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Detroit Tax Law Case Clarifies City Apportionment Rules

The city of Detroit recently won a an important city income tax case at the Michigan Supreme Court that likely impacts many service businesses operating within the city or other Cities located in Michigan that impose a local city income tax. If you have questions about this case, tax apportionment or other state and local tax issues generally, contact Michigan tax attorney Andrew Steiger for a free consultation to see if he can lower your Michigan tax burden and provide you with Michigan tax relief.

The case at issue, Honigman Miller Schwartz & Cohn, LLP v. Detroit, involves the definition of “services rendered” for Detroit income tax apportionment purposes. Apportionment is the process of determining what income is subject to Detroit income tax and what income is not based on where the services are “rendered”.

Detroit Tax Law at Issue

For the city of Detroit, the word "rendered" meant where the services are performed. In this regard, lawyers physically working in their offices in Detroit rendered the services in Detroit. The result is that the services income is subject to Detroit city income tax.

The law firm disagreed with that interpretation and viewed the term “rendered” to mean where the services were delivered. Because many of the law firm’s clients were located outside the Detroit city boundary lines, the services rendered to these clients reduced the Detroit taxable base and Detroit city income tax by apportioning services income to outside the city.

Michigan Supreme Court Rules in Favor of the City of Detroit

The Michigan courts hearing the case had differing views on what rendered means. The Michigan Supreme Court ultimately sided with the city of Detroit to hold that rendered means where the services are performed, not where they are delivered. This holding increased the law firm’s city income tax base and tax bill.

How Does This Case Affect Your Taxes?

The case also highlights the goals of tax lawyers when reading and interpreting tax statutes and the related risks. The law firm used the statutes’ different terms to argue the terms must have different meanings, otherwise the terms used up the legislature would be consistent. Good Michigan tax lawyers and Detroit tax lawyers can review the income tax codes with this purpose in mind to help clients reduce tax bills.

Unfortunately, the Michigan Supreme Court did not side with the taxpayer, highlighting the risk of using such a strategy. Taxpayers worried about future tax audits, whether an IRS or Michigan tax audit, can pay tax ahead of time and then ask for a refund with the intent to challenge the law and if successful get your money back. This avoids penalties and interest that can accumulate over many years while the tax litigation process plays out.

Other areas where taxpayers may challenge tax assessments is Michigan sales and use tax law, where there are many exemptions that taxpayers may be able to claim.

Contact a Michigan Tax Lawyer to Discuss Your Tax Relief Options

If you have questions about this case or Michigan or Detroit income taxation in general and need Michigan tax relief, contact Michigan tax attorney Andrew Steiger to discuss your tax matter. If you have received a tax assessment or notice of intent to assess taxes from the state of Michigan or Detroit, do not wait for the assessment notice to expire. The city will pursue you in court through debt collectors and you may lose your right to challenge the assessment if you do not act. Take action today and contact Michigan tax attorney Andrew Steiger at (248) 259-6367.

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