Macpa Claws Of State


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State and Local Tax issues affecting MI taxpayers

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  • Depending upon the nature of the project, we have resources of over 30 professionals ready to serve you and your client needs.
  • Taxing Services: can generate substantial $$$$ Broadly is essential if the long-run revenue adequacy of the sales tax is to be maintained May reduce the year-to-year volatility of sales tax collections Will make the sales tax fairer Can improve the allocation of economic resources Can simplify the process of administering and complying with the sale tax TREASURER ERNESTLY BELIEVES $1.8 BILLION IN NEW REVENUE
  • 1993-5 = Manufacturer/Contractor – one who uses raw materials and fabricates item that is converted to real. Key – Manufacturer/Contractor = tax base includes labor to fabricate/construct 1999-2 = Contractor that purchases items and ‘convert’s’ to real is taxed on the purchase price.
  • with the Department. Sequist v. Fabiano 1936 Mi. Supreme Ct
  • Unpublished opinion
  • RAB on sale of TPP
  • Forms language – ‘as determined…’
  • Law states – with regard to flow through entities – 4577 or 4578 confusing – look at example
  • S-Corp Co 1 – owns the property/building Co 2,3,4 rent from Co 1 - thus eliminations $125k What should go into Gross Receipts Calc? $1,625 or $1,500 Look at definition of ‘Taxpayer’ = Person or UBG liable for tax = Person = indiv, p’ship, S-Corp, LLC or any other group acting as a unit
  • Officer/Director C-corp - disqualified compensation > $180k S-Corp – shows shareholder A column N > $180k
  • Assumes flow through entity – S-Corp with compensation Sec 417 additional disqualifiers An individual, a partnership, a limited liability company, or a subchapter S corporation is disqualified if the individual, any 1 partner of the partnership, any 1 member of the limited liability company, or any 1 shareholder of the subchapter S corporation receives more than $180,000.00 as a distributive share of the adjusted business income minus the loss adjustment of the individual, the partnership, the limited liability company, or the subchapter S corporation. (3) To determine the reduction percentage under subsection (1)(c), the following apply: (a) The reduction percentage for a partnership, limited liability company, or subchapter S corporation is based on the distributive share of adjusted business income minus loss adjustment of the partner, member, or shareholder with the greatest distributive share of adjusted business income minus loss adjustment. (9) (b) "Adjusted business income" means business income as defined in section 105 with all of the following adjustments: Sec 105 (2) "Business income" means that part of federal taxable income derived from business activity. For a partnership or S corporation, business income includes payments and items of income and expense that are attributable to business activity of the partnership or S corporation and separately reported to the partners or shareholders. 
  • The purpose of this memo is … The company has … The filing position being taken is… It is more likely than not to be sustained if reviewed The statutory authority and case authority to take this position is based on …
  • The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser.
  • Macpa Claws Of State

    1. 1. Clause / Claws of the STATE
    2. 2. Samuel L. Hodges CPA <ul><li>Sam has more than 20 years of experience providing state and local tax advice to companies both domestically and abroad. Before starting his own firm, he served as the Senior Manager and Practice Leader for a mid-sized as well as a Big 4 national accounting firm as well as working for a leading oil, gas and chemical producer and a leading tier-one auto supplier. Sam is a former Board member of the Michigan Association of Certified Public Accountants. Based upon his knowledge and experience, he has been asked to join the MACPA President’s Advisory Council and Michigan’s Turnaround Task Force. </li></ul><ul><li>Sam is a frequent speaker on state and local tax topics and has also testified before Michigan’s House Subcommittee on tax simplification. </li></ul><ul><li>Sam earned a Bachelor of Science in Business Administration with a major in accounting from the University of Tulsa, in Tulsa Oklahoma. Sam is a CPA licensed in Michigan and Oklahoma and is a member of the Michigan Association of Certified Public Accountants, Oklahoma Society of Certified Public Accountants, American Institute of Certified Public Accountants, and is a CPA Ambassador. </li></ul>
    3. 3. Sam Hodges & Associates <ul><li>Sam Hodges </li></ul><ul><ul><li>[email_address] </li></ul></ul><ul><ul><li> </li></ul></ul><ul><ul><li> </li></ul></ul><ul><ul><li> </li></ul></ul><ul><ul><li>(248) 327-6430 </li></ul></ul><ul><ul><li> </li></ul></ul><ul><li>Ed Kisscorni </li></ul><ul><ul><li>[email_address] </li></ul></ul><ul><ul><li> </li></ul></ul><ul><ul><li>(248) 327-6430 </li></ul></ul><ul><ul><li> </li></ul></ul><ul><li>Lance Siemen </li></ul><ul><ul><li>[email_address] </li></ul></ul><ul><ul><li>(248) 327-6430 </li></ul></ul><ul><ul><li> </li></ul></ul><ul><li>BD Copping </li></ul><ul><ul><li>[email_address] </li></ul></ul><ul><ul><li>(248) 327-6430 </li></ul></ul><ul><ul><li> </li></ul></ul>The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser.
