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Where services revenue is sourced has changed for Michigan cities

[1]The rules for where city sales for service-based businesses are sourced has changed, but the city of Detroit may appeal it.

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:

ShindelRock will keep clients informed as this case continues to develop. In the meantime, please contact us directly [2] 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.