 | | |
|
|
|
Michigan Business Tax
|
|
|
U49. Three entities, an operating farm, a trucking company, and a rental company, meet the "more than 50% ownership" test for a unitary business group. The farm pays rent to the rental company for the use of the farm land, and pays the trucking company to ship its goods. Without the farm, which is subject to the agricultural exemption, the other two entities do not have a "flow of value" between them. Are the three entities a unitary business group? If so, and the farm does not file because of the agricultural exemption, are the receipts received by the other two entities from the farm eliminated as intercompany transactions?
|
|
|
|
Answer:
|
Section 207(d) of the MBT, rather than providing a blanket exemption for an
entity engaged in the production of agricultural goods, instead exempts from the
MBT "[t]hat portion of the tax base attributable to the production of
agricultural goods by a person whose primary activity is the production of
agricultural goods." MCL 208.1207(d). Thus, an entity whose primary activity is
commercial farming is exempt from the MBT only to the extent that its tax base
is attributable to the production of agricultural goods. In other words, the
revenue from any other non-agricultural goods producing activities conducted by
the farming entity (for example, income from an on-site produce stand at which
the farm's agricultural products are sold at retail) will remain in the farming
entity's tax base and be subject to the MBT. The exemption provided by section
207(d) is not one that exempts the farming entity from all MBT liability or that
automatically releases it from the obligation of filing an MBT return.
The agricultural exemption is, in essence, an adjustment to a taxpayer's MBT tax
base. Because the term "taxpayer" under the MBT includes a unitary business
group, MCL 208.1117(5), the determination whether a group of entities
constitutes a unitary business group must be made at the outset, before the
taxpayer's tax base is calculated. The MBT defines a unitary business group, in
part, as a group of U.S. persons, one of which owns or controls, directly or
indirectly, more than 50% of the ownership interests with voting or similar
rights of the other U.S. persons, and whose business activities or operations (i)
result in a flow of value between the members or (ii) are integrated with,
dependent upon, or contribute to each other. MCL 208.1117(6). Thus, to
constitute a unitary business group, the three entities in the example must meet
both the ownership test and one of the two relationship tests. If the three
entities satisfy both tests, they form a unitary business group, regardless of
the applicability of the agricultural exemption.
A unitary business group files a single, combined MBT return which includes all
members of the unitary business group. MCL 208.1511. Assuming that the three
entities in the example do comprise a unitary business group, in preparing its
return, each member of the group would first calculate its individual business
income and modified gross receipts tax bases. The farm entity member would
subtract from its tax bases the portion of each base that is related to its
production of agricultural goods. MCL 208.1207(d). Each group member must then
eliminate from its tax bases all intercompany transactions. MCL 208.1511. In the
example given, this step would eliminate both the income received by the
trucking company and the rental income received by the rental company, since all
of the underlying transactions would have taken place between members of the
unitary business group. The unitary business group (the taxpayer) would then
calculate its business income and modified gross receipts tax bases by combining
the tax bases of the group's individual members. The group's tax bases would
then be allocated or apportioned, and the amount allocated or apportioned to
Michigan will be subject to the MBT. If the unitary business group has
apportioned or allocated gross receipts of less than $350,000, the group will
not be required to file a return or pay the tax imposed by the MBT. MCL
208.1505(1).
|
|