    4. 4. Things YOU need to know <ul><li>Michigan Sales / Use Tax Update </li></ul><ul><li>Other State Sales / Use Tax Issues </li></ul><ul><li>Constitutional Issues </li></ul><ul><ul><li>Nexus </li></ul></ul><ul><li>Michigan Business Tax Update </li></ul><ul><ul><li>Suggested Technical Amendments </li></ul></ul><ul><ul><li>Document – Document - Document </li></ul></ul>
    5. 5. Taxation of Services <ul><li>Michigan </li></ul><ul><ul><li>Broad tax on Services attempted </li></ul></ul><ul><ul><li>Passed in September 2007, effective Dec 1, 2007 </li></ul></ul><ul><ul><li>Repealed the same day it went into effect </li></ul></ul><ul><ul><li>Replaced with the MBT Surcharge </li></ul></ul>
    6. 6. Taxation of Services, Continued <ul><ul><li>Michigan House Bill 5810 </li></ul></ul><ul><ul><ul><li>Introduced 2/16/2010 (no support currently) </li></ul></ul></ul><ul><ul><ul><li>All services taxable except those specifically excluded </li></ul></ul></ul><ul><ul><ul><ul><li>Services provided by certain organizations (charitable, religious, social) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Business to Business (accounting, architectural) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Are all business to business services excluded? Maybe </li></ul></ul></ul></ul>
    7. 7. Taxation of Services, Continued <ul><li>Massachusetts </li></ul><ul><ul><li>Enacted in 1990 to be effective 03/06/91 </li></ul></ul><ul><ul><li>Repealed retroactive to 03/06/91 </li></ul></ul><ul><li>Florida </li></ul><ul><ul><li>Passed in 1986 to take effect in July 1987 </li></ul></ul><ul><ul><li>Included Professional, Insurance and Personal Services </li></ul></ul><ul><ul><li>Repealed January 1, 1988 </li></ul></ul><ul><ul><li>Sales Tax on TPP increased from 5% - 6% </li></ul></ul>
    8. 8. Taxation of Services, Continued <ul><li>FTA Survey </li></ul><ul><ul><li>Most Services Taxed – DE, HI, NM, SD, WA </li></ul></ul><ul><ul><li>Michigan – 26 of which 12 are utilities </li></ul></ul><ul><ul><ul><li>Rentals of TPP </li></ul></ul></ul><ul><ul><ul><li>Lodging (hotel, cottage 30 days or less) </li></ul></ul></ul><ul><ul><ul><li>Electricity </li></ul></ul></ul><ul><ul><ul><li>Natural Gas </li></ul></ul></ul><ul><ul><ul><li>Telephone </li></ul></ul></ul>
    9. 9. Taxation of Services, Continued <ul><li>Why is there such a push to tax services? </li></ul><ul><ul><li>Taxing Services can generate substantial $$$$ </li></ul></ul><ul><ul><li>Taxing Services can generate substantial $$$$ </li></ul></ul><ul><ul><li>Taxing Services can generate substantial $$$$ </li></ul></ul><ul><ul><li>Taxing Services can generate substantial $$$$ </li></ul></ul>
    10. 10. Mixed Transactions (Bundling) <ul><li>Draft Rule </li></ul><ul><li>Two or more identifiable products sold for one non-itemized price </li></ul><ul><li>What is primarily being sold? </li></ul><ul><ul><li>Taxable TPP or Taxable Service </li></ul></ul><ul><ul><li>Exempt TPP or Exempt Service </li></ul></ul><ul><li>Factors to Consider </li></ul><ul><ul><li>What the buyer sought (primary factor) </li></ul></ul><ul><ul><li>What is the primary business of the seller? </li></ul></ul><ul><ul><li>Whether the taxable item is available for sale without the exempt item </li></ul></ul><ul><ul><li>Extent to which the exempt item has contributed to the value of the taxable item </li></ul></ul><ul><li>If service, the service provider is taxable on TPP consumed (nothing new) </li></ul>
