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Michigan Business Tax

M40. Our company adds a handling charge to all customer invoices. Is this handling charge taxable under the MBT?

Yes. Under the MBTA, a taxpayer (other than a financial institution or an insurance company) is subject to both a business income tax and a modified gross receipts tax, which together comprise the taxpayer's MBT liability. Handling charges added to customer invoices must be included when determining the taxpayer's business income tax base as well as its modified gross receipts tax base. There is no language in the MBTA which would exclude such handling charges from the calculation of either of these taxes.

For purposes of calculating the business income tax, "business income" is defined generally as "that part of federal taxable income derived from business activity." MCL 208.1105(2). "Business activity" means "a transfer of legal or equitable title to or rental of property, whether real, personal, or mixed, tangible or intangible, or the performance of services, or a combination thereof, made or engaged in, or caused to be made or engaged in, whether in intrastate, interstate, or foreign commerce, with the object of gain, benefit, or advantage, whether direct or indirect, to the taxpayer or to others …." MCL 208.1105(1). Selling property of any kind to and/or performing services for customers is clearly "business activity"; thus, all income received from such endeavors, to the extent that it is part of a taxpayer's federal taxable income, constitutes taxable "business income" under the MBTA. There is no language in the MBTA that would exclude handling charges added to customer invoices from business income.

Similarly, a taxpayer calculates its modified gross receipts tax base by determining its gross receipts less "purchases from other firms," as defined in MCL 208.1113(6), before apportionment. MCL 208.1203(3). "Purchases from other firms" generally includes purchases of inventory, depreciable assets, and materials and supplies used in the taxpayer's business. MCL 208.1113(6). A handling charge is a fee charged to a customer that is typically intended to cover the company's cost of packaging and mailing an order. Handling charges, even if they reflect amounts paid to a third-party that are simply passed through to customers, do not fall within the statutory definition of "purchases from other firms." Therefore, handling charges added to customer invoices are not deducted from gross receipts when determining the modified gross receipts tax base under the MBTA.