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Honigman Miller Schwartz and Cohn LLP v. City of Detroit

Court of Appeals of Michigan

January 18, 2018

CITY OF DETROIT, Respondent-Appellee.

         Tax Tribunal LC No. 16-000202

          Before: Murphy, P.J., and Sawyer and Beckering, JJ.

          Sawyer, J.

         We are asked in this case to determine whether services performed by an attorney in Detroit on behalf of a client located outside the city while that attorney is physically located in his or her office in the city is to be considered in-city or out-of-city income for purpose of § 23 of the City Income Tax Act (CITA).[1] Petitioner maintains that the relevant consideration is where the client receives the services, while respondent and the Tax Tribunal maintain that the relevant consideration is where the work is performed. We agree with petitioner and reverse the Tax Tribunal and remand.

         Petitioner is a law firm with a primary office in the city of Detroit, but with additional offices located elsewhere. Petitioner represents clients both within Detroit and outside Detroit. Under § 18 of CITA[2], petitioner must determine what percentage of its business income is attributable to Detroit. Petitioner utilizes §§ 20 through 24[3] in making this determination. This method requires the taxpayer to calculate the percentage attributable under three different methods and then average the three.[4] The three factors are: (1) the property factor under § 21, considers what percentage of the business' tangible personal and real property is located within the city, [5] (2) the payroll factor under § 22, considers what percentage of the payroll is attributable to "work done or services performed within the city, "[6] and (3) the sales factor under § 23, considers the gross revenue "derived from sales made and services rendered in the city"[7]compared to all gross revenue.

         This case involves tax years 2010-2014 (the "subject years"). The parties agreed upon the computation of the first two factors (the property factor and the payroll factor), but disagree as to the computation of the sales factor. As noted above, the dispute involves whether to consider "services rendered" as being where the client receives the services (petitioner's interpretation) or where the work is performed (respondent's interpretation). Specifically, petitioner states that it calculated its "in-city" gross revenue by summing the gross revenue collected from clients located within the city of Detroit. According to petitioner, it had been utilizing this methodology in the past, but it is not until the subject years that the city objected and calculated the sales factor based on the billable hours recorded for work performed within the city, regardless of the location of the client. The difference is not insignificant.[8] For the subject years, under the city's methodology, slightly over 51% of petitioner's gross revenue would be considered in-city, while under petitioner's methodology, it would be slightly less than 11%.[9]

         In the Tax Tribunal, the parties filed cross-motions for summary disposition. The hearing officer determined that § 23 was ambiguous and unclear. The hearing officer concluded that because services are intangible, they cannot be delivered in the same manner as tangible property and that there was no reason to overrule the city's construction of the statute. Initially, we note that both parties agree that the tribunal erred in determining that § 23 is ambiguous.[10] Of course, they offer differing interpretations of the statute. But, as an initial matter, we agree that the statute is unambiguous. Accordingly, we must interpret the plainly expressed meaning of the statute as contained in the words utilized by the Legislature.[11] And we conclude that that plainly expressed meaning does not support respondent's position nor the conclusion of the tribunal.

         We begin by observing that the Legislature used two different terms in drafting the payroll factor under § 22 and the sales factor under § 23. The payroll factor refers to "services performed" and § 23 refers to "services rendered." We agree with petitioner that these must be given two different meanings because when "the Legislature uses different words, the words are generally intended to connote different meanings. Simply put, 'the use of different terms within similar statutes generally implies that different meanings were intended.' 2A Singer & Singer, Sutherland Statutory Construction, (7th ed), § 46:6, p 252. If the Legislature had intended the same meaning in both statutory provisions, it would have used the same word."[12] Thus, because § 22 looks to where the work is done or performed, then the Legislature likely intended that the term "services rendered" in § 23 to have a different meaning.

         The tribunal deals with this issue by also noting the directive of the Supreme Court in GC Timmis & Co v Guardian Alarm Co[13] that statutory

language does not stand alone, and thus it cannot be read in a vacuum. Instead, "[i]t exists and must be read in context with the entire act, and the words and phrases used there must be assigned such meanings as are in harmony with the whole of the statute . . . ." Arrowhead Dev Co v Livingston Co Rd Comm, 413 Mich. 505, 516; 322 N.W.2d 702 (1982). "[W]ords in a statute should not be construed in the void, but should be read together to harmonize the meaning, giving effect to the act as a whole." Gen Motors Corp v Erves (On Reh), 399 Mich. 241, 255; 249 N.W.2d 41 (1976) (opinion by Coleman, J.). Although a phrase or a statement may mean one thing when read in isolation, it may mean something substantially different when read in context. McCarthy v Bronson, 500 U.S. 136, 139; 111 S.Ct. 1737; 114 L.Ed.2d 194 (1991); Hagen v Dep't of Ed, 431 Mich. 118, 130-131; 427 N.W.2d 879 (1988). "In seeking meaning, words and clauses will not be divorced from those which precede and those which follow." People v Vasquez, 465 Mich. 83, 89; 631 N.W.2d 711 (2001), quoting Sanchick v State Bd of Optometry, 342 Mich. 555, 559; 70 N.W.2d 757 (1955). "It is a familiar principle of statutory construction that words grouped in a list should be given related meaning." Third Nat'l Bank in Nashville v Impac Ltd, Inc, 432 U.S. 312, 322; 97 S.Ct. 2307; 53 L.Ed.2d 368 (1977); see also Beecham v United States, 511 U.S. 368, 371; 114 S.Ct. 1669; 128 L.Ed.2d 383 (1994).

         In our view, however, this strengthens, rather than weakens, petitioner's interpretation. While the Legislature does not give much direct guidance in § 23 to the meaning of "services rendered" it does give explicit guidance to "sales made in the city." MCL 141.23(1) provides as follows:

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 ...

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