In Search of...Michigan Taxpayers

The Michigan Department of Treasury in 1998 revised the jurisdictional standard that determines whether a taxpayer is subject to tax under the Single Business Tax (SBT) Act or is subject to tax in another state for purposes of apportionment. The SBT liabilities of many companies located in Michigan have been significantly reduced as a result of the revised nexus rules, which often allow more sales to be sourced outside of Michigan. The repeal of the sales throwback rule has further contributed to the reduction of SBT paid by Michigan-based companies. Not surprisingly, the Michigan Treasury has contacted many out-of-state businesses with activity in the state to determine nexus status and collect delinquent taxes if due.

Many taxpayers remain confused about Michigan's revised nexus rules and the periods they cover; consequently, many companies with business activity in Michigan have not properly addressed nexus issues with the state. Others, however, have opted to approach the Michigan Treasury to settle tax issues proactively via voluntary disclosure (rather than wait to be contacted by the state).

Michigan's Nexus Standard

The revised nexus standard for Michigan SBT is set forth in Revenue Administrative Bulletin (RAB) 1998-1. The standard now resembles the "physical presence" test set forth in Quill Corp. v. North Dakota, 504 US 298 (1992), rather than the narrower test of P.L. 86-272, which had previously been applied in determining nexus for SBT purposes. An out-of-state business is subject to Michigan's SBT if it regularly and systematically conducts in-state business activity through its employees or representatives. RAB 98-1 provides a list of activities that constititute "business activity" for nexus purposes; this list includes solicitation of sales. Regular and systematic business activity exists if at least 10 days of activity occur annually. Facts and circumstances determine the existence of systematic business activity if the taxpayer has activity less than 10 days annually. It will be presumed to exist if the activities are performed two or more days annually, unless the taxpayer can successfully argue that the activities are not conducted for the purpose of developing or maintaining a market in the state.

The use tax nexus standard is expressed in RAB 1999-1. Regular and systematic presence exists if at least two days of presence occur annually. The 10-day rule for SBT does not apply for sales and use tax nexus purposes.

Revised Standard is Retroactive

The nexus standard set forth in RAB 1998-1 follows the Michigan Court of Appeals decision in Gillette Co., 198 Mich. App. 303 (1993). The Michigan Treasury has applied the nexus standard retroactive to 1989 (based on a four-year statute of limitations). The retroactive nature of the standard has been litigated, but has been upheld in two Michigan Court of Appeals decisions: Syntex Laboratories, 233 Mich. App. 286 (1998), and most recently, Topps Company, Inc., Michigan Court of Appeals, No. 203495 (6/11/99) (unpublished opinion).

Retroactive application of the nexus standard does not apply to foreign businesses other than insurance companies and some nonprofit organizations. RAB 1999-10 provides that foreign businesses not subject to Federal income taxes under the Code or an applicable income tax treaty for tax years beginning before 2000 are not required to file a SBT return for those years.

The recent developments in the courts suggest that taxpayers with nexus for SBT, particularly those with activity in Michigan as far back as 1989, should consider approaching the Michigan Treasury to voluntarily comply with the reporting requirements for SBT, as well as other taxes (including sales tax and local property taxes).

Voluntary Disclosure Process

State revenue agencies have developed voluntary disclosure programs to encourage taxpayers to comply with tax reporting requirements and remit any taxes due to the state. Waiver of penalties and limitation of the number of prior-year tax returns that must be filed are offered as incentives. A taxpayer is allowed to anonymously approach the revenue agency to disclose its activities in the state and propose terms of an agreement. The negotiating process begins at this point and continues until both sides come to an agreement.

Although most terms are negotiable from a taxpayer's point of view, some revenue agencies are restricted by statute and cannot vary the terms of an agreement. The typical lookback period is three years and penalties are normally waived. Interest is usually assessed.

Michigan's Voluntary Disclosure Program. The Michigan Department of Treasury has developed a formal program that allows a business to disclose its activities anonymously for taxes imposed by the state (including SBT, sales tax and income withholding taxes). The program at one time was limited to businesses that did not have nexus for SBT prior to the change in the standard (i.e., if a business had property in the state in prior years, it would not have qualified for voluntary disclosure). However, all taxpayers are now eligible to participate in the program.

The standard agreement is a four-year lookback for both SBT and sales tax. However, a company that included its sales to Michigan customers in its sales apportionment numerator on its state income tax returns in prior years (i.e., thrown back) will qualify for a three-year lookback for SBT. Four years of sales tax returns is required in either case.

The voluntary disclosure process is initiated by writing an anonymous letter to the Michigan Treasury along with a completed nexus questionnaire omitting the taxpayer's name and Federal identification number. The letter should be sent to:

Discovery and Tax Enforcement Division

Michigan Department of Treasury

P.O. Box 30140

Lansing, MI 48909-7640

More information can be obtained at the Michigan Treasury Website (www.treas.state.mi.us/mitax/discovry/vdweb.htm). Taxpayers can expect waiver of late-filing and late-payment penalties, but interest will be assessed.

MTC's National Nexus Program. The Multistate Tax Commission (MTC) has developed a National Nexus Program to assist taxpayers in resolving its delinquent state tax liabilities through voluntary disclosure. The MTC will contact the state revenue agencies requested by the taxpayer, prepare the voluntary disclosure offers and execute the agreements—all free of charge. Forty states currently participate in the program. More information can be obtained at the MTC's website (www.mtc.gov/txpyrsvs/disclose.htm).

The MTC's program appears to be particularly useful in expediting the voluntary disclosure process for a taxpayer with sraightforward nexus issues in several states. Accounting firms and other tax consultants are available for situations that demand in-depth nexus analysis and require more sophisticated negotiations with state revenue department officials.

Voluntary Disclosure

Complying voluntarily is often the best solution for taxpayers in many different situations. Nexus concerns can be addressed informally on an anonymous basis for all tax issues, and some issues may be identified that the taxpayer has not considered. State revenue department officials are generally helpful and cooperative during the process, and are willing to negotiate in some cases. However, the wary taxpayer should do his homework; once an agreement is executed, the taxpayer is bound by the terms of the contract and the revenue official is under no obligation to address any issue outside of the agreement. Using experienced tax consultants is highly recommended to help mitigate such risks.

From Paul Lyons, CPA, MBA, Rehmann Robson, PC, Farmington Hills, MI