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Michigan Business Tax
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B7. Are system software royalties, excluded from the determination of tax liability under the Single Business Tax Act ("SBTA") (see MCL 208.9(4)(g)(viii) and (7)(c)(vii)), likewise excluded from the determination of tax liability under the Michigan Business Tax Act (?MBTA")?
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Answer:
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No. System software royalties are included in the determination of the Business Income tax base and the Modified Gross Receipts tax base under the MBTA. Unlike in the SBTA, there is no language in the MBTA which excludes such royalties from the calculation of either of these taxes.
Under the MBTA, a taxpayer (other than a financial institution or insurance company) is subject to two separate and distinct taxes, a Business Income tax and a Modified Gross Receipts tax. A taxpayer's Business Income is subject to certain statutory adjustments before allocation or apportionment. MCL 208.1201(2). Business income is generally defined as "that part of federal taxable income derived from business activity." MCL 208.1105(2). "Business activity" is defined in part as "a transfer of legal or equitable title to or rental of property, whether real, personal, or mixed, tangible or intangible, . . . , 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). MCL 208.1201(2)(f) states that "Except as otherwise provided under this subsection, to the extent deducted in arriving at federal taxable income, [a taxpayer must add to the Business Income tax base] any royalty, interest, or other expense paid to a person related to the taxpayer by ownership or control for the use of an intangible asset if the person is not included in the taxpayer's unitary business group." MCL 208.1201(2)(f). There is no language in the MBTA excluding system software royalties from Business Income.
Likewise, there is no language in the MBTA excluding system software royalties from the Modified Gross Receipts tax base. Generally, a taxpayer's Modified Gross Receipts tax base is "a taxpayer's gross receipts less purchases from other firms before apportionment?." MCL 208.1203(3). "Gross Receipts" is defined in part as "the entire amount received by the taxpayer from any activity whether in intrastate, interstate, or foreign commerce carried on for direct or indirect gain, benefit, or advantage to the taxpayer or to others?." MCL 208.1111(1). There is no language in the MBTA excluding system software royalties from Gross Receipts.
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