Michigan Supreme Court: Services must be sourced to Detroit

May 27, 2020
May 27, 2020
0 min. read

The Michigan Supreme Court recently ruled in Honigman Miller Schwartz and Cohn LLP v. City of Detroit that legal services performed in Detroit for clients located outside the city should be sourced to Detroit for purposes of the city income tax.  

Detroit imposes an income tax under the state’s Uniform City Income Tax Ordinance (UCITO) which is authorized by Michigan’s City Income Tax Act. The tax is calculated using a three-factor formula consisting of property, payroll and sales. Under the ordinance, the sales factor is the percentage of all gross revenue derived from sales made and services rendered in the city compared with all gross revenue.

The taxpayers at issue performed legal services for clients located outside the city. The legal dispute centered on the meaning of ‘services rendered in the city’ for purposes of computing the sales factor. In calculating its city income tax for the years at issue, a law firm interpreted ‘services rendered’ as meaning the location where the client receives the services. The firm took a ‘destination,’ or market-based, approach to sourcing the sales. Detroit argued, and the court agreed, that the legislature adopted an origin test when enacting the UCITO. For purposes of the tax, the court concluded that ‘rendered’ means performing the service, not delivering the service.

The court’s ruling reversed the Michigan Court of Appeals’ January 2018 judgment in favor of the taxpayer.


All businesses, particularly those performing professional services, operating in Detroit should be aware of this ruling. If a service is performed in Detroit, revenue from the service will be sourced to the city no matter the location of the customer. In the modern economy many professional service providers do not perform services in the actual location of their customers. Businesses may have sourced receipts from services performed in Detroit to the location of their customers. 

Business and professional services sourcing 

For most business and professional services businesses, there are two primary methods to sourcing service revenue: cost of performance and market based. Cost of performance generally sources service revenue to the state in which the service is performed. Market-based sourcing rules generally source the sale of a service to the state in which the service or benefit of the service is received. More states are adopting market-based sourcing rules due in large part to the development of the internet and the ability to work remotely as opposed to working on-site. This is especially common with business and professional services providers. As of Jan. 1, 2020, over half of the states have adopted market-based sourcing rules. Additionally, there are various complexities within the market-based sourcing approach that should be considered, such as identifying where the customer is located or where the customer will receive the benefit, as well as the benefit of the service received at the taxpayer’s commercial domicile, billing address or office. Tax planning around these various rules is essential to minimize total taxes and to avoid being taxed on the same income twice.

Correctly sourcing revenue is not only a risk if it is done incorrectly, but may also serve as an opportunity to reduce exposure. The bottom line is that sourcing for all state and local tax types can be complex. Businesses with questions on sourcing should speak with their tax advisors for further information.

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