Did you ever think about starting your own business? Well, whether you want to or not, you may be about to take the plunge. From January 1st, if you have “modified gross receipts” of $350,000 you will be defined as a business under Michigan’s new Michigan Business Tax. The definition of modified gross receipts becomes rather important, because you are about to be taxed as a business on that amount. The definition is as broad as it is simple: Modified gross receipts include the entire amount received from any activity.
This includes capital gains, and there is no deduction for capital losses recognized from the sale of investment assets. The MBT does not differentiate between active business income and income from investments. This is how the Michigan Department of the Treasury describes it:
Does the Modified Gross Receipts Tax component of the Michigan Business Tax Act tax capital gains of investors, including trusts, Family Limited Partnerships and individuals?
Yes, the modified gross receipts tax is a tax on every taxpayer with nexus. [see below*] “Taxpayer” means a person or a unitary business group liable for a tax, interest, or penalty under this act. The term “person” means an individual, firm, bank, financial institution, insurance company, limited partnership, limited liability partnership, copartnership, partnership, joint venture, association, corporation, subchapter S corporation, limited liability company, receiver, estate, trust, or any other group or combination of groups acting as a unit. Therefore, the modified gross receipts tax is imposed on the above named persons if taxpayer nexus with Michigan exists.
The modified gross receipts tax base is a taxpayer’s gross receipts less purchases from other firms before apportionment. The definition of “gross receipts” means the entire amount received by the taxpayer from any activity whether intrastate, interstate, or foreign commerce carried on for direct or indirect gain, benefit, or advantage to the taxpayer or to others with certain exceptions. MCL 208.1111(1)(o) excepts from gross receipts, proceeds from sales of capital assets as defined in section 1221(a) of the internal revenue code, less any gain from the disposition to the extent that gain is included in federal taxable income. Stated another way, the gain included in federal taxable income is included in the modified gross receipts tax base. There are no other statutory exceptions or exclusions that are applicable to capital gains recognized from the sale of investment assets. As a result, these gains are included in gross receipts.
The result of this is that people with money to invest will be encouraged to invest it outside of Michigan and will be strongly encouraged to move out of the State. This is simply insane, and if it isn’t changed will do incalculable harm to an economy already on life support.
Our legislators have been too busy trying to undo the damage from the hastily conceived and arbitrary tax on services to even realize that, come January 1st, they’ll have created a whole new class of taxpayer to soak. Unfortunately for Michigan, many people who fall into this new tax category are mobile, and the tax consequences are severe enough that they may well decide to take their investment capital, and their spending power, to a jurisdiction that is less punitive.
Incompetent is one word for our legislators, though many more less polite epithets will probably occur to you.
It gets worse. Sales tax you collect could be part of your modified gross receipt total. The Treasury explains here:
Is sales tax collected by a retail business considered part of its modified gross receipts under the Michigan Business Tax?
Yes. The seller of tangible personal property is the person legally liable for payment of sales tax. A seller that is reimbursed sales tax by the purchaser of tangible personal property must include in its gross receipts the “entire amount received” from “any activity” unless the amount received is statutorily exempted under MCL 208.1111. Therefore, a taxpayer that receives sales tax from a purchaser as part of a transaction not otherwise exempt under the Michigan Business Tax must include in gross receipts the amount received from the sale of tangible personal property as well as the sales tax received.
A taxpayer, other than an insurance company, has nexus with Michigan and is subject to the tax imposed under the MBT if (a) the taxpayer has a physical presence in this state for more than one day in a tax year, or (b) the taxpayer actively solicits sales in this state and has unapportioned gross receipts of $350,000 or more sourced to this state. MCL 208.1200(1).