City of Detroit Wins Lawsuit Regarding City Tax

[JonWylie]

The Crains article had a good outline of what happened, including quotes from Duggan saying how big this is for the city and what a loss at the Supreme Court would have meant.

"Today, Chuck [[Raimi) won the biggest lawsuit. We had a law firm in this town that didn't think you should be able to collect income taxes on the work being done in the city, but the Supreme Court today unanimously ruled that our income tax collection process was being done legally," the mayor said. "Had we lost that case, it would be far more financially devastating to our future than anything that's happening with COVID-19 and I deeply appreciate that 7-0 vote of the Michigan Supreme Court …"

Here is a Freep article if you don't subscribe to Crains

[LongGone06]

The Crains article had a good outline of what happened, including quotes from Duggan saying how big this is for the city and what a loss at the Supreme Court would have meant.

Honigman is a prestigious firm. The question is, what impact, if any, will this have on their future presence in the city.

[Richard]

Or any other company or franchise with multiple locations outside of the city.

If you are headquartered in the city and a majority of your revenue is generated from the suburbs clients,it seems like it would put you at a disadvantage.

[313WX]

They're more than welcome to leave the city if they don't like having to collect income taxes.

This was a good decision by the Supreme Court, because otherwise it would have set a bad precedent for other city taxes across the country.

[Richard]

^ there ya go just tell them to hit the 8 mile.

It just makes it more expensive for people outside of the city to do business in the city.

Looks good on paper but has its downsides.

Thats why people find it cheaper to establish businesses outside of the city limits.

Where I am at it is a $350 business tax license fee that the city charges,so you can collect taxes to pay to the city.

So you have to pay them for permission to collect their taxes for them.

For me it is a $800 to $1000 dollars a month difference in doing business in the city verses county,for a small business that adds up over time.

[Johnnny5]

The Michigan Supreme Court is fairly well balanced politically, so a unanimous 7-0 vote is all I need to see. As someone that almost always owes come April 15th, I'm not a huge fan of those that try to dodge their tax obligations. I'll keep that in mind if I need any legal services in the future.

[Metro25]

Honigman is a prestigious firm. The question is, what impact, if any, will this have on their future presence in the city.

Nothing, this isn't 1970, nobody wants to work in a desolate soul-sucking suburban office park just to save a few coins on taxes.

[Richard]

You guys must be billionaires.

It was an additional 1.1 million dollars over and above the city taxes they already paid.

You guys can throw your few coins at me at that number.

“Detroit had sought an additional $1.1 million from Honigman in 2016.”

So the ones saying they are not paying taxes,they were.

So if you buy a hamburger from McDonalds are you asked for an ID and charged an extra tax verses buying the same hamburger in the burbs?

I guess this is kinda the same situation where burb employees working in the city are charged an extra city tax?

Or the same as those who live in the city and use a burb address?

[Honky Tonk]

this isn't 1970

Thanx for the update.

[JonWylie]

You guys must be billionaires.

It was an additional 1.1 million dollars over and above the city taxes they already paid.

You guys can throw your few coins at me at that number.

“Detroit had sought an additional $1.1 million from Honigman in 2016.”

So the ones saying they are not paying taxes,they were.

So if you buy a hamburger from McDonalds are you asked for an ID and charged an extra tax verses buying the same hamburger in the burbs?

I guess this is kinda the same situation where burb employees working in the city are charged an extra city tax?

Or the same as those who live in the city and use a burb address?

If I read it right, Honigman was claiming that only 11% of their revenue originated from the city, while they have around 50% of their total employees in the state within the city. So unless the attorneys in their suburban offices are absolutely grinding, it would make sense that about half of their taxable income was generated within the city and from workers within the city.

[Richard]

I am reading it as,if you are based in the city and provide work for somebody outside of the city,you have to bill them according to the city tax rates and not the rate of the city they live in.

Hence the additional 1.1 million figure was the difference in the rate they charged them verses what they should have at the city rate.

They are established but a small business working in a highly competitive arena would not be able to compete when it comes to city verses suburb bidding.

Say a small homebuilder based in the city and a burb customer wants a quote,there will be $1000s of difference just in the tax,somebody has to eat that and it will not be the homeowner.

[JonWylie]

I am reading it as,if you are based in the city and provide work for somebody outside of the city,you have to bill them according to the city tax rates and not the rate of the city they live in.

Hence the additional 1.1 million figure was the difference in the rate they charged them verses what they should have at the city rate.

They are established but a small business working in a highly competitive arena would not be able to compete when it comes to city verses suburb bidding.

Say a small homebuilder based in the city and a burb customer wants a quote,there will be $1000s of difference just in the tax,somebody has to eat that and it will not be the homeowner.

Just on a glance reading the court opinion, this line is pretty concise.

"Thus, when calculating the percentage of gross revenue from services rendered in the city, the focus is on where the service was performed, not on where it was delivered"

I think in your example, the home would be built in the suburbs, so it would not be subject to city tax, but maybe payment for the plans or design of the house would if the designer was based in the city.

[jiminnm]

Just on a glance reading the court opinion, this line is pretty concise.

"Thus, when calculating the percentage of gross revenue from services rendered in the city, the focus is on where the service was performed, not on where it was delivered"

I think in your example, the home would be built in the suburbs, so it would not be subject to city tax, but maybe payment for the plans or design of the house would if the designer was based in the city.

I was surprised to see the court of appeals overturn that long standing rule and the case get to the Supremes. I worked in Detroit, and was taxed as a nonresident, but also had clients out of the city. When I worked in the city, regardless of the work, I was taxed. When I visited clients out of the city or otherwise worked out the city, I was not taxed. That same approach should also apply to any taxes owed by the firm.

[Wesley Mouch]

So we have a good legal finding. Cities are within their rights to tax physical presence -- not client presence.

OK.

So Detroit [[and a few others) can continue to tax physical presence -- and will find that over time some firms who don't physically serve Detroit will relocate -- to save their employees from paying this tax.

The more work you do over Zoom, the less it will matter where you are located.

I haven't followed this, but I would guess that a thousands of Detroit non-resident taxpayers are very carefully tracking their days where they did not physically come to work. Probably a lot of dough that will stay in worker's pockets.

Expect lower rents and fewer daytime meals in downtown's future.

[JonWylie]

So we have a good legal finding. Cities are within their rights to tax physical presence -- not client presence.

OK.

So Detroit [[and a few others) can continue to tax physical presence -- and will find that over time some firms who don't physically serve Detroit will relocate -- to save their employees from paying this tax.

The more work you do over Zoom, the less it will matter where you are located.

I haven't followed this, but I would guess that a thousands of Detroit non-resident taxpayers are very carefully tracking their days where they did not physically come to work. Probably a lot of dough that will stay in worker's pockets.

Expect lower rents and fewer daytime meals in downtown's future.

I think that would be a pretty hard legal premise to argue. The infrastructure for the work is still being based out of somewhere. If the company maintains their office in Detroit, I don't envision employees being able to escape city tax because they work from home certain days. All of their W2's are still coming from the Detroit based address.

[Richard]

This not about employment taxes,it is about client taxes for services rendered.

Think plumbers,electricians,anybody that is based in the city according to this should be taxing services rendered at the city tax rate.

Headquartered in Detroit and you get a client wanting to hire you you have to charge them the city tax where you are headquartered or based.

In this case they have multiple locations in other cities and states and the city is saying,even if you get a client in another location outside of the city,you still have to charge them the taxes based on your headquarters location in the city.

It is my understanding that that is how they came up with the 1.1 million extra taxes.

Say for instance they have an office in Bloomfield,they accept a client there,they have to tax them according to where the headquarters is based IE the city.

Correct?

