Nexus & Apportionment 5. What are the nexus standards under the CIT?
A taxpayer, other than an insurance company, has nexus with Michigan and is subject to the tax imposed under the CIT if (a) the taxpayer has a physical presence in this state for more than one day in a tax year, (b) the taxpayer actively solicits sales in this state and has gross receipts of $350,000 or more sourced to Michigan, or (c) the taxpayer has an ownership interest or a beneficial interest in a flow-through entity, directly, or indirectly through one or more other flow-through entities, that has nexus in Michigan. MCL 206.621(1). The same nexus standard applies to a financial institution with regard to the imposition of the franchise tax. MCL 206.653.
However, the corporate income tax is limited by federal statutory provisions commonly referred to as PL 86-272, which prohibits Michigan from imposing an income tax if the only in-state business activity of the out-of-state person is the solicitation of orders for sales of tangible personal property where the orders are sent outside the state for approval or rejection and are filled by shipment or delivery from a point outside the state. 15 USC 381 et seq. Once a taxpayer exceeds the safe harbor of PL 86-272, the taxpayer is then subject to the corporate income tax on its entire tax base, including that portion of income otherwise protected by PL 86-272. Protection under PL 86-272 does not apply to financial institutions, as they are subject to a franchise tax on net capital, which is not an income tax.
Physical presence means “any activity conducted by the taxpayer or on behalf of the taxpayer by the taxpayer’s employee, agent, or independent contractor acting in a representative capacity.” MCL 206.621(2)(b). Physical presence does not include “the activities of professionals providing services in a professional capacity or other service providers if the activity is not significantly associated with the taxpayer’s ability to establish and maintain a market in this state.” MCL 206.621(2)(b).
“Actively solicits” under the nexus standard referenced in item (b) above means either of the following:
(i) Speech, conduct, or activity that is purposefully directed at or intended to reach persons within [Michigan] and that explicitly or implicitly invites an order for a purchase or sale[, or]
(ii) Speech, conduct, or activity that is purposefully direct at or intended to reach persons within [Michigan] that neither explicitly nor implicitly invites an order for a purchase or sale, but is entirely ancillary to requests for an order for a purchase or sale.
Active solicitation includes, but is not limited to, solicitation through: (1) the use of mail, telephone, and e-mail; (2) advertising, including print, radio, internet, television, and other media, and; (3) maintenance of an internet site over or through which sales transactions occur with persons within Michigan.
Examples of active solicitation include: sending mail order catalogs; sending credit applications; maintaining an internet site offering online shopping, services, or subscriptions, and; soliciting through media advertising, including internet advertisements.