Nexus & Apportionment 13. If a CIT taxpayer owns an interest in a flow-through entity how does that taxpayer calculate its apportionment factor?

If a taxpayer has a direct (or indirect through 1 or more other flow-through entities) ownership or beneficial interest in a flow-through entity and the taxpayer is not unitary with that flow-through entity, the taxpayer's business income that is directly attributable to the business activity of the flow-through entity is apportioned to Michigan using the flow-through entity's sales factor. MCL 206.661(2).

However, if a taxpayer is unitary with a flow-through entity, the taxpayer must include in its sales factor used for apportionment the taxpayer's proportionate share of the flow-through entity's Michigan and total sales. MCL 206.661(2), 206.663(1).

A taxpayer is unitary for apportionment purposes with a flow-through entity if that taxpayer:

• Owns or controls, directly or indirectly, more than 50% of the ownership interest with voting rights or ownership interests that confer comparable rights to voting rights of the flow-through entity, and
• The taxpayer has business activities or operations with the flow-through entity that (1) result in a flow of value between or among persons in the group, or (2) are integrated with, are dependent upon, or contribute to each other. [MCL 206.663(1).]

If a taxpayer is unitary for apportionment purposes with a flow-through entity, the taxpayer must include in the numerator of its sales factor an amount equal to the flow-through entity's total sales in Michigan multiplied by the taxpayer's percentage of ownership of that flow-through entity. In the denominator of its sales factor, the taxpayer would include an amount equal to the flow-through entity's total sales everywhere multiplied by the taxpayer's percentage of ownership of that flow-through entity. Sales between a taxpayer and a flow-through entity unitary with that taxpayer must, to the extent of the taxpayer's interest in the flow-through entity, be eliminated in calculating the sales factor. Sales between a flow-through entity unitary with a taxpayer and another flow-through entity unitary with that same taxpayer must, to the extent of the taxpayer's interest in the selling flow-through entity be eliminated when calculating the apportionment sales factor. MCL 206.663(2).