By Edward J. Castellani, JD, CPA
The Michigan Business Tax (MBT), which replaced Michigan’s Single Business
Tax January 1, 2008, provides new and expanded definitions of nexus.
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Treasury’s Interpretation
More important than the new nexus rules under the MBT is the Treasury Department’s interpretation of what constitutes physical presence, economic presence and active solicitation of sales in Michigan.
One nexus standard under the MBT is that a person may have nexus with Michigan if that person has physical presence in the state for more than one day during the tax year. Traditionally, a person generally had to have an office, employee or an independent contractor in Michigan to establish physical presence with Michigan.
A second nexus standard has evolved in recent case law known as economic presence. Under the concept of economic presence, nexus is present when a taxpayer has substantial economic presence in a state without physical presence in the state. This concept is supported by the Treasury Department in Revenue Administrative Bulletin (RAB) 2007-6, which provides, in part as follows:
| With the development and proliferation of communication technology exhibited, for example, by the growth of electronic commerce now makes it possible for an entity to have a significant economic presence in a state absent any physical presence there. Whether a person has substantial economic presence depends on the quality and quantity of taxpayer contacts with Michigan and the degree to which the taxpayer avails itself of the benefits of an economic market in the State. |
The economic presence standard is addressed in the MBT under its active
solicitation provisions. Under the MBT, nexus is established if a person
actively solicits sales in this state and has Michigan gross receipts of
$350,000 or more. Active solicitation of sales is not defined in the new
law. Instead the MBT provides that "'actively solicits' shall be defined by
the Treasury Department through written guidance that shall be applied
prospectively."
RAB 2007-6 provides the written guidance and interpretation of “actively
solicits.” Under the RAB active solicitation means:
| "Actively solicits" means purposeful solicitation of persons
within this state. Solicitation is purposeful when it is
directed at or intended to reach persons within Michigan or the
Michigan market. Active solicitation includes, but is not limited to, the use of mail, telephone and e-mail; advertising, including print, radio, Internet, television and other media; and maintenance of an Internet site over or through which sales transactions occur with persons within Michigan. |
The RAB examples of active solicitation include sending mail order catalogs;
sending credit applications; maintaining an Internet site offering online
shopping, services or subscriptions; and engaging in media advertising,
including Internet advertisements. In evaluating whether acts of
solicitation are sufficient to establish "active solicitation," the
Department looks to the quality, nature and magnitude of the activity.
Under this interpretation of the MBT nexus rules, a business may be actively
soliciting business in Michigan, and have economic presence and nexus when
its sales exceed $350,000, solely by the fact that the taxpayer maintains a
web site from which Michigan residents can make purchases.
In addition to the MBT rules discussed above, a Federal Statute, Public Law
86-272 also addresses a state’s right to tax interstate transactions. Public
Law 86-272 is a federal law that prohibits a state from imposing a business
income tax if the only in-state business activity of the out-of-state person
is the solicitation of orders for sales of tangible personal property where
the orders are sent outside the state for approval or rejection and are
filled by shipment or delivery from a point outside the state. The RAB
addresses the interplay of this law on the MBT and its definition of nexus.
The MBT is comprised of four taxes: a business income tax, a modified gross
receipts tax, a gross direct premiums tax and a franchise tax. The gross
direct premiums tax and franchise tax apply only to insurance companies and
financial institutions respectively. The RAB provides that a person whose
activities are limited to those protected by PL 86-272 is not subject to the
business income tax portion of the MBT but will be subject to the modified
gross receipts tax portion of the MBT, as if the MBT can be bifurcated into
two distinct taxes.
The MBT, along with recent case law, has clearly expanded the definition of
nexus for MBT purposes. Consequently, the MBT will apply to persons that were
not subject to the Single Business Tax. The extent to which substantial
nexus can be established without physical presence in Michigan will be
determined by the facts and circumstances of each case. Persons that make
sales to Michigan residents must review the MBT and its new standards to
determine whether they are subject to the MBT.
About the Author
Edward J. Castellani is an attorney and CPA with Fraser, Trebilcock,
Davis & Dunlap P.C. who practices state and local tax law. He may be reached
at 517-377-0845 or at
ecast@fraserlawfirm.com.