Today I want to talk about professionals providing remote services across state lines. Let’s say you are a State A natural resources lawyer working on a State B mining project for a client based out of State C. All your services were provided from your State A office and all your legal work related to the development of the State B mining project.
Your fees for the project were $100,000 and its time to prepare your tax returns. Who gets to impose income tax on that revenue? State A? State B? State C? All, or two of the states?
Each state may have different formulas for apportioning the $100,000 fee to its income tax return. Each of these formulas, however, will contain a sales factor. For some states the sales factor will be the only factor that would apply to professional services.
A recent case in Michigan illustrates one approach taken in applying the sales factor to professional services. The basic facts were the same as the above example, except that the apportionment involved the imposition of the Detroit income tax on legal fees of a Detroit based law firm that was earned for professional services performed in the Detroit office, but received by a client located outside of Detroit.
This revenue under the sales factor would be apportioned to Detroit if the law firm’s fees were “derived from sales made and services rendered in” Detroit. Detroit said the services were rendered in the Detroit office of the law firm because all the lawyer work that earned the fees was done in the Detroit office. The law firm said that the services were rendered outside of Detroit where the client received the services.
The Michigan Court of Appeals agreed with the law firm. It noted that its sales factor would not apportion revenue to Detroit from the sale of tangible personal property shipped by a Detroit based company from Detroit and delivered to a customer outside of Detroit. Instead, it would apportion this sales revenue to the jurisdiction where the customer received the goods. Honigman Miller Schwartz and Cohn LLP v. City of Detroit, No. 336175 (1st Dist., Jan. 18, 2018). https://scholar.google.com/scholar_case?case=9904738817996822417&q=detroit+sales+payroll+factor+%22tax+tribunal%22&hl=en&as_sdt=4,198&as_ylo=2018
Comment. States apportion service income based upon a sales factor, either alone or in a tandem with property and payroll factors. So, check the definition of the sales factor in each tax jurisdiction having a connection with the professional services. See if the revenue is apportioned where the services were performed or where the services were received by the client or customer.
By John McCauley: I help people buy and sell businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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