What are the tax consequences and issues of offering franchises for sale in the State of Michigan?
- United States
- 07/18/2002
- Frank, Haron, Weiner and Navarro P.L.C.
The main tax issue that you need to be concerned with in this situation is the Michigan single business tax. This tax is a value-added tax which was instituted in the 1970’s to simplify a variety of taxes that previously had been imposed on corporations doing business in Michigan. As such, corporations doing business in Michigan are not subject to a corporate income tax on the state level, rather they pay the single business tax.
Whether a foreign corporation is subject to the Michigan single business tax is a very complicated question and cannot be resolved in a short memorandum of this nature.
The criteria for determining whether a foreign corporation is subject to the Michigan single business tax involves the issue of whether the corporation has “sufficient nexus” in carrying out its activities with the State of Michigan so as to provide for jurisdiction for the state to impose the single business tax on this corporation.
Before we can intelligently answer your questions regarding the tax implications of the proposed operations here in Michigan, we would need to see a little more detail as to the exact operations you propose to institute with respect to offering these franchises for sale in the State of Michigan.
Depending on how the operation is structured, it might be that you would not be subject to the Michigan single business tax. However, the definition of “sufficient nexus” is again a technical term of art which has been subject to interpretation and expansion by Michigan courts.
It is more likely that if your operation offers and sells franchises in the State of Michigan and provides any kind of support to its franchisees in terms of business operations, marketing expertise, etc., that the State of Michigan will take the position that your company has sufficient nexus to impose a single business tax on it.
Another consideration which is noted earlier is that if you decide to obtain a Certificate of Authority from the State of Michigan, you would have a very difficult, probably impossible time arguing that you do not have sufficient nexus with the State of Michigan and your business activities to warrant the imposition of the single business tax on your company. Again this is not a simple issue, and it cannot be answered without further examination of the details of your proposed venture in the state, followed by an exhaustive review of the statute and applicable case law.
You should understand that the single business tax is not an income-based tax, but a variety of different factors are taken into account with this tax is computed.
