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Michigan Supreme Court Resolves Uncertainty of City Income Tax Sales Sourcing

The Michigan Supreme Court recently released an opinion on city income tax sourcing of services that resolves several years of uncertainty about what is relevant – the location of your employees or the location of your clients.

We previously wrote an article about this topic in spring 2018, when the Michigan Court of Appeals issued a ruling in favor of the taxpayer. The Court of Appeals’ opinion stated that these sales should be sourced according to the location of a service provider’s clients – not to the location where the service provider’s employees performed the work. A little over two years later, in May 2020, the Michigan Supreme Court has weighed in and overturned the Court of Appeals with its decision of services to be sourced where work was performed.

Location of Services

In the case of Honigman Miller Schwartz and Cohn LLP v City of Detroit, Honigman argued that statutory sourcing language regarding “services rendered” results in the revenue from said services to be sourced based on their clients’ locations. The law firm felt that since the payroll sourcing language was “services performed” and clearly looked to the location of the employees while doing the work, the different language in the sales sourcing statute must mean that it was the clients’ location that was relevant for sales sourcing. With a large office in Detroit, the law firm’s argument would have saved it about $1.1 million of Detroit income tax over a five-year period.

In this battle between Honigman and Detroit, the Michigan Tax Tribunal initially agreed with the city of Detroit. Then the Michigan Court of Appeals agreed with Honigman, even so firmly as to deny Detroit’s request that they reconsider their opinion.

Finally, the Michigan Supreme Court has settled the matter once and for all by siding with Detroit on the theory that, while the words “rendered” and “performed” are different, the difference was primarily dictated by English language syntax and the context in which each word was used. Thus, the different words didn’t necessarily have different meanings, with both being concerned with where the services were done, not where the clients were located.

What does this mean for your business?

  • While the City of Detroit tried to portray a change to sourcing services based on where the clients are located as completely a win for taxpayers and a loss for the city, any sourcing methodology creates winners and losers amongst taxpayers. Likewise, this reversion to cost-of-performance sourcing that looks to where the work was performed helps some taxpayers and hurts others. You will be hurt if you have revenue-generating employees in a city with an income tax who are servicing clients located outside the city. But you will be helped if you have the opposite situation – having revenue-generating employees outside the city limits performing services for clients located in a city with an income tax.
  • Most likely, considering the uncertainty that remained while the case was pending before the Michigan Supreme Court, you have continued to source service revenue for Michigan city income tax purposes based on cost-of-performance sourcing. If so, then this case does not change anything for you.
  • If you reacted to the March 2018 Court of Appeals ruling by changing to using market-based sourcing, you should change back to cost-of-performance sourcing for any city income tax returns yet to be filed. Also, you should consider whether to amend returns filed using market-based sourcing, which may have been done for 2017, 2018 and/or 2019.

Additional Resources

If you would like to discuss the information above, or any areas where Rehmann can assist, please reach out to your Rehmann advisor. You may also contact us at

Published in Tax

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