    11. 11. Quote <ul><li>IRS: We’ve got what it takes </li></ul><ul><li>To take what you’ve got. </li></ul>
    12. 12. Use Tax Audit <ul><li>Statute of Limitations </li></ul><ul><ul><li>Four Years (Maybe) </li></ul></ul><ul><ul><ul><li>Up to ten years if the taxpayer is not registered </li></ul></ul></ul><ul><li>Michigan Vendors </li></ul><ul><ul><li>No longer an audit defense </li></ul></ul><ul><ul><li>States position </li></ul></ul><ul><ul><ul><li>Consumer is liable unless sales tax paid (§ 205.94) </li></ul></ul></ul>
    13. 13. Sales Tax Audits <ul><li>Cash Basis Audits </li></ul><ul><ul><li>Party Stores etc. </li></ul></ul><ul><ul><ul><li>Purchase Analysis </li></ul></ul></ul><ul><ul><ul><li>Sample period </li></ul></ul></ul><ul><ul><ul><li>Food deduction </li></ul></ul></ul><ul><ul><ul><li>Good records are imperative </li></ul></ul></ul><ul><ul><ul><ul><li>Must be able to segregate all exempt receipts </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Food, lottery, bottle deposits, money orders, magazines, garbage tags, check cashing fees, services </li></ul></ul></ul></ul>
    14. 14. Manufacturing / Construction Contractors <ul><li>RAB 1993-5 </li></ul><ul><ul><li>Use Tax Base of TPP AFFIXED to Real by Manufacturer/Contractor </li></ul></ul><ul><li>RAB 1999-2 </li></ul><ul><ul><li>Sales and Use Tax in the Construction Industry </li></ul></ul><ul><ul><ul><li>If ‘converted’ – tax is on person converting </li></ul></ul></ul><ul><ul><ul><li>Only exemptions for Nonprofit Hospitals, Housing and Church Sanctuaries </li></ul></ul></ul>
    15. 15. Amazon Laws <ul><li>Economic Presence </li></ul><ul><ul><li>Slightest Connection </li></ul></ul><ul><ul><ul><li>Payment to in-state resident for referral by link or internet web site </li></ul></ul></ul><ul><ul><ul><li>De mimimus rules </li></ul></ul></ul><ul><ul><li>Laws on books – North Carolina, Rhode Island and Colorado </li></ul></ul><ul><ul><li>Other states considering include CA, CT, HI, IL, MD, MN, MS, NM, TN, VT, VA, WI </li></ul></ul>
    16. 16. Amazon Laws, Continued <ul><li>Colorado Affiliate Nexus </li></ul><ul><ul><li>Effective 3/1/10 retailers are doing business in Colorado if an affiliate has a physical presence </li></ul></ul><ul><ul><li>Controlled group based on IRC § 1563(a) and (b) </li></ul></ul><ul><ul><li>If no nexus in Colorado, unregistered retailers must notify customers of Use Tax requirement. §39-21-112.3.5(3)(a) </li></ul></ul><ul><ul><li>Seller must notify state of purchases made by Colorado purchases. §39-21-112.3.5(3)(d)(II) </li></ul></ul><ul><ul><li>De minimus rule - $100,000 </li></ul></ul><ul><ul><ul><ul><ul><li>California – Proposed similar legislation </li></ul></ul></ul></ul></ul>
    17. 17. Quote <ul><li>I had plastic surgery last week. </li></ul><ul><li>I cut up my credit cards. </li></ul>
