The Michigan Supreme Court held that revenue from the performance of services must be sourced to the location where the service provider’s employees performed the work, not where the services were delivered, for purposes of the City of Detroit’s income tax. Detroit imposes an income tax under the Uniform City Income Tax Ordinance (“UCITO”), which is authorized under the state’s City Income Tax Act. Under the UCITO, receipts from services are sourced to the City if the services are “rendered in the city.” The taxpayer, a law firm, contended that its revenue derived from legal services performed by its attorneys in Detroit but delivered to clients located outside the City was not revenue from services “rendered in the city” and thus was not includable in its revenue factor. The law firm pointed out that because the city tax’s payroll sourcing rules used a different term – “services performed” – to focus on the location of employees, the use of different language – “services rendered” – in the sales sourcing provision indicated that it was the client’s location that was determinative for revenue sourcing purposes.
The Court of Appeals previously agreed with the taxpayer and held that service receipts are sourced to the location of the service provider’s clients. In reversing the Court of Appeals decision, the Michigan Supreme Court found that the legislature adopted an origin test, rather than a destination or market-based test. In the court’s view, the use of different words did not imply two different meanings and thus, the term “rendered” focuses on the location of where the service was done, not where it was delivered.
Accordingly, the court concluded that the firm was required to source revenues from its legal services to Detroit, where the lawyers rendering the services were located, regardless of where the services were delivered.