Tax Type
Corporation Income Tax
Description
"Taxable income' defined; Michigan single business tax
Topic
Computation of Income
Date Issued
10-17-1994
October 17, 1994
Re: Ruling request: Corporate income tax
Michigan single business tax
Dear*********
This will reply to your letter of May 19, 1994, in which you requested a ruling regarding the deductibility of the Michigan single business tax (the "MSBT") for purposes of the Virginia corporate income tax.
RULING
VR 630-3-402 provides, in pertinent part:
-
- If any net income taxes and other taxes, including franchise and excise taxes which are based on, measured by, or computed with reference to net income, imposed by other taxing jurisdiction were deducted in determining federal taxable income, such amount shall be added to federal taxable income.
The question, therefore, is whether the MSBT is based on, measured by, or computed with reference to net income. In reviewing this question, the department has examined the nature of the MSBT.
The MSBT is levied on the privilege of doing business in Michigan. While federal taxable income is the starting point for the tax base, there are significant modifications that must be made in determining the tax base. Adjustments are made for such items a's compensation, depreciation, taxes, net operating losses, and partnership income or loss. After the resulting base is apportioned and allocated to Michigan, additional modifications are made for Michigan's "capital acquisition deductions" and statutory exemptions. Finally, a significant deduction is allowed which limits the tax base to no more than 50% of adjusted gross receipts.
The department has also examined the decisions of other state courts with respect to this tax. The California State Board of Equalization held that the MSBT does not constitute a tax "on or according to or measured by income and profits." (See In the Matter of the Appeal of the Dayton Hudson Corporation).
In Gillette Co. v. Michigan Department of Treasury, 198 Mich. App. 303, 497 N.W.2d 595 (Mich. Ct. App. 1993) the Michigan courts held that the MSBT is not a tax imposed on net income. It was held that although federal taxable income is the starting point and a component of the tax base, because of the extensive adjustments required to compute the MSBT the tax is not measured by net income.
The department finds that the adjustments required to compute the MSBT, in particular the limitation of the tax base to 50% of adjusted gross receipts, make a significant departure from traditional concepts of "net income." The department also gives great weight to the holding of a Michigan court that the MSBT is not imposed on net income. Accordingly, the Michigan single business tax is not found to be a tax which is based on, measured by, or computed with reference to net income.
Accordingly, the tax does not have to be added back to federal taxable income in determining Virginia taxable income for purposes of the corporate income tax.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8133M
Rulings of the Tax Commissioner