In a measure specifically enacted for the benefit of Canadian trucking firms, the State of Michigan has revised its Single Business Tax (SBT) law to provide favorable treatment to Canadian carriers. The measure was signed into law on Dec. 11, 2000, and provides a significant reduction in the tax base for Canadian carriers.
This new law was aimed at reducing the effect of different legislation, enacted approximately a year ago, which revived the Michigan SBT against Canadian carriers after a moratorium of several years.
The Michigan SBT is the only general business tax levied by the State of Michigan. In contrast to franchise taxes or corporate income taxes in other states, the SBT is not based on revenues or net income. Instead, it is a modified value-added tax that attempts to tax the sales price of a product or service, minus the cost of materials or other resources used in production.
The SBT tax base, on which the tax is calculated, consists of three major components: profits (adjusted net income), labor (compensation and benefits paid to employees) and capital (depreciation, interest, dividends and royalties).
The key element of the new law deals with the calculation of the tax base. The starting point for calculating the tax base is the company’s net income. Often, that number is a negative number, in the case of companies that have an operating loss for tax purposes. Regardless of whether the number is positive or negative, the next step is to add back compensation paid by the taxpayer to its workers. Then, to that number, the taxpayer adds back “capital” items such as depreciation and interest. The resulting figure is the tax base.
One may note that the SBT formula uses terms such as “compensation to employees,” and “depreciation of tangible assets.” Carriers that utilize leased employees or leased equipment may have relatively smaller numbers for compensation and depreciation respectively. We recommend that carriers seek an opinion from a tax advisor as to the calculation of the SBT tax base.
The tax base is not the ending point for calculation of the tax. Since the tax base represents the overall operations of the company, the company must then allocate the tax base to its activities occurring solely within Michigan. As is common in other states, this allocation is done on the basis of revenue miles. For example, if 10 per cent of the carrier’s revenue miles are in Michigan, then only 10 per cent is the allocation percentage and only 10 per cent of the tax base is allocable to Michigan. Then, before the tax is calculated, there is a standard exemption (subject to adjustment in some cases), of $45,000. The bottom line is that the carrier would pay a tax (2.2 per cent in 2000) on the amount of the tax base allocable to Michigan in excess of the standard exemption of $45,000.
The Michigan Department of Treasury has estimated that for most taxpayers, the compensation portion of the formula represented 70 per cent of the tax base. Canadian carriers are given two choices under the new law. They can take total compensation and multiply it by 50 per cent, or multiply it by the allocation percentage, a number that is often much lower than 50 per cent. Accordingly, on average, the new law will automatically reduce the tax base by 35 per cent, and potentially by significantly more. We have seen many examples where the tax base is represented almost 100 per cent by the compensation factor. Therefore, a carrier with a small percentage of miles in Michigan could eliminate its SBT tax liability entirely.
In fact, we would expect most Canadian carriers to have little or no SBT tax liability under the new law. But keep mind, every case is different and it is difficult to generalize. n
– Daniel Joyce can be reached at Hirsh and Joyce, Attorneys at Law, at 716-564-2727.
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