    18. 18. Court Cases <ul><li>Granger Land Development Co v. Department of Treasury Dk No. 286355, Mi Ct of Appeals </li></ul><ul><ul><li>Granger owns and operates landfills </li></ul></ul><ul><ul><li>Methane produced from trash </li></ul></ul><ul><ul><li>Granger recovers gas and sells to related company to generate electricity </li></ul></ul><ul><ul><li>State determined that Granger was not an industrial processor. (real v personal) </li></ul></ul><ul><ul><ul><li>Court of Appeals disagreed </li></ul></ul></ul>
    19. 19. Court Cases, Continued <ul><li>Hunderman & Sons Redi-Mix, Inc. v Michigan Department of Treasury </li></ul><ul><li>Michigan Tax Tribunal, No. 342101 </li></ul><ul><ul><li>Does Equipment used by Hunderman qualify for the Industrial Processing exemption. </li></ul></ul><ul><ul><ul><li>Trailers used to transport cement powder, sand and gravel to the batch plant are taxable as transportation, not manufacturing - Taxable </li></ul></ul></ul><ul><ul><ul><li>Pump trucks transport concrete from the mixer trucks to the job site with no new materials added - Taxable </li></ul></ul></ul>
    20. 20. Court Cases, Continued <ul><li>Auto Club Insurance Association v Department of Treasury </li></ul><ul><li>Michigan Court of Appeals Dk No. 286600 </li></ul><ul><ul><li>Is a lease to a tax exempt entity subject to use tax? Yes per Ct of Appeals. </li></ul></ul><ul><ul><ul><li>ACIA is an insurance company </li></ul></ul></ul><ul><ul><ul><li>Exempt from use tax because SBT is in lieu of tax </li></ul></ul></ul><ul><ul><ul><li>ACIA paid use tax to Michigan and non-Michigan lessors based on language in the lease </li></ul></ul></ul><ul><ul><ul><li>Treasury denies ACIA refund request </li></ul></ul></ul><ul><ul><ul><li>Lessor is both a “consumer” and a “seller” </li></ul></ul></ul><ul><ul><ul><li>Treasury position is that legal incidence of tax is on lessor and the payment of the tax is a contractual matter between ACIA and the lessors. </li></ul></ul></ul>
    21. 22. Michigan Business Tax <ul><li>Technical Corrections / Known Issues </li></ul><ul><ul><li>RAB forthcoming </li></ul></ul><ul><ul><li>Multistate Tax Compact </li></ul></ul><ul><ul><ul><li>Alternative Apportionment </li></ul></ul></ul><ul><ul><li>Small Business Credit </li></ul></ul><ul><ul><ul><li>Forms v. Law </li></ul></ul></ul><ul><ul><li>Document your positions </li></ul></ul>
    22. 23. Multistate Tax Compact <ul><li>MBT – Service </li></ul><ul><ul><li>Single Factor </li></ul></ul><ul><ul><li>100% Sales </li></ul></ul><ul><ul><li>Benefits Received </li></ul></ul><ul><ul><li>DO YOU KNOW WHAT THIS MEANS? </li></ul></ul><ul><li>MTC – Service </li></ul><ul><ul><li>Three Factor </li></ul></ul><ul><ul><li>Equally Weighted </li></ul></ul><ul><ul><li>> Cost of Performance </li></ul></ul><ul><ul><li>Let’s look at an example </li></ul></ul>
    23. 24. Multistate Tax Compact 33% 417 1,250 Tax @ 5% 8,333 25,000 Taxable 8% 25% Appt % 25% 25% Sales % 0% Pay % 0% Prop % 100,000 100,000 Income MTC MBT
