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Michigan Supreme Court Rules That Services Are Sourced to Location of Performance for Local Income Taxes

Sometimes, the application of a state tax rule can hinge on the interpretation of one word, which was the case when the Michigan Supreme Court was asked whether “services rendered” meant “services performed” or “services delivered” for apportionment purposes under Detroit’s income tax.

By: Betsy Tuck, SALT Manager

In the February 2018 issue of the SALT Newsletter, we wrote an article on the case between Honigman Miller Schwartz and Cohn LLP (“Honigman”) and the City of Detroit in which the Michigan Court of Appeals ruled in favor of Honigman that the law firm revenues derived from clients outside of Detroit are not sourced to Detroit under the city’s sales apportionment factor. On May 18, 2020, the Michigan Supreme Court issued an opinion reversing the Court of Appeals decision, finding in favor of the city.[1]

In Michigan, cities are able to assess a local income tax by incorporating the Uniform City Income Tax Ordinance (“UCITO”) into their own city ordinances.[2] Under UCITO, taxpayers that do business both inside and outside of the city are required to apportion their income to the city based on a three-factor business allocation percentage, which takes into account a measure of a business’s property, payroll, and sales attributable to the city relative to its total property, payroll and sales.[3] The sales factor is the percentage of “sales made and services rendered” in the city to total sales.[4]

Based on Honigman’s interpretation of “services rendered”, the Detroit-based law firm sourced revenues from the performance of legal services to the location of clients. The City of Detroit challenged this position under the belief that Honigman should have sourced the services based on the location of performance (i.e., Detroit) which would have resulted in a higher percentage of sales in Detroit versus elsewhere. The Court of Appeals ruled in favor of Honigman, but the Michigan Supreme Court has now reversed that decision.

In defense of each of their respective positions, both sides referenced Merriam-Webster’s Collegiate Dictionary’s (11th ed.) definition of “render,” but cited different versions of the definition – 1) “to transmit to another: DELIVER” and 2) “to do (a service) for another.”

Honigman argued that “render” should follow the definition “to deliver,” and therefore, revenue from its legal services should be sourced to the location of the client (i.e., the location to which the services are delivered). By contrast, the City of Detroit asked the Court to interpret the word “render” to mean “to do (a service) for another,” thereby sourcing Honigman’s revenue from services performed in Detroit to the City.

The Supreme Court looked to other areas of UCITO where the word “render” is used in a similar context. The business allocation method states that “the entire net profits of such taxpayer earned as a result of work done, services rendered or other business activity conducted in the city shall be ascertained by determining the total ‘in-city’ percentages of property, payroll and sales.”[5] The Court then noted that  the payroll percentage should be based on “total compensation paid to employees for work done or for services performed within the city.”[6]

Based on the use of “render” and “performed” in those provisions, the Court concluded that the intent of the Legislature was to look to where services are performed and business is conducted, not the location of delivery. The Court of Appeals looked to the same language in the code and determined that the Legislature, by choosing to use the words “perform” and “render” in each section, intended for the terms to have distinct meanings.

As state tax advisors, we often face issues where we are asked to interpret tax language. This is not an easy task as evidenced in this example – even a law firm (whose job it is to render advice interpreting the law) found itself on the wrong side of this interpretation.

When taking a position on a state tax return, it is important to understand that position as well as the potential arguments on the other side. Aprio’s SALT team has experience researching and analyzing state tax issues, and we can assist businesses make an informed decision, considering the potential upside and the downside of each position as well as the taxpayer’s risk tolerance. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Betsy Tuck, SALT Manager at betsy.tuck@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the June 2020 SALT Newsletter.

[1] Honigman Miller Schwartz and Cohn LLP v City of Detroit, Docket No. 157522. (Mich. Sup. Ct., May 18, 2020).

[2] Mich. Comp. Laws Ann. § 141.503(1).

[3] See Mich. Comp. Laws Ann. §§ 141.618 and 141.620.

[4] Mich. Comp. Laws Ann. § 141.623.

[5] Mich. Comp. Laws Ann. § 141.620.

[6] Mich. Comp. Laws Ann. § 141.622.

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