Which Cities In Michigan Assess Local Income Taxes?

The State of Michigan assesses a 4.25% flat tax on the income of all individuals, businesses, estates and trusts residing or doing business within its boundaries. However, Michigan law also allows cities within the state to adopt the uniform city income tax ordinance assess their own flat tax on income above and beyond both the federal and state liabilities already imposed. In these tough economic times, more and more cities are considering this option to enhance revenue for municipal operations.

Generally, cities may impose an annual tax of 1% on corporations and resident individuals and an annual tax of 0.5% on nonresident individuals. MCL 141.611. However, cities with population of 600,000 people or more may assess a tax rate as high as 2.4% on resident individuals and 1.2% on non-resident individuals. MCL 141.503(2)(d). Cities must allow a tax exemption of at least $600.00 for each personal and dependency exemption, although they may permit a higher rate up to the full personal and dependency exemption allowed under the Internal Revenue Code. MCL 141.631(1). Further tax exemptions may be allowed for taxpayers who are over 65 years old or blind (or both), or for taxpayers who are paraplegic, quadriplegic or otherwise totally and permanently disabled. MCL 141.631(2).

Cities that adopt the uniform city income tax ordinance may tax a resident’s income to the same extent and on the same basis that the income would have been taxed under the federal Internal Revenue Code:

• “On a salary, bonus, wage, commission and other compensation.” MCL 141.612(a).

• “On a distributive share of the net profits of a resident owner of an unincorporated business, profession, enterprise, undertaking or other activity, as a result of work done, services rendered and other business activities wherever conducted.” MCL 141.612(b).

• “On dividends, interest, capital gains less capital losses, income from estates and trusts and net profits from rentals of real and tangible personal property.” MCL 141.612(c).

• “On other income of a resident individual.” MCL 141.612(d).

In addition, cities that adopt the uniform city income tax ordinance may tax a non-resident’s income to the same extent and on the same basis that the income would have been taxed under the federal Internal Revenue Code provide the income was sufficiently connected to the city:

• “On a salary, bonus, wage, commission, and other compensation for services rendered as an employee for work done or services performed in the city. Income that the nonresident taxpayer receives as the result of disability and after exhausting all vacation pay, holiday pay, and sick pay is not compensation for services rendered as an employee for work done or services performed in the city. Vacation pay, holiday pay, sick pay and a bonus paid by the employer are considered to have the same tax situs as the work assignment or work location and are taxable on the same ratio as the normal earnings of the employee for work actually done or services actually performed.” MCL 141.613(a).

• “On a distributive share of the net profits of a nonresident owner of an unincorporated business, profession, enterprise, undertaking, or other activity, as a result of work done, services rendered, and other business activities conducted in the city.” MCL 141.613(b).

• “On capital gains less capital losses from sales of, and on the net profits from rentals of, real and tangible personal property, if the capital gains arise from property located in the city.” MCL 141.613(c).

Estates and trusts are generally not subject to city income taxes EXCEPT to the extent that income of the trust and estate is not includible in the return of a resident individual as “income from estates and trusts” defined by the Internal Revenue Code. If the estate or trust must pay city income tax, then it will only be those kinds of income taxable as if it was a non-resident taxpayer. MCL 141.627. However, this taxable estate and trust income does not include dividends on stock of state and national banks or interest from obligations of the United States, any individual state or subordinate unit of government (e.g. savings bonds). MCL 141.628(1).

For corporations doing business within a city, an income tax can be levied on taxable net profits. MCL 141.614. Sole proprietors and partnerships are not taxable, but the individual owners and partners are liable in their separate and individual capacities. MCL 141.615. Non-resident taxpayers with net profits “earned as a result of work done, services rendered or other business activity conducted in the city” will have their tax liability determined based on the “total ‘in-city’ percentages of property, payroll and sales.” MCL 141.620. This “business allocation percentage” (as determined by aggregating the partial business activity ratio of average net book value, gross rental value of real property, employee compensation and gross revenue) is applied to the total net profits to determine the portion subject to city income taxes. MCL 141.624.

