Michigan Supreme Court to Review State Tax Law Provision Regarding Location of Services Rendered

Assume you have an office in the city, and you’re serving clients outside that city – a common scenario. Are your professional services “rendered” in your office’s city and therefore subject to local sales taxation in that city? Or, are your services “rendered” where your client is?

As it commences its 2019-2020 term this October, the Michigan Supreme Court will decide this question in Honigman v Detroit, 322 Mich App 667 (2018), and it’s an issue to which all providers of professional services should pay attention. Honigman is a law firm with an office in Detroit, and like most, if not all, professional services firms, it has clients beyond those city limits. 

The City Income Tax Act (CITA), MCL 141.501 et seq., requires certain business taxpayers to calculate taxes based on their activity in the city. Taxable revue is determined in part by using three statutory factors; each of which accounts for revenue attributable to a different aspect of the business: (1) property – the percentage of the taxpayer’s real and personal property located in the city that allows business generation, MCL 141.621; (2) payroll – the percentage accounting for the extent to which a taxpayer’s employees perform work in the city and generate revenue while physically located there, MCL 141.622; and (3) sales – the gross revenue “derived from sales made and services rendered in the city,” MCL 141.623. The Michigan Supreme Court will soon decide the proper interpretation and application of the sales factor. 

For the period between 2010 and 2014, pursuant to the CITA, Honigman reported that roughly 11% of its gross revenues were for “services rendered within the city.” Having determined that this figure was more like 50%, the City of Detroit assessed Honigman around $1.1 million in local taxes. Honigman disputed the amount by filing a petition in the Michigan Tax Tribunal. 

Honigman argued, and continues to argue, that the phrase “services rendered” in section MCL 141.623 (regarding the sales factor) has a distinct legal meaning, evidenced by the fact the Michigan Legislature used the phrase “services performed” in a different provision of the CITA, MCL 141.622 (regarding the payroll factor). Accordingly, in Honigman’s view, even though it performed client services in Detroit, because those services were delivered to clients outside the city, they were not “rendered within the city.” The city has taken the position that the terms are synonymous, and that because the services were performed within the city, the revenue derived from those services is subject to city tax. 

The tax tribunal agreed with the city, but the Michigan Court of Appeals agreed with Honigman and reversed the tribunal in a published decision. In addition, the appellate court observed that while the Legislature didn’t elaborate on the meaning of “services rendered” in MCL 141.623, it did explain the meaning of “sales made in the city” under MCL 141.623(1). To that end, the appellate court was persuaded by the Legislature’s “common thread” in the statute—that the location of the taxpayer and the client is irrelevant; what matters is the destination of the service. 

The Supreme Court has granted the city’s application for leave to appeal and will now address whether the appellate court correctly construed the phrase “services rendered within the city” in MCL 141.623.​ Because the Supreme Court granted leave, it will issue an opinion in this case by the end of July 2020, at the latest. 

While tax law generally tends to be complex, the issue in this case is rather straightforward—it’s a simple matter of statutory interpretation, but with a great deal of significance. If the Supreme Court affirms the decision of the appellate court, its ruling will provide comforting finality for firms located in cities like Detroit, that deliver a large amount of its services outside those cities. If the Supreme Court reverses the appellate court, the decision would likely disrupt next year’s budget for many professional services firms. 

Either way, this case is something to watch. 

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