Michigan Treasury Department Releases Nexus Standard Ruling for Business Taxes

The Michigan Department of Treasury (“DT”) issued on October 21, 2008 Revenue Administrative Bulletin 2008-4 (“RAB”) to clarify the nexus standard to be applied in determining whether a taxpayer is subject to Michigan Business Tax (“MBT”). The RAB takes effect on January 1, 2008.

By way of background, the MBT is classified under four components: 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.

According to the DT, under the MBT, a taxpayer has substantial nexus with Michigan and is subject to the MBT if the taxpayer has a physical presence in this state for a period of more than 1 day during the tax year or if the taxpayer actively solicits sales in this state and has gross receipts of $350,000 or more sourced to this state.

In other words, there are two alternative nexus standards under the MBT. First, a person has nexus with the state if that person has physical presence in the state for more than one day during the tax year. Alternatively, a person has nexus with the state if the person actively solicits sales in this state and has Michigan gross receipts of $350,000 or more.

A taxpayer has nexus with Michigan for MBT purposes if that taxpayer “has a physical presence in this state for a period of more than 1 day during the tax year.” RAB, citing MCL 208.1200.  “Physical presence” means: any activity conducted by the taxpayer or on behalf of the taxpayer by the taxpayer’s employee, agent, or independent contractor acting in a representative capacity. Physical presence does not include the activities of professionals providing services in a professional capacity or other service providers if the activity is not significantly associated with the taxpayer’s ability to establish and maintain a market in this state. Id., citing MCL 208.1200.

In addition, the business income tax is levied on taxpayers with Michigan business activity “unless prohibited by 15 USC 381 to 384.“2 15 USC 381 to 384, more commonly known as PL 86-272. This federal law prohibits Michigan 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. Id., citing 15 USC 381 et seq.

The RAB adds that a taxpayer has nexus with Michigan and is subject to the MBT if “the taxpayer actively solicits sales in this state and has gross receipts of $350,000 or more sourced to this state.” Id., citing MCL 208.1200(1).

Under RAB 2007-6, and pursuant to MCL 208.1200(2), “actively solicits” means purposeful solicitation of persons within this state. Solicitation means (1) speech or conduct that explicitly or implicitly invites an order; and (2) activities that neither explicitly nor implicitly invite an order, but are entirely ancillary to requests for an order. Solicitation is purposeful when it is directed at or intended to reach persons within Michigan or the Michigan market.

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. However, such a person otherwise having sufficient nexus with Michigan will be subject to the modified gross receipts tax portion of the MBT.

The RAB further states that once nexus is established by a taxpayer during a tax year for MBT purpose, nexus shall exist for that taxpayer for the entire tax year.

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