Tax Type
Individual Income Tax
Description
Taxes paid by residents to other states; Michigan Single Business Tax
Topic
Credits
Date Issued
01-07-1994
January 7, 1994
Re: Request for Ruling: Individual Income Tax
Dear*****
This will reply to your letter of June 2, 1993, in which you submit a request for ruling concerning the out-of-state tax credit for taxes paid to another state.
FACTS
You are a Virginia resident and a shareholder of an S corporation which conducts business in Michigan. The corporation is subject to the Michigan Single Business Tax. You have requested a ruling on whether you can claim a credit for the taxes the corporation pays to Michigan.
RULING
Va. Code §58.1-332 (copy enclosed) allows taxpayers filing resident individual income tax returns to claim credit for income tax paid to another state for earned or business income derived from sources outside Virginia. S corporation shareholders can claim a credit against income taxes owed to Virginia for income taxes the corporation pays to another state. However, no credit is allowable for franchise tax, license tax, excise tax, unincorporated business tax, occupation tax, or any tax characterized as such even though it is based on earned or business income. As a result, the law limits the credit for taxes paid to another state specifically to income taxes.
The Michigan Single Business Tax is designed to tax all business activity in the state regardless of whether the business is a corporation, partnership, or proprietorship. It is calculated based on the economic size of a business. The economic size is the sum of the business's profits (or losses), payroll and fringe benefits, net interest paid and depreciation, less capital expenditures. Income is only one factor used to compute the tax. Additionally, Michigan Code §7.558(31)(3) states that the "[Single Business] tax levied under this section and imposed is upon the privilege of doing business and not upon income."
Since the Michigan Code declares that the tax is not an income tax and since income is not directly taxed but rather is a component of the tax, we can only conclude that the Michigan Single Business Tax is not an income tax. Accordingly, a Virginia resident cannot claim a credit for the tax an S corporation pays to Michigan. You cannot, therefore, claim an out-of-state credit on your Virginia return for taxes the corporation pays to Michigan.
I hope that the foregoing has responded to you inquiries. If you have any further questions, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner