Opinion ID: 4535167
Heading Depth: 3
Heading Rank: 1

Heading: uniform city income tax ordinance

Text: This dispute involves the proper interpretation of the UCITO, which has been adopted by Detroit under Detroit Ordinances, § 18-10-1 et seq.5 The provisions of the UCITO, including MCL 141.618, establish the framework within which Honigman must apportion its net profit. Section 18 addresses the taxation of a business’s “net profit” for business activities that are not “exclusively” conducted within the city: When the entire net profit of a business subject to the tax is not derived from business activities exclusively within the city, the portion of the entire net profit, earned as a result of work done, services rendered or other business activity conducted in the city, shall be determined under either [MCL 141.619], [MCL 141.620 to MCL 141.624], or [MCL 141.625]. [MCL 141.618.] There is no dispute that Honigman’s city taxes are determined under MCL 141.620 to MCL 141.624. Those provisions set forth the three-factor formula, known as the “business allocation percentage method,” for calculating the taxable “net profit of a business.” Section 20 introduces the three-factor formula as follows: The business allocation percentage method shall be used if such taxpayer is not granted approval to use the separate accounting method of allocation. The entire net profits of such taxpayer earned as a result of work done, services rendered or other business activity conducted in the city shall be ascertained by determining the total “in-city” percentages of property, payroll and sales. “In-city” percentages of property, payrolls and sales, 5 Detroit adopted the UCITO by way of its authority as a home-rule city. See Detroit Charter, art 1, § 1-101. We recognize that Detroit has incorporated these tax provisions into its code of ordinances, but for ease of reference, we refer only to the identical provisions under MCL 141.601 et seq. 7 separately computed, shall be determined in accordance with [MCL 141.621 to MCL 141.624]. [MCL 141.620.] This formula thus identifies three discrete factors-- the property factor, the payroll factor, and the revenue factor-- that must each be ascertained and then averaged to arrive at the “business allocation percentage.” MCL 141.621 to MCL 141.624. The first of these, the property factor, states, in relevant part: First, the taxpayer shall ascertain the percentage which the average net book value, of the tangible personal property owned and the real property, including leasehold improvements, owned or used by it in the business and situated within the city during the taxable period, is of the average net book value of all of such property, including leasehold improvements, owned or used by the taxpayer in the business during the same period wherever situated. [MCL 141.621.] The payroll factor next states: Second, the taxpayer shall ascertain the percentage which the total compensation paid to employees for work done or for services performed within the city is of the total compensation paid to all the taxpayer’s employees within and without the city during the period covered by the return. For allocation purposes, compensation shall be computed on the cash or accrual basis in accordance with the method used in computing the entire net income of the taxpayer.[6] If an employee performs services within and without the city, the following examples are not all inclusive but may serve as a guide for determining the amount to be treated as compensation for services performed within the city: (a) In the case of an employee compensated on a time basis, the proportion of the total amount received by him which his working time within the city is of his total working time. 6 “Compensation” is defined as “salary, pay or emolument given as compensation or wages for work done or services rendered, in cash or in kind, and includes but is not limited to the following: salaries, wages, bonuses, commissions, fees, tips, incentive payments, severance pay, vacation pay and sick pay.” MCL 141.604(2). 8 (b) In the case of an employee compensated directly on the volume of business secured by him, such as a salesman on a commission basis, the amount received by him for business attributable to his efforts in the city. (c) In the case of an employee compensated on other results achieved, the proportion of the total compensation received which the value of his services within the city bears to the value of all his services. [MCL 141.622 (emphasis added).] Finally, the revenue factor states, in relevant part: Third, the taxpayer shall ascertain the percentage which the gross revenue of the taxpayer derived from sales made and services rendered in the city is of the total gross revenue from sales and services wherever made or rendered during the period covered by the return. [MCL 141.623 (emphasis added).] Concerning “sales made in the city,” the revenue factor affords further guidance for calculating revenues involving the delivery of goods: (1) For the purposes of this section, “sales made in the city” means all sales where the goods, merchandise or property is received in the city by the purchaser, or a person or firm designated by him. In the case of delivery of goods in the city to a common or private carrier or by other means of transportation, the place at which the delivery has been completed is considered as the place at which the goods are received by the purchaser. The following examples are not all inclusive but may serve as a guide for determining sales made in the city: (a) Sales to a customer in the city with shipments to a destination within the city from a location in the city or an out-of-city location are considered sales made in the city. (b) Sales to a customer in the city with shipments to a destination within the city directly from the taxpayer’s in-city supplier or out-of-city supplier are considered sales made in the city. (c) Sales to a customer in the city with shipments directly to the customer at his regularly maintained and established out-of-city location are considered out-of-city sales. 9 (d) Sales to an out-of-city customer with shipments or deliveries to the customer’s location within the city are considered sales made in the city. (e) Sales to an out-of-city customer with shipments to an out-of-city destination are considered out-of-city sales. [MCL 141.623(1).] The parties agree on the method of calculation for the property and payroll factors, but they dispute how to calculate the percentage of revenue from “services rendered in the city” under the revenue factor.7 From 2010 to 2014, Honigman calculated the numerator of the revenue factor under § 23 as encompassing only revenue derived from services delivered to clients located within Detroit, but the city asserts that Honigman should have included within this numerator revenue for all services performed within Detroit without regard to either the client’s location or the place of delivery. Before we interpret the pertinent statute to ascertain how Honigman must calculate revenue from “services rendered” under the revenue factor, there is value in briefly reviewing the history of our state’s tax treatment of revenue from the sale of services.