Wednesday, March 31, 2010

Michigan on the Hunt: The Department of Treasury’s Nexus Enforcement Efforts

Recently, many direct marketers and online retailers received a letter from the Michigan Department of Treasury notifying them of the “carrot and stick” approach the Department of Treasury is taking regarding the enforcement of the Michigan sales and use tax, the Michigan Business Tax (“MBT”), which was adopted on January 1, 2008, and the Michigan Single Business Tax (“SBT”), a tax on gross receipts which was repealed effective December 31, 2007.

The carrot that Michigan has offered is not very big. If a company comes forward to sign a voluntary disclosure agreement, makes payment of taxes and interest for the four year period prior to the filing, and agrees to begin collecting and paying each of these taxes on a go forward basis, it is relieved of liability for penalties, and Michigan will limit its lookback period for tax and interest to four years prior to the filing. No tax, penalty, or interest would be due for any period prior to that.

This is not a very big carrot, though, because for pure Internet sellers and direct marketers, nexus for sales and use tax purposes and for the Michigan SBT under the Michigan statute and regulations requires a physical presence of the company in Michigan, i.e., sales representative activity of at least two days on an annual basis, not including attendance at trade shows at which no orders were taken. (See Revenue Administrative Bulletin No. 1998-1 for a discussion of other nexus creating activities under the SBT).

Thus, the only real benefit of submitting a VDA to marketers who had no physical presence would be the waiver of penalties on the tax for 2008 and 2009 and the avoidance of future interest on taxes paid. The costs would be payment of taxes for which the company might not otherwise be liable and the costs and burden of providing for future tax collection. Of course, the decision as to whether the VDA process is beneficial for a company should be made only after carefully analyzing the facts and circumstances for that company under the guidance of the company’s advisers. But the point is that before grabbing the “opportunity” to sign up for the VDA, a company should analyze and weigh very carefully the benefits of the VDA against its costs.


  1. I received this in the mail last week. After reading it carefully I believe that it only applies to companies that have at least $250,000 in sales to Michigan residents. Can you confirm if this is correct?

  2. The text of the law states that the Michigan Business Tax applies only to companies with a physical presence in the state or that have more than $350,000 per year of sales in Michigan. However, sales are based on sales of all entities under common ownership. The law also states that the net income tax portion of the MBT does not apply to companies that are exempt under Public Law 86-272, a federal statute. Thus, the economic presence standard of sales of greater than $350,000 applies only to the gross receipts portion of the MBT. There is a good argument that the economic presence test is unconstitutional.