It is not always clear what constitutes “in-city” or “out-of-city” income and this leads to battles between businesses and cities in the Michigan Tax Tribunal. In Honigman Miller Schwartz and Cohn LLP v City of Detroit, 322 Mich App 667 (2018), a law firm challenged the assessment of the city income tax where the attorney’s office was physically located in city limits but the client was located outside of its boundaries. The City of Detroit argued that the tax was appropriate because the relevant consideration is where the work is performed, not where the work is eventually delivered. The Tax Tribunal found in favor of the city, but the Michigan Court of Appeals reversed and determined that the determining factor is where the service is delivered to the client, not where the work was done. The Court of Appeals determined that a service “provided to a client outside the city of Detroit it is to be considered an ‘out-of-city’ service while services provided to a client in the city of Detroit is to be considered an ‘in-city’ service. In the aftermath of this opinion, the City of Detroit is concerned about the potential flood of refund claims to arise due to years of taxes imposed on revenue based on where services were performed, not where the services ended up. This case is currently on appeal before the Michigan Supreme Court.

As of January 1^st, 2019, 24 cities impose an income tax on residents and non-residents as follows:

• City of Albion (Effective Date: January 1^st, 1972)

1. Exemption Amount: $600.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Battle Creek (Effective Date: July 1^st, 1967)

1. Exemption Amount: $750.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Benton Harbor (Effective Date: January 1^st, 2018)

1. Exemption Amount: $750.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Big Rapids (Effective Date: January 1^st, 1970)

1. Exemption Amount: $600.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Detroit (Effective Date: July 1^st, 1962)

1. Exemption Amount: $600.00
2. Resident Rate: 2.4%
3. Non-Resident Rate: 1.2%

• City of East Lansing (Effective Date: January 1^st, 2019)

1. Exemption Amount: $600.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Flint (Effective Date: July 1^st, 1964)

1. Exemption Amount: $600.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Grand Rapids (Effective Date: July 1^st, 1967)

1. Exemption Amount: $600.00
2. Resident Rate: 1.5%
3. Non-Resident Rate: 0.75%

• City of Grayling (Effective Date: January 1^st, 1972)

1. Exemption Amount: $3,000.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Hamtramck (Effective Date: July 1^st, 1962)

1. Exemption Amount: $600.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Highland Park (Effective Date: July 1^st, 1965)

1. Exemption Amount: $600.00
2. Resident Rate: 2.0%
3. Non-Resident Rate: 1.0%

• City of Hudson (Effective Date: January 1^st, 1971)

1. Exemption Amount: $1,000.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Ionia (Effective Date: January 1^st, 1994)

1. Exemption Amount: $700.00 (will prorate for part-time residency)
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Jackson (Effective Date: January 1^st, 1970)

1. Exemption Amount: $600.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Lansing (Effective Date: July 1^st, 1968)

1. Exemption Amount: $600.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Lapeer (Effective Date: January 1^st, 1967)

1. Exemption Amount: $600.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Muskegon (Effective Date: July 1^st, 1993)

1. Exemption Amount: $600.00 (will prorate for part-time residency)
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Muskegon Heights (Effective Date: January 1^st, 1989)

1. Exemption Amount: $600.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Pontiac (Effective Date: January 1^st, 1968)

1. Exemption Amount: $600.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Port Huron (Effective Date: January 1^st, 1969)

1. Exemption Amount: $600.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Portland (Effective Date: January 1^st, 1984)

1. Exemption Amount: $1,000.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Saginaw (Effective Date: July 1^st, 1965)

1. Exemption Amount: $750.00 (will prorate for part-time residency)
2. Resident Rate: 1.5%
3. Non-Resident Rate: 0.75%

• City of Springfield (Effective Date: January 1^st, 1989)

1. Exemption Amount: $750.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

• City of Walker (Effective Date: January 1^st, 1988)

1. Exemption Amount: $600.00
2. Resident Rate: 1.0%
3. Non-Resident Rate: 0.5%

Ironically, the cities that maintain the highest income tax rates (e.g. Detroit, Grand Rapids and Saginaw) are also the cities who are seeing the greatest levels of population decrease in recent years. In these difficult times, higher taxes are chasing people and businesses out of the biggest urban areas to seek tax relief in the suburbs or rural areas. This has the unintentional effect of reducing the tax base further and putting the city in an even more difficult financial position. Another result is that the city will aggressively pursue taxes on those revenues that it believes it is entitled to, whether or not the taxpayer is a resident or non-resident individual. When the city oversteps its bounds, it is advantageous to have a tax attorney in your corner that can push back on potentially illegal assessments.

If you have further questions about city income taxes or require legal representation, then do not hesitate to contact the experienced lawyers at Kershaw, Vititoe and Jedinak PLC for assistance today.