Linnehan Leasing v. State Tax Assessor
| Decision Date | 31 March 2006 |
| Citation | 898 A.2d 408,2006 ME 33 |
| Parties | LINNEHAN LEASING et al. v. STATE TAX ASSESSOR et al. |
| Court | Maine Supreme Court |
Ralph I. Lancaster, Esq., James G. Good, Esq., Jonathan A. Block, Esq. (orally), Pierce Atwood, Portland, for plaintiffs.
G. Steven Rowe, Attorney General, Thomas A. Knowlton Asst. Atty. Gen. (orally), Augusta, for defendants.
Panel: SAUFLEY, C.J., and CLIFFORD, DANA, ALEXANDER, CALKINS, LEVY, and SILVER, JJ.
[¶ 1] This matter is before us on consolidated appeals from judgments by the Superior Court in Hancock and Kennebec Counties. Each case involves application of the bad debt sales tax credit, 36 M.R.S. § 1811-A (2005), to the transactional arrangements between Linnehan Leasing d/b/a Credit Now Auto Company (Linnehan) and its affiliated finance company, Atlantic Acceptance Co. (Atlantic). In Han-05-162, Linnehan and Atlantic appeal the Superior Court's (Hancock County, Mead, J.) dismissal of their claim for a declaratory judgment regarding proposed transactions between Linnehan and Atlantic. In Ken-05-183, the State Tax Assessor appeals the Superior Court's (Kennebec County, Studstrup, J.) judgment overturning a ruling of the Maine Revenue Services and holding that Linnehan was entitled to a bad debt sales tax credit for defaults in consumer credit contracts with Atlantic. We affirm the Hancock County judgment, and we vacate the Kennebec County judgment.
[¶ 2] Eligibility for the bad debt sales tax credit is governed by 36 M.R.S. § 1811-A that states:
The tax paid on sales represented by accounts charged off as worthless may be credited against the tax due on a subsequent report filed within 3 years of the charge-off, but, if any such accounts are thereafter collected by the retailer, a tax shall be paid upon the amounts so collected.
[¶ 3] Pursuant to section 1811-A, a "retailer" can qualify for the credit if it: (1) pays the sales tax upon the sale; (2) later charges-off the buyer's account as worthless on its books; and (3) applies for the credit within three years of the account being charged-off. DaimlerChrysler Servs. N. Am., LLC v. State Tax Assessor, 2003 ME 27, ¶ 12, 817 A.2d 862, 865. "Retailer" is defined by 36 M.R.S. § 1752(10) (2005) as a "person who makes retail sales or who is required to register by section 1754-A or 1754-B."1 "Person," for purposes of this appeal, was defined as:
[A]ny individual, firm, copartnership, association, society, club, corporation estate, trust, business trust, receiver, assignee or any other group or combination acting as a unit, and the plural as well as the singular number . . . .
[¶ 4] There is no significant dispute about the facts. Linnehan, an automobile dealer with several used car sales offices in Maine, is a registered Maine retailer, pursuant to 36 M.R.S. § 1754-B (2005).
[¶ 5] Atlantic is a finance company that works exclusively with Linnehan. Atlantic is not a registered retailer. The two companies together constitute a "buy here, pay here" operation. Each company is separately incorporated and files separate income tax returns.
[¶ 6] The Linnehan and Atlantic corporations are owned and controlled by the Linnehan family. Some business associates own minority interests in each corporation. Linnehan and Atlantic share office space, a management team, telephone system, parking lot, computer system, web site, payroll service, and insurance coverage.
[¶ 7] When a customer buys a car from Linnehan and seeks financing, he or she is first approved by Atlantic. After the customer's credit is accepted, the customer signs a retail sale finance agreement with Linnehan, which states that he or she will pay the purchase price of the vehicle, applicable fees, interest, and sales tax to Linnehan. That agreement is immediately assigned to Atlantic. In exchange for the assignment, Atlantic pays Linnehan a price that is discounted to reflect immediate payment and acceptance of the risk of default. As a result of the assignment, the customer is obligated to pay Atlantic, rather than Linnehan.
[¶ 8] At the end of each month, Linnehan pays sales tax to the State on the total purchase price of all vehicles sold during that month.
[¶ 9] Approximately twelve percent of Atlantic's loans go into default. After attempting to collect the outstanding loan balance, Atlantic charges-off the account as worthless on its books and deducts the charged-off amount from its income for tax purposes. Atlantic then repossesses the car, and Linnehan sells the car at auction, usually, the record indicates, for ten to twenty percent of the customer's purchase price of the vehicle. The auction sale price of the vehicle is credited to the defaulted customer's account. Linnehan then determines what percentage of the total sales tax remains outstanding on the customer's account and credits that figure against its subsequent sales tax liability.
[¶ 10] Prior to this controversy, Linnehan had taken the bad debt credit for fourteen years. In 2002, Linnehan was audited. Maine Revenue Services determined that Linnehan did not qualify for the bad debt credit because it suffered no loss from charged-off accounts. Accordingly, Linnehan was assessed back taxes, penalties, and interest for the period from May 1, 1999, to December 31, 2001. The assessment required Linnehan to pay $334,134.51 in sales tax, $3825.76 in use tax, $70,249.30 in interest, and $84,490.14 as a penalty for negligence.
[¶ 11] Linnehan filed for reconsideration pursuant to 36 M.R.S. § 151 (2005), and the Assessor upheld the assessment. Linnehan then filed an appeal in the Superior Court in Kennebec County pursuant to M.R. Civ. P. 80C and 36 M.R.S. § 151. After a hearing on cross motions for summary judgment, the court vacated the assessment, holding that Linnehan and Atlantic were so intertwined that they could be considered one "person" and thus a "retailer" in order to qualify for the section 1811-A tax credit. The State Tax Assessor appeals that Kennebec County decision.
[¶ 12] While the Rule 80C action was pending, Linnehan learned that the State Tax Assessor had issued an advisory opinion to the Lee Auto Group, stating that a planned course of transactions between Lee and a related finance company would make Lee eligible for the bad debt tax credit. Lee, like Linnehan, worked with a closely affiliated finance company to which it assigned finance agreements. Lee proposed that before an account was charged-off on the finance company's books, but after it was determined that there were problems with payments on the account, Lee would repurchase the finance agreement from the finance company and attempt to collect the debt from the customer. If Lee was unsuccessful, Lee would charge-off the account on its books. The Assessor determined that the proposal would make Lee eligible for the bad debt tax credit pursuant to 36 M.R.S. § 1811-A.
[¶ 13] Linnehan asked the Assessor whether, after Atlantic had identified a bad debt and charged-off the account, Linnehan would be eligible for the bad debt tax credit if it purchased the already charged-off accounts from Atlantic, renewed collection attempts, and then charged-off the accounts again, this time on Linnehan's books. The Assessor advised Linnehan that it would not be eligible for the credit under those circumstances.
[¶ 14] After the Assessor advised Linnehan that its proposal would not make it eligible for the credit, Linnehan filed a motion to amend its complaint in the Kennebec County case to include a petition for a declaratory judgment and an equal protection claim based on alