Getting accustomed to an entirely new state tax regime may just be the toughest part for CFOs preparing to implement the new Michigan Business Tax (MBT). The MBT, adopted in mid-July, replaces Michigan’s much-maligned Single Business Tax (SBT) when it expires on December 31, 2007. Like it or not, the SBT was in place for more than three decades and it’s the tax code many Michigan-based CFOs have grown up with. “One of our biggest challenges with the MBT is that we’ve grown accustomed to working within the rules of the SBT for so many years,” said Paul MacDonald, CPA, Vice President of Finance for the Detroit Red Wings, Inc. “Now it all changes and we’ve got to figure out exactly how the MBT will impact our business and look for optimal ways to accommodate the new law.” Viewed as a hybrid of plans introduced by the House and Senate, the MBT captures the House’s priority in the personal property tax relief it provides. Further, it reflects the Senate’s preference for a combined gross receipts and business income tax base. The final version of the MBT, encompassed by Senate Bill 94 (C-1), was not approved without criticism. Furthermore, a round of technical changes and corrections is expected, along with guidance and rulemaking from state treasury officials. The MBT calls for a tax on 0.80 percent of a taxpayer's modified gross receipts and 4.95 percent of a taxpayer's business income. As approved, for both bases, the tax package imposes a unitary combined reporting system, a single sales factor apportionment formula, expanded "active solicitation" economic nexus standards, and new credits for wages, investment and research and development activity within the state. Special provisions are in place for insurance companies and financial institutions. “It’s a whole new tax landscape,” commented Lawrence Leaman, Director of Corporate Tax at Masco Corporation. “The MBT is broad-based with a unitary component. Unlike the SBT which was judged a ‘value added tax’ regime, the MBT will most likely be regarded an ‘income tax regime’.” “But it’s still early in the game,” added Leaman. “Technical corrections and rulemaking will ultimately determine the full impact of the MBT.” Meanwhile, CFOs along with their tax departments are scrutinizing the new law and struggling to analyze how it will impact their companies. CPA Hal Richards, currently a finance and operations consultant has spent most of his career as CFO for numerous mid-sized Michigan- and Georgia-based companies. From a smaller company perspective, Richards suggests that CFOs can learn a lot about the structure of the MBT, as well as key provisions, by reviewing a summary prepared by the House Fiscal Agency. “It (the MBT) is reminiscent of a time before SBT when we had multiple taxes,” said Richards. “The MBT is not just a simple tax. CFOs are really going to have to do their homework to determine how it will affect their specific enterprise.” One aspect of the law garnering a lot of attention is the "modified gross receipts" provision. This unique tax has aspects of a value added tax (VAT), but unlike a VAT, it does not allow a deduction for the purchase of services other than in limited instances, such as for services purchased by real estate contractors. The definition of gross receipts is largely carried over from the SBT, but since there was limited guidance under the SBT related to that definition, significant questions exist regarding the inclusion of certain items of receipts under this tax base. Many of the expected points of controversy and potential technical corrections relate to this novel component of the new tax structure. Other Controversies Remain There are a number of other aspects of the bill that are controversial and raise technical issues. Both Leaman and MacDonald observed that the unitary filing requirement presents a host of new challenges for their own organizations along with many others, since it is a dramatic departure from the former SBT separate entity and elective combination provisions. Particular challenges will be faced by non-corporate entities under common control that could be required to file on a combined basis. Other points of concern include the adoption of a broad economic nexus standard; the lack of a non-business income or casual transaction provision in the income tax; and the adoption of new market-based sourcing rules for apportionment purposes that differ in many respects from the former SBT provisions. There are also important questions regarding the appropriate financial reporting treatment of the new tax, including whether the modified gross receipts tax should be accounted for as an income tax under FAS 109. “The new tax will most likely be deemed an income tax, so we believe it will fall under FAS 109 and FIN 48,” Leaman explained. Leaman cautions CFOs to be aware of this issue and determine how the two standards may impact company financial statements particularly in relation to FIN 48, which became effective for fiscal years beginning after December 15, 2006. A relief provision is also being sought for companies in a net deferred tax liability position to relieve the impact on book earnings from the implementation of the new tax. Public companies will need to address these issues in the current accounting period, including the impact of any enacted deferred liability relief, and will likely be seeking the assistance of their CPAs in determining the appropriate accounting treatment. While they’re concerned about specific provisions of the MBT, and they’re anxious to see the MBT in its final form after corrections, Leaman, MacDonald and Richards generally feel the MBT is a positive for Michigan. “There are positive aspects to the MBT and what the legislators accomplished in a challenging legislative environment,” said Leaman. “Although the tax rate might be perceived to be higher than desired, there are incentives built into the tax structure that provide economic benefits for the state and substantial economic incentives for corporations that choose to have significant business presence in Michigan. The compensation credit and the R&D tax credit, in particular, provide reasons for employment growth and technological growth in the state.” “It’s a tax structure that has real-world incentives, which are more relevant to the global economy,” Leaman added. While the MBT faces more scrutiny and certain change in the coming months, Leaman, MacDonald and Richards all agree that time and technical corrections will determine the ultimate impact of the new Michigan Business Tax. About the Author Marla Janness is editor of the MACPA bi-monthly newsletter, Leader’s Edge and the weekly E-News. Marla can be reached at mjanness@michcpa.org.