IP Asset Management Companies and Michigan's Single Business Tax
Under Michigan's Single Business Tax (SBT), non-Michigan corporations are often able to use the SBT to achieve state tax benefits that cannot be obtained by Michigan corporations.
These benefits are obtained through a subsidiary set-up to manage the company's intangibles, and especially intellectual properties such as trademarks, patents and copyrights, which are increasingly becoming a large component of the market value of today’s companies.
These asset management subsidiaries are designed solely to manage the company's intellectual property, thereby achieving benefits such as a strong licensing program to increase licensing revenue, better oversight of the development of new intellectual properties, increased efficiency in the administration of maintaining the intellectual property, and better oversight of the marketplace for possible enforcement of the intellectual property against infringers.
In addition to these business advantages, certain states provide tax benefits to such intangible management companies. For example, Delaware has directly legislated that no tax or reduced taxes shall be levied against certain types of income received from intangibles.
Michigan's SBT provides similar tax benefits, but almost incidentally. The nature of the single business tax is modified “value added” tax focusing on “services consumed” or “benefits received” and the three components of labor, capital and profit. Royalties paid by a Michigan corporation are added to the tax base in the calculation of the business tax.
However, a deduction from the tax base is provided for those Michigan companies which receive royalties from the licensing of intellectual property. That is, Michigan taxes the company paying royalties rather than the company receiving royalties. See, e.g., Zenith Data Systems v. Department of Treasury 555 N.W.2d 264 (Mich. 1996) and Mobil Oil Corp. v. Department of Treasury, 373 N.W. 2d 730 (Mich. 1985).
This unique tax formulation results in an unfortunate imbalance. An asset management company in Michigan may use the royalties received as a deduction to eliminate or minimize its tax burden, while its non-Michigan parent corporation may gain tax benefits for royalties paid under a more traditional tax policy, depending on the state. At the same time, a Michigan corporation establishing an asset management company in Michigan would not receive such a tax benefit because the deduction for royalties received would be effectively offset by taxes on royalties paid.
As Michigan government is currently debating what tax structure will replace the Small Business Tax, it as a unique opportunity for Michigan to address this imbalance. If Michigan’s tax law was modified to promote the establishment of asset management companies in Michigan, by both Michigan and non-Michigan corporations, many benefits to the Michigan economy could be expected. Not only would this promote the better management of an increasingly important and large component of modern companies’ market value, but fostering the technology being developed and managed in Michigan would lead to a growing technological marketplace in this state.
This article has been reprinted with permission from the Mitechnews.Com.