United States

Michigan: Apportionment Guidance Provided Regarding Where the Benefit of a Service is Received

Oct 26, 2015
From KPMG TaxWatch

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Recently, the Michigan Department of Treasury issued a Revenue Administrative Bulletin (RAB) providing guidance on Michigan’s market-based sourcing rules. For purposes of the Michigan Corporate Income Tax Act, sales from the performance of services are sourced to Michigan if the recipient of the service receives the benefit of the service in Michigan. If the benefit is received in Michigan and in another state or states, the receipt is attributed to Michigan to the extent that the benefit is received in the state.  The RAB sets forth guidelines on how to properly source service receipts and includes numerous examples applying the guidelines.

At the beginning of the RAB, the Department addresses who can be the recipient of the service. Specifically, the RAB clarifies that although the purchaser of a service will often be the recipient of the service, the recipient of a service could be someone other than the purchaser. Next, the Department lists several guidelines for determining when the benefit of a service or a portion of the benefit of a service is received in Michigan. For example, under the RAB, if a service is provided to a purchaser engaged in a business in Michigan and in other states, the benefit of the service is received in Michigan to the extent that it relates to the purchaser’s business in Michigan. In determining the extent to which the benefit of a service is received in Michigan, a taxpayer may use any method to apportion the benefit between Michigan and the other state(s), provided that the method is reasonable and appropriate in light of all existing facts and circumstances. The chosen method must be uniformly and consistently applied and must be supported by the taxpayer's business records as they existed at the time that the service was provided. The Department notes that if a taxpayer’s situation is not specifically addressed by a guideline, the taxpayer should use the guideline that most closely resembles its situation.

The Corporate Income Tax Act allows taxpayers to source receipts based on the customer’s billing address if the location where the customer received the benefit of the service cannot be determined. In the RAB, the Department reminds taxpayers that they may not simply use the customer's billing address without first making a reasonable and demonstrable effort, based on their books and records, to determine where the benefit of a service is received. The Department further reminds taxpayers that receipts are not excluded from the apportionment factor entirely if the location of the recipient's benefit cannot be determined. For more information on Michigan Revenue Administrative Bulletin 2015-20, please contact Michael D. Bozimowski at 313-230-3183. 

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.