Important Change for Businesses Subject to City Income Tax
The Michigan Court of Appeals (COA), in an issue of first impression under the Michigan City Income Tax Act (CITA), has decided that, where a taxpayer’s service is provided to a client outside the city, it is to be considered an “out-of-city” service (and not subject to city taxes) while services provided to a client located within the city are to be considered an “in-city” service (and are subject to city taxes).
On Jan. 18, 2018, in Honigman Miller Schwartz and Cohn LLP vs. City of Detroit the COA held, for purposes of calculating the sales factor under the Michigan City Income Tax Act, revenue earned for providing services from an office within the city of Detroit on behalf of a client located outside of the city of Detroit is sourced to the location where the service is delivered to the client, not to the location from which the services were performed.
The taxpayer in this case is a law firm with an office within the city of Detroit who provides legal services to clients located both within and outside of Detroit. The taxpayer computed its Detroit sales factor based on where its client received the service. The City of Detroit contended that the sales factor should be based on where the service work was performed which, in this case, would have been from the law firm’s Detroit office.
The court looked to the meaning of “sales made in the city” and, in particular, examples provided in the CITA related to the sales of goods. The court noted that the destination of the goods is the relevant factor, not the location of the taxpayer. The court reasoned that services cannot be “delivered” in the same manner as a tangible item; however, this does not mean that services cannot be delivered. The court concluded that, for purposes of the CITA, service revenue should be included in the sales factor where the service is delivered to the client, not where the service is performed.
Seglund Gabe Pawlak & Groth, PLC
28345 Beck Road
Wixom, MI 48393
Phone: (248) 869-0030
Fax: (248) 869-0039
***The information provided in this article is for informational purposes only and is not legal advice.