July 5, 2020

Volume X, Number 187

July 03, 2020

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Michigan Supreme Court Rules in City of Detroit's Favor In Income Tax Sourcing Matter

On May 18, 2020 the Michigan Supreme Court released its opinion in Honigman Miller Schwartz and Cohn LLP v. City of Detroit, Docket No. 157522. Oral arguments in this case occurred on October 2, 2019 and the court's decision has been anticipated with great interest by taxpayers, tax professionals and municipalities.

The key issue in this case was the proper calculation of the revenue factor for purposes of allocating the petitioner's income to the city of Detroit. Pursuant to the Uniform City Income Tax Ordinance (UCITO), the numerator of the revenue factor must include "services rendered in the city." Petitioner, a law firm, derived a significant amount of income from legal services performed by its attorneys within the city of Detroit but delivered to clients located outside Detroit. Revenue derived from such activity, argued the petitioner, was not generated by services rendered in the city and thus was not includible in the numerator of the revenue factor. The city disagreed and assessed more than $1 million in additional tax based on its position that services rendered in the city refers to the location where the services are performed, not where they are delivered.

The Michigan Tax Tribunal granted summary disposition to the city, finding that the statute was ambiguous but that services rendered in the city required calculating the revenue factor based upon where services were performed, not where they were delivered. The Michigan Court of Appeals reversed and remanded, concluding that the term rendered is different than the term performed, which is used elsewhere in the UCITO statute. The Court of Appeals reasoned that the legislature's use of these two different terms indicated that they had two separate meanings, and that the calculation of the revenue factor should be based upon where the service is delivered to the client, not where it is performed by the petitioner.

Upon review of Michigan's statutory history with respect to sourcing income from the sale of services and an examination of the use of the term render in the context of the UCITO specifically, the Michigan Supreme Court determined that services rendered focuses upon where services are done, not where they are delivered. In its analysis, the court particularly highlighted the contrast between the computation of the payroll factor (based upon total compensation paid to employees for work done or services performed within the city) and the revenue factor (calculated based upon the gross revenue of the taxpayer derived from sales made and services rendered in the city), noting that "render" is used when referring to a taxpayer's revenue derived from doing services for a customer or client, while "perform" is used in the context of an employee's work for his or her employer.

In its conclusion, the court's opinion noted that the Michigan legislature has adopted an origin test for the calculation of the revenue factor with respect to revenue derived from services. This is in contrast to the destination or market-based test that is customarily used to allocate revenue from the sale of goods. Based on this finding, the court reversed the Court of Appeals and remanded the case back to the Michigan Tax Tribunal.

© 2020 Varnum LLPNational Law Review, Volume X, Number 147


About this Author

Thomas J. Kenny, Varnum, Tax Litigation Attorney, Franchise Income Lawyer


om is a partner on the firm's Tax Practice Team. His practice includes civil and criminal tax litigation. Previously employed by the Department of Attorney General, Tom acted as legal counsel to the Department of Treasury in litigation matters before the Michigan Tax Tribunal, Court of Claims, Court of Appeals and Supreme Court. Prior to his employment with the Michigan Attorney General, he was an assistant prosecuting attorney in Detroit and handled criminal litigation and appeals.

Tom's tax practice focuses on the representation of Fortune 1000...

Eric M. Nemeth, Tax Planning Attorney, Varnum, Financial Controversy Lawyer

Eric is a partner and leads the tax team. He concentrates on tax and financial controversy (IRS and various States) from examinations appellate conferences, criminal investigations, witness representation and civil and criminal tax litigation. He works with government regulatory and general tax matters. He has served as Senior Trial Attorney for the District Counsel of the Internal Revenue Service and as Special Assistant U.S. Attorney for the Department of Justice. He is a frequent speaker on tax enforcement and has served as an expert witness and binding arbitrator.

Erin Haney, Tax attorney, Varnum

Erin is a member of Varnum's Tax Practice Team. As a former senior auditor for the Michigan Department of Treasury, she is experienced in Michigan tax compliance and controversy matters. Erin is also a certified public accountant, and she worked as a tax consultant for a major accounting firm prior to pursuing a career in law. During law school she served as a research assistant reviewing updates for the Guidebook to Michigan Taxes and completed an internship with the United States District Court for the Western District of Michigan.

John C. Ray, Certified Public Account, Tax attorney, Varnum
Certified Public Accountant

John is a certified public accountant who focuses on federal and multi-state controversies, audits, tax planning and litigation support.

John was formally employed by the Michigan Department of Treasury for 28 years as an auditor, audit supervisor and audit manager for Michigan sales, use, personal income, motor fuel and single business taxes audits.