible personal property leasing are in the state if the property is located in Michigan when first placed in service by the lessee. Receipts from the lease of transportation tangible personal property are in the state if used within the state or if the location of use cannot be determined, the receipts are Michigan receipts if the property has its principal base of operations within this state.Special issues exist for Unitary Business Groups with financial institutions as members.
A Unitary Business Group may include a financial institution that is taxable under Chapter 2B of the Michigan Business Tax Act. In calculating the tax bases and the apportionment formula of the combined return, any business income, modified gross receipts or a sales attributable to a Unitary Business Group member taxable under Chapter 2B is eliminated. The operative effect of this provision, taken literally, is that the Unitary Business Group can include a financial institution that does not contribute any business income to the business income tax base, any modified gross receipts to the modified gross receipts tax base and no sales to the calculation of the single sales factor apportionment formula (which is the subject of a separate Practice Insight) but whose membership in the Unitary Business Group may be employed by Treasury to include within the group other persons in which or with which the financial institution has ownership or voting control, flow of value or business activities or operations that are integrated with or are dependent upon or contribute to each other within the definition of a Unitary Business Group contained in MCLS § 208.1117(6). Thus, the mere presence of the financial institution within the Unitary Business Group can serve to require the inclusion in the Unitary Business Group of other persons which would otherwise not be included in the group. Treasury has issued a proposed Revenue Administrative Bulletin (RAB) entitled "Michigan Business Tax Unitary Business Group Control Test." These materials are published solely as reference materials for use by attorneys and other tax professionals. They do not constitute an opinion or written advice concerning federal or state tax issues and are not written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable tax laws.
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