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| M52. We manufacture customized tooling systems, which we then sell to our customer. After the sale, although the customer owns the tooling, it physically remains at our plant, and we use the tooling to manufacture the customer's product... |
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Yes. Under the MBTA, a taxpayer (other than a financial institution or an insurance company) is subject to both a business income tax and a modified gross receipts tax, which together comprise the taxpayer's MBT liability. Proceeds from the sale of custom tooling must be included when determining a taxpayer's business income tax base as well as its modified gross receipts tax base. There is no language in the MBTA which would exclude such sales from the calculation of either of these taxes.
For purposes of calculating the business income tax component of the MBT, "business income" means "that part of federal taxable income derived from business activity." MCL 208.1105(2). "Business activity" is broadly defined as "a transfer of legal or equitable title to or rental of property, whether real, personal, or mixed, tangible or intangible, or the performance of services, or a combination thereof, made or engaged in, or caused to be made or engaged in, whether in intrastate, interstate, or foreign commerce, with the object of gain, benefit, or advantage, whether direct or indirect, to the taxpayer or to others ?." MCL 208.1105(1). Selling property of any kind (such as the tooling) to customers and performing services (such as the design and manufacture of the tooling) for customers both clearly constitute "business activity"; thus, all income received from such endeavors, to the extent that it is part of a taxpayer's federal taxable income, constitutes taxable "business income" under the MBTA. There is no language in the MBTA that would exclude sales of custom-made tooling from business income, and the fact that the tooling remains at the manufacturer's plant does not alter that conclusion.
Similarly, a taxpayer calculates its modified gross receipts tax base by determining its gross receipts less "purchases from other firms," as defined in MCL 208.1113(6), before apportionment. MCL 208.1203(3). "Purchases from other firms" generally includes purchases of inventory, depreciable assets, and materials and supplies used in the taxpayer's business. MCL 208.1113(6). While the customized tooling might otherwise satisfy the definition of a depreciable asset or a material or supply used in the taxpayer's business, the tooling is made and sold, rather than purchased, by the taxpayer. Accordingly, the receipts from the customized tooling cannot be excluded as "purchases from other firms," and sales of such tooling are not deducted from gross receipts when determining the modified gross receipts tax base under the MBTA.
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