So in that case they will now look at what percentage of business they do in the city,and will find it is more feasible to move the headquarters to the suburbs.

They already collected taxes for the services,the extra 1.1 million is derived from what they should have charged the customer based on the city tax rate.

So now they cannot go back to the customer and say,by the way we need to back charge you,the 1.1 million comes out of their pocket and they are going to be thinking that is the extra tax it costs us to operate in the city limits,and is it worth it.

From now on people in the burbs are going to be thinking hard about doing business with companies based in the city limits,because that is one of the reasons to move to the burbs to begin with,escape the high cost of city taxes.

To me it is a weird way of doing it,we base it by county,which if the city falls into that county it is at that rate.

For us,labor only is not taxable,if you include materials in,then materials and labor combined and taxed at 8.5%.

So like in the case up there Wayne county would be flat taxed at that rate,otherwise you are discouraging business set up and employment within the actual city limits.

In our case different counties have different tax rates and you charge the customer based on the county where the services are preformed not where you are based.

If they did not have other locations and all the clients came into the city to do business then it would be understandable,as the services were performed in the city.

[JonWylie]

This not about employment taxes,it is about client taxes for services rendered.

Think plumbers,electricians,anybody that is based in the city according to this should be taxing services rendered at the city tax rate.

Headquartered in Detroit and you get a client wanting to hire you you have to charge them the city tax where you are headquartered or based.

In this case they have multiple locations in other cities and states and the city is saying,even if you get a client in another location outside of the city,you still have to charge them the taxes based on your headquarters location in the city.

It is my understanding that that is how they came up with the 1.1 million extra taxes.

Say for instance they have an office in Bloomfield,they accept a client there,they have to tax them according to where the headquarters is based IE the city.

Correct?

So in that case they will now look at what percentage of business they do in the city,and will find it is more feasible to move the headquarters to the suburbs.

They already collected taxes for the services,the extra 1.1 million is derived from what they should have charged the customer based on the city tax rate.

So now they cannot go back to the customer and say,by the way we need to back charge you,the 1.1 million comes out of their pocket and they are going to be thinking that is the extra tax it costs us to operate in the city limits,and is it worth it.

From now on people in the burbs are going to be thinking hard about doing business with companies based in the city limits,because that is one of the reasons to move to the burbs to begin with,escape the high cost of city taxes.

To me it is a weird way of doing it,we base it by county,which if the city falls into that county it is at that rate.

For us,labor only is not taxable,if you include materials in,then materials and labor combined and taxed at 8.5%.

So like in the case up there Wayne county would be flat taxed at that rate,otherwise you are discouraging business set up and employment within the actual city limits.

In our case different counties have different tax rates and you charge the customer based on the county where the services are preformed not where you are based.

If they did not have other locations and all the clients came into the city to do business then it would be understandable,as the services were performed in the city.

It's going to be a trade off just like any company that locates in a city or more expensive area. The largest law firms are all downtown. If Honigman was to suddenly move all of their attorneys to the suburbs, they would not attract the same talent out of law school as Dickinson, Bodman, Miller/Canfield, etc. Pretty much the same with regards to tech companies. I'm sure they'd love to locate to Montana or somewhere land and taxes are cheap, but they continue to pop up on the West Coast or other large cities. Not much different. I'm sure the city wouldn't cut off their nose to spite their face in this instance. If they thought they would lose a bunch of businesses, they wouldn't have fought it.

[Honky Tonk]

Honigman is a prestigious firm. The question is, what impact, if any, will this have on their future presence in the city.

The bigger question is "what impact will this have on other businesses considering moving to Detroit?"

[Zacha341]

For certain. And now with some companies saying they want some of their staff to work from home indefinitely?

[Honky Tonk]

For certain. And now with some companies saying they want some of their staff to work from home indefinitely?

I've posted this before. I think when the coronavirus passes, you're going to see some permanent changes to the way businesses are conducted, just like changes were implemented after 9-11. Remember "Casual Fridays"?