Construction Contractors

Construction Contractors

June 01, 2005
CONSTRUCTION CONTRACTORS cannot be taxed by a state on fees for engineering work that is done physically in another state.

Fluor builds projects in Michigan. Michigan collects a “single business tax” on companies doing business in the state. Companies must first figure out what share of their profits from a construction job was earned in Michigan before applying the tax rate. They do it by taking total profits and allocating a share to Michigan based on the fraction their total sales, property and payroll that are in Michigan.

Fluor took the position that its fees for engineering work on Michigan construction jobs should not be considered revenue from Michigan sales since the work was done in a Fluor office in another state.

A Michigan appeals court agreed with Fluor in April. The court said the state tax collector was right when he insisted that Michigan law treats the fees as revenue from Michigan sales, but the statute is unconstitutional. The commerce clause of the US constitution bars a state from overreaching by taxing business outside its borders. “If other states used the same apportionment formula,” the court said, “there are situations where more than one state would tax business activity performed in one state for construction activities in another.” The case is Fluor Enterprises, Inc. v. Department of Treasury.

Keith Martin