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Ready or Not…Here Comes the Michigan Business Tax (MBT)

As published in the March 2008 issue of The Greater Lansing Business Monthly.

On July 12, 2007, Governor Granholm signed Public Act 36, referred to as the Michigan Business Tax (MBT), which was generally effective January 1, 2008. The scope of this legislation has presented significant challenges for tax professionals and taxpayers when interpreting its meaning and application in the day to day business environment. The Michigan Department of Treasury (Department) has a helpful website with a Frequently Asked Question section (see http://www.michigan.gov/treasury) that provides guidance on how the Department is currently interpreting the MBT. This article reviews some of the interpretative debate surrounding the MBT.

The MBT is comprised of two tax bases (a gross receipts tax base and a business income tax base) a surcharge, and numerous tax credits. For purposes of computing the gross receipts base, modifications were provided with the goal of correlating the tax burden on taxpayers in different industries with the economic gain they realize from the gross receipt. An additional goal was to reduce the potential duplicative impact (and corresponding drain on the Michigan economy) for sales between companies in Michigan. If it was not for this subtraction, the same physical item could be taxed a number of times in the distribution supply channel. The principal modification is to subtract “purchases from other firms”.

Included in the definition of “purchases from other firms”, is “inventory acquired during the tax year, including freight, shipping, delivery, or engineering charges included in the original contract price for that inventory”. In addition, the definition includes, “to the extent not included in inventory or depreciable property, materials and supplies, including repair parts and fuel”. The law provides that “a term used in this act and not defined differently shall have the same meaning as when used in comparable context in the laws of the United States relating to federal income taxes in effect for the year unless a different meaning is clearly required”. On the surface, those definitions seem straightforward.

Let’s consider how this might apply to a group of physicians providing oncology services utilizing chemotherapy drugs. For federal income tax purposes, drugs administered by a physician in the course of providing medical services are generally characterized as medical supplies, not inventory. When the patient is treated and drugs are administered, the drugs could easily represent sixty percent or more of the total cost of services with the physician’s fee representing forty percent or less. Thus far, the Michigan Department of Treasury has interpreted the law as providing that materials and supplies are “purchases from others” eligible for the subtraction, solely when these costs are incurred in connection with inventory or assets eligible for depreciation or amortization (see Q & A M17 on the MBT website). Now the question is whether the chemotherapy drugs would be considered inventory for MBT purposes, even though they may not be so defined for federal income tax purposes. You can see that the answer to the question will determine whether the tax is applied to the whole receipt from the patient or solely the amount pertaining to the physicians services (i.e. the 40% or lower number after subtracting the cost of the drugs).

The answer to this question is significant, particularly if the predicted transformation from a manufacturing economy to a service economy occurs. The pharmaceutical company would include the gross receipt from the sale of the drugs to the physician in its tax base. If the physician does not subtract drugs as a purchase from others, these same drugs will again be included in the tax base of a Michigan business and taxed again. While this is an example pertaining to physicians, this same issue is present in numerous service industries.

It is important for all taxpayers to review the MBT and the guidance provided, as it is published, to ensure that the applicable tax pertaining to their business activity is being correctly determined. Stay tuned, as developments on this front are sure to have a significant impact on our collective economic health.

Mark Hooper, CPA serves as the Chairman of the Executive Committee for Andrews Hooper & Pavlik P.L.C. and as Managing Partner for their Okemos location. Mark is involved with numerous community and charitable organizations and currently serves as President-elect of the Rotary Club of Lansing and is a member of the Broad College of Business Alumni Board at Michigan State University. (Andrews Hooper & Pavlik P.L.C. also has locations in Auburn Hills, Bay City, Grand Rapids and Saginaw.)