Detailed Michigan Development
The Michigan Supreme Court recently held that the sales factor sourcing rule for services under the Uniform City Income Tax Ordinance looks to where the services are performed, rather than where the services are received. The taxpayer was a law firm that represented clients within and outside of Detroit. Under the Uniform City Income Tax Ordinance, a taxpayer apportions its income to the city using a three-factor formula consisting of property, payroll and sales. The sales factor considers the gross revenue “derived from sales made and services rendered in the city” compared to all gross revenue. At issue was specifically was whether the “services rendered” language meant receipts from services performed in the City of Detroit for clients outside the City were sourced based on where they were performed (City’s view) or where the client received the service (taxpayer’s view).
The appeals court determined that because the term “performed” is used in the payroll factor statute and the term “rendered” is used in the sales factor statute, the terms must have different meanings. If the payroll factor looks to where an employee performs services, then the term “rendered” for purposes of the sales factor cannot also look to where the employee performs the service. Therefore, in the appeals court’s view, services were rendered where the customer was located.
On appeal to the state’s highest court, the Court observed that central to the outcome was the definition of the term “rendered.” Both parties articulated plausible interpretations of the statute that resulted in different tax consequences. However, viewing the statute not in isolation, but in the context of the overall statutory scheme, the court held that the City’s definition constituted the more appropriate understanding of the term. The term “render” most precisely means “to do (a service) for another” and in the Court’s view, the location where that occurred was where the service was performed. As support for its conclusion, the Court reviewed the language of the revenue factor statute and noted that the legislature specifically adopted a market-based approach for sales of goods and had outlined several examples related to sales of goods. Yet, there was no specific market sourcing language or examples for sales of services. Reviewing the overall tax framework, the Court noted that although the payroll factor provision used the term “performed” and the sales factor provision used the term “rendered,” the terms were similarly defined and the intent in both provisions appeared to be to attribute payroll and service receipts where the service has been done or carried out. The court also made extensive references to the history of statutes being adopted to move away from the origin sourcing of services in UDITPA to a market-based approach. Please contact Mike Bozimowski at 248-756-5832 with questions on Honigman, Miller, Schwartz, and Cohn, LLP v. City of Detroit.
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