Michigan eliminates "throwback rule" and provides for voluntary disclosure.

In 1997, Michigan courts issued four opinions that clearly struck down P.L. 86272 as the Michigan nexus standard (see The TaxAdviso; May 1998, p. 316). As a result of these decisions, the Michigan Department of Treasury issued Revenue Administrative Bulletin 98-1 (RAB 98-1), which moved Michigan to a Commerce Clause nexus standard.

The nexus standard change provided opportunities for Michigan-based companies. However, taxpayers were fated with recordkeeping and documentation problems in proving out-of-state nexus to avoid the "throwback rule." In response to this dilemma, the Michigan Treasury asked the legislature to eliminate it.

The effect of the change in nexus standard on some non-Michigan companies was more disastrous. Many non-Michigan firms, believing they were protected from filing under P.L. 86272, would now have to pay Michigan single business tax (SBT). To make matters worse, the change in nexus standard was made retroactive to 1989. To lessen the hardship on non-Michigan taxpayers, the Michigan Treasury asked the legislature to enact voluntary disclosure legislation.

New Nexus Standard

As a result of the judicial decisions on `nexus, the Michigan Revenue Commissioner convened a working group of business and professional tax specialists from both within and outside of government to assist in writing a new nexus standard; this resulted in the issuance of RAB 98-1 on Feb. 24, 1998. (A complete text of RAB 98-1 can be found at the Michigan Department of Treasury Website, at http://www.treas.state.mi.us.)

RAB 98-1 is not a promulgated rule and, therefore, does not have the force and effect of law. However, the position statement is forceful, and will probably be challenged in the courts.

RAB 98-1 states that an out-of-state business is subject to Michigan's SBT jurisdiction when it engages in any of the following activities:

* Has one or more Michigan resident employees conducting business activity in Michigan;

* Owns, rents, leases, maintains or has the right to use and uses tangible personal or real property permanently or temporarily physically located in Michigan;

* Employees own, rent, lease, use or maintain an office or other establishment in Michigan;

* Agents, representatives, independent contractors, brokers or others, acting on its behalf, own, rent, lease, use or maintain an office or other establishment in Michigan, and this property is used in the representation of the out-of-state business in Michigan and is significantly associated with its ability to establish and maintain a market in Michigan;

* Has goods delivered to Michigan in vehicles it owns, rents, leases, uses or maintains, or delivered by a related party acting as a representative of the out-of-state business; and

* Regularly and systematically conducts in-state business activity through its employees, agents, representatives, independent contractors, brokers or others acting on its behalf, whether or not these individuals or organizations reside in Michigan.

Ten or more days of any business activity on an annual basis in Michigan is deemed regular and systematic nexus-creating activity. Less contact is judged based on the facts and circumstances of the contact, except that two or more days of certain enumerated activities are rebuttably presumed regular and systematic nexus-creating activities. Such activities include:

* Soliciting sales;

* Making repairs or providing maintenance or service to property sold or to be sold;

* Collecting current or delinquent accounts related to sales of tangible personal property through assignment or otherwise;

* Installing or supervising installation at delivery or after;

* Conducting training for employees, agents, representatives, independent contractors, brokers or others acting on its behalf, or for customers or potential customers;

* Providing customers any kind of technical assistance or service including (but not limited to) engineering assistance, design service, quality control, product inspections or similar Services;

* Investigating, handling or otherwise assisting in resolving customer complaints;

* Providing consulting services; or

* Soliciting, negotiating or entering into franchising, licensing or similar agreements.

Conducting any of these activities in Michigan for 10 days or more constitutes regular and systematic business activity. RAB 98-1 indicates that the following activities do not necessarily create nexus when conducted for fewer than 10 days in Michigan:

* Meeting with in-state suppliers of goods and services;

* In-state meeting with governmental representatives in their official capacity;

* Attending occasional meetings (e.g., board meetings, retreats, seminars and conferences sponsored by others, etc.);

* Holding recruiting or hiring events;

* Advertising in the state through various media;

* Renting customer lists to or from an in-state entity; or

* Attending or participating, or both, in trade shows at which no orders for goods are taken and no sales are made.

A business physically present in the state, but not carrying on any business activity, will not be subject to Michigan SBT. Further, lawyers, accountants, investment bankers and other similar professionals in Michigan who perform services for an out-of-state business in their professional capacity shall not be considered as conducting instate business activity on behalf of the out-of-state business.

Once a taxpayer establishes nexus for SBT purposes during a tax year, nexus shall exist for that taxpayer for at least that entire tax year. RAB 98-1 applies to all open tax periods ending after 1988. The Department of Treasury believes the decisions in Gillette Co., 497 NW2d 595 (1993), and Guardian Industries Corp., 499 NVd2d 846 (1994), allow it to enforce the new nexus standard on a retroactive basis.

Repeal of Throwback Rules

A good thing gets better for Michigan multistate taxpayers; the Michigan legislature has repealed the throwback rule provision in the sales factor of the Michigan SBT apportionment formula. The repeal is effective for tax years starting after 1997.

The repeal amends the sales factor portion of the law. A Michigan taxpayer selling tangible personal property from a storage or warehouse in Michigan to customers located out of state can completely eliminate the throwback rule, by qualifying for apportionment and being taxable in at least one other state.

