Michigan tax becomes less financial burden, more administrative annoyance

Once a potential nightmare of retroactive taxation, the Michigan Single Business Tax (SBT) has been downgraded to an accounting headache for processors and moldmakers doing business with Michigan-based customers.

Lobbying efforts over the last two years by the federal and provincial governments, and various associations, including the Canadian Machining and Tooling Association, Canadian Plastics Industry Association, and the Automotive Parts Manufacturers Association, have led to a tax that “in most cases, will not be a deterrent to doing business in Michigan,” said George Costaris of the Canadian Consulate General in Detroit, at a recent CTMA seminar. “The cost of compliance will probably be more than the tax itself.”

The details of the MSBT as it applies to Canadians have been slowly revealed in a series of bulletins from the Michigan treasury, but some final clarification is still to come.

Canadian firms that conduct business activity in Michigan but don’t have a permanent establishment in the state are subject to the tax beginning Jan. 1, 2000. Business activity is defined as more than two days of solicitation per year — meaning if someone from your company sets foot in Michigan, assume you meet the criteria for business activity. Currently, tax forms for foreign companies do not exist and the regulations are not all ironed out, but expect to pay tax in 2001 based on your 2000 sales.

So what should moldmakers and processors do right now about the Michigan tax? “Plan for it,” says Mike Monahan of Plante & Moran, LLP, certified public accountants and management consultants based in Mount Clements, MI. Consult an accountant, says Monahan, and determine your exposure to the tax. “It would be relatively inexpensive to do an assessment and see what the tax would be,” adds Carey Singer, a partner with the accounting firm Mintz & Partners (Toronto). The amount your business is taxed will depend on U.S. federal taxable income, compensation of employees in the U.S. and the apportionment of your tax base. As well, there’s a $250,000 minimum threshold for gross receipts that may play a role.

“Our estimates are that the effective tax rate is about 0.5 percent,” says Costaris. In spite of the aggravation of compliance, he “wouldn’t advise anyone to hide in the reeds. It is no longer a burdensome tax, and you need to know if you have high exposure, and plan for it.”

One suggestion is that processors and moldmakers try to transfer title of goods on Canadian soil (i.e., F.O.B. your plant in Canada). If the recipient takes possession of the goods in Canada it will reduce your tax base and thus reduce your tax liability.