    24. 25. Small Business Credit <ul><li>Limitations of Small Business Credit </li></ul><ul><ul><li>Gross Receipts exceed $20 million or </li></ul></ul><ul><ul><li>Adjusted Business Income > $1.3M </li></ul></ul><ul><ul><li>“ as determined on Form 4577” </li></ul></ul><ul><ul><li>Compensation and Directors fees of shareholder of regular corp exceeds $180k </li></ul></ul><ul><ul><li>Indiv, Shareholder, Partner or Member has distributive share exceeds $180k </li></ul></ul>
    25. 26. Small Business Credit <ul><li>Sec 417 states: [this credit] is available to any taxpayer with gross receipts that do not exceed $20 million and with adjusted business income minus the loss adj that does not exceed $1.3 million [inflation adj] and if any 1 individual, partner member, shareholder of S receives > $180k as distributive share of adj business income </li></ul>
    26. 27. Small Business Credit 218 118 18 18 372 Total Sholder Wages 1 1 1 1 4 D - 5% 7 7 7 7 28 C - 10% 10 10 10 10 40 B - 10% 200 100 - - 300 A - 75% Shldr Ownership/Wages 100 (150) (100) (10) (160) (160) Taxable Inc 1,000 500 - 125 1,625 (125) 1,500 Gr Receipts Co 4 Co 3 Co 2 Co 1 Subtot Elim UBG Facts (000)
    27. 28. Small Business Credit 212 (160) 372 372 (4) (8) 4 4 D - 5% 12 (16) 28 28 C - 10% 24 (16) 40 40 B - 10% 180 (120) 300 300 A - 75% N Total M Income L Total K Ins J Salaries Shr holder Share of Form
    28. 29. Small Business Credit 159 Income Disqualifier 75% Largest Shareholder 212 Total 372 Compensation (160) Income Law (000)
    29. 30. Document Document Document <ul><li>Unitary Business Group </li></ul><ul><ul><li>Who’s in – who’s out </li></ul></ul><ul><li>Apportionment </li></ul><ul><ul><li>Methodology </li></ul></ul><ul><ul><li>Information available </li></ul></ul><ul><ul><li>Why used </li></ul></ul><ul><ul><li>Compare to other state filings (?) </li></ul></ul><ul><li>Credits </li></ul>
    30. 31. Documentation <ul><li>Purpose </li></ul><ul><li>Facts </li></ul><ul><li>Conclusion / Position </li></ul><ul><li>Analysis </li></ul><ul><li>Authority </li></ul><ul><ul><li>Statute </li></ul></ul><ul><ul><li>Case Law </li></ul></ul><ul><ul><li>Regulations </li></ul></ul><ul><ul><li>Revenue Administrative Bulletins* </li></ul></ul>
    31. 32. Questions
    32. 33. Thank you <ul><li>Don’t forget to fill out the rating form - place a check by 5+ </li></ul>
    33. 34. Follow Us <ul><li>Twitter => @SamHodgesCPA </li></ul><ul><li>LinkedIn=> SamHodgesCPA </li></ul><ul><li>Blog => </li></ul><ul><li>FaceBook => too long…  </li></ul>
    34. 35. Sam Hodges & Associates <ul><li>Sam Hodges </li></ul><ul><ul><li>[email_address] </li></ul></ul><ul><ul><li> </li></ul></ul><ul><ul><li> </li></ul></ul><ul><ul><li> </li></ul></ul><ul><ul><li>(248) 327-6430 </li></ul></ul><ul><ul><li> </li></ul></ul><ul><li>Ed Kisscorni </li></ul><ul><ul><li>[email_address] </li></ul></ul><ul><ul><li> </li></ul></ul><ul><ul><li>(248) 327-6430 </li></ul></ul><ul><ul><li> </li></ul></ul><ul><li>Lance Siemen </li></ul><ul><ul><li>[email_address] </li></ul></ul><ul><ul><li>(248) 327-6430 </li></ul></ul><ul><ul><li> </li></ul></ul><ul><li>BD Copping </li></ul><ul><ul><li>[email_address] </li></ul></ul><ul><ul><li>(248) 327-6430 </li></ul></ul><ul><ul><li> </li></ul></ul>The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser.