Honigman, the largest law firm in Detroit, wanted to source its services not based on where its attorneys were performing the work, but based on where its clients were located. They interpreted the law as requiring market-based sourcing, and so they filed their tax returns in this way. The City of Detroit accepted Honigman’s tax returns for a number of years, but then rejected this market-based sourcing beginning with 2010, ultimately assessing Honigman over $1 million of taxes, penalties and interest for the years of 2010 – 2014.
While this change is based this specific case, the change applies to all Michigan cities with an income tax.* What hasn’t changed is that wages are sourced based on where the work is performed, however, now sales for services businesses are sourced based on where their customer is located, regardless of where the work is performed.
Considerations for taxpayers:
- Businesses in Detroit and other Michigan income tax cities are now able to exclude revenue for work performed for customers they have outside of the city. If you fit this category, then you may want to consider filing protective refund claims for the prior four years, and then source sales going forward under the new rules. But remember, the city may appeal the case, so this new decision could be reversed.
- Service-based businesses that are not located in a city with an income tax, but have customers located in said cities, will have to evaluate to see if they are now required to file city returns. It’s important to note that even if the business has a loss, they would still be required to file a tax return. Also, businesses may have customers in more than one taxing city, and thus may have multiple city returns to file.
ShindelRock will keep clients informed as this case continues to develop. In the meantime, please contact us directly  to discuss how it specifically affects your business.
* Current Michigan cities with an income tax are: Albion, Battle Creek, Big Rapids, Detroit, Flint, Grand Rapids, Grayling, Hamtramck, Highland Park, Hudson, Ionia, Jackson, Lansing, Lapeer, Muskegon, Muskegon Heights, Pontiac, Port Huron, Portland, Saginaw, Springfield, and Walker.