As we enter the 2016 tax compliance season, taxpayers should consider a favorable Michigan Tax Tribunal (Tribunal) ruling clarifying the "materials and supplies" deduction for purposes of determining the Michigan Business Tax (MBT) modified gross receipts tax base.¹ In Plastic Surgery Associates, the Tribunal held that "materials and supplies" are purchases from other firms, beyond those supporting inventory or depreciable property, and those "materials and supplies" are allowable as a subtraction in determining the modified gross receipts tax base. Further, since the Michigan Business Tax Act (MBTA) does not define the term "materials and supplies," taxpayers should look to a federal income tax definition when used in a comparable context as allowed under MCL 208.1103, which provides that a taxpayer can look to IRC Section 162 and corresponding regulations and relevant federal case law for the definition.

Implications

In light of the Tribunal's decision, taxpayers that elected to continue to file under the MBTA (and not the current Corporation Income Tax (CIT)) are encouraged to consider reviewing their "materials and supplies" deduction more closely for the upcoming compliance season. Taxpayers should keep in mind that Michigan requires taxpayers that elected to remain under the MBTA to file and determine their MBT liability based on the greater of the MBT or CIT after certificated credits. To benefit from this ruling, the taxpayer's MBT liability must exceed this broadened materials and supplies deduction. Taxpayers should also consider the potential for filing refund claims for any tax years still open under statute. The statute of limitations on refunds is generally four years from the date set for the filing of the original return.²

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ENDNOTES

¹ Plastic Surgery Associates, PC v. Michigan Department of Treasury, Dkt. No. 16-000011 (Mich. Tax Trib. Nov. 15, 2016).

² MCL Section 205.27a(2).