United States

Michigan: Appeals Court Rules in Favor of Law Firm in Service Sourcing Dispute

Jan 29, 2018
From KPMG TaxWatch

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Recently, the Michigan Court of Appeals, reversing the Tax Tribunal, ruled that services performed by an attorney in Detroit on behalf of a client located outside the city were not sourced to Detroit for purposes of the City Income Tax. The taxpayer at issue was a law firm that represented clients within and outside of Detroit. Under the City Income Tax law, 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. The dispute boiled down to whether the “services rendered” language meant the services were sourced based on where they were performed (City’s view) or where the client received the service (taxpayer’s view). 

The court noted at the outset that, for payroll factor purposes, the City sourcing ordinance refers to “services performed.” In the court’s view, this meant that for sales factor purposes, “services rendered” had to mean something different then “services performed” or the same language would have been used. Furthermore, the statute addressing when sales of tangible goods are considered to be made in the City indicated that what is relevant is not the location of the taxpayer (or even the customer), but the destination of the goods. If the destination is within the City, then the sale is made in the City. If the destination is outside the City, then the sale is not considered made in the City. Although recognizing that services are different tangible goods, the court nevertheless determined that services can be delivered and that the receipts from sales of services should be sourced consistent with sales of goods— to the location where delivered to a customer. Please contact Mike Bozimowski at 313 230 3183 with questions on this decision. 


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.