With immediate effect, Public Act 225 of 1998 was signed by the governor on July 1, 1998. It simply states: "Sales of tangible personal property are in this state in any of the following circumstances:... (b) For tax years beginning on or after January 1, 1998, the property is shipped or delivered to any purchaser within this state regardless of the free on board point or other conditions of the sales."

Voluntary Disclosure Legislation

The broader nexus standard set forth in RAB 98-1, by being administered on a retroactive basis back to Jan. 1, 1989, could result in substantial penalties (Michigan law provides for failure-to-file penalties of 5% per month, up to 50%) and interest (1% over prime) for out-of-state businesses that have not previously filed and paid Michigan SBT. Many of these firms believed their Michigan business activities were immune solicitation activities under P.L. 86-272. In 1998, the Michigan legislature passed voluntary disclosure legislation, allowing out-of-state taxpayers to come forward and voluntarily disclose their prior-years' tax liabilities under the new standard.

The legislation allows the Commissioner to enter into a voluntary disclosure agreement for the purpose of bringing nonfilers into compliance. All taxes and fees administered by the Revenue Act would be eligible for inclusion in a voluntary disclosure agreement. A taxpayer has to meet specific eligibility requirements, including payment of all taxes and interest for a lookback period and future filings. The Department of Treasury agrees to waive all penalties during the lookback period and not assess any tax, penalty or interest covered under the agreement for any period before the lookback period.

For SBT purposes, the lookback period means the four most recently completed fiscal or calendar years over a 48-month period or the first date the person subject to a voluntary disclosure agreement began doing business in Michigan (if less than 48 months). If there is doubt as to tax liability during the lookback period, another period, as determined by the Commissioner to be in the best interest of the state and to preserve equitable and fair administration of taxes, may be agreed to. Also, if tax returns were filed in another state for a tax based on net income that included sales in the numerator of the apportionment formula that must now be included in the numerator of the Michigan apportionment, the lookback period cannot be more than the most recent 36-month period.

Other provisions of the voluntary disclosure legislation are:

* Taxpayers must not have been contacted by the Department of Treasury or its agents for audit or discovery, and must not be under investigation for the tax for which they are requesting to make voluntary disclosure.

* Persons who previously have been sent inquiry letters by the Department of Treasury will have 180 days after enactment of the voluntary disclosure legislation to send a written request to enter into a voluntary disclosure agreement. After the 180-day period, they are considered as having previous contact with the Department of Treasury and, therefore, are disqualified from participating in the voluntary disclosure program. "Previous contact" means any contact by the Michigan Department of Treasury or its agents, including the other state agencies, regarding impending audit, review or assessment. This includes letters of inquiry, other written inquiries, notices, subpoenas and any prior registration.

* The Department of Treasury will not disclose to other states information obtained through a voluntary disclosure agreement, unless specifically requested to do so by another state.

* If a taxpayer makes any material misrepresentation in its application for disclosure, the Department of Treasury may void the agreement.

* The Department of Treasury will not waive any rights to audit a taxpayer for prior periods to verify the taxpayer's representations and to determine its tax liability.

Practical Ramifications 

A Michigan-based multistate firm may have significant refund opportunities and enjoy large reductions in its SBT. The Michigan statute of limitations is four years; therefore, the last four years of SBT returns could be amended to take advantage of the change in nexus standard.

A Michigan-based firm that sells tangible personal property to customers located out of state should undertake a nexus study, to specifically identify the extent of nexus activity in each state. The nexus study should be followed by an apportionment study, which identifies the location of the company property, payroll and sales. These studies provide the information needed to apportion tax base among the states in accordance with each's laws. The change in the Michigan nexus standard should result in refunds for Michigan taxpayers. However, because Michigan will notify all states in which sales are not thrown back to Michigan, the taxpayer should clearly identify and document the extent of business activity in each state. Additional state tax filings may result.

Prospectively, the Michigan-based multistate taxpayer that apportioned its SBT base in the past, should take full advantage of the throwback rule repeal. Accurate studies should be done to identify sales by state of destination.

Taxpayers that in the past have not apportioned tax base, but have sales out of Michigan, should plan their business activities in such a way as to apportion tax base and take full advantage of the law change. Usually, changes in a business activity necessary to create nexus in at least one state can be minor. However, if they allow the taxpayer to apportion, the tax savings can be significant when combined with the throwback repeal.

The non-Michigan taxpayer must act fast. If it has not been filing Michigan SBT returns despite a physical presence in the state because of P.L. 86272 protection, it must file, under RAB 98-1 provisions, tax returns back to 1989, to the extent it had Commerce Clause nexus in those years. Further, penalties up to 50% and interest will be added to the tax due.

If a taxpayer enters into a voluntary disclosure agreement with the Department of Treasury, the penalty can be abated and the number of return years limited to four or fewer. Filing a Michigan SBT return will have a domino effect on other states' tax returns if they require throwback.

The new voluntary disclosure law gives the Commissioner authority to limit the lookback period to the number of years open in the domicile state, or an even shorter period if there is doubt as to tax liability. Non-Michigan-based firms should assess the overall impact of the changes and consider the Michigan voluntary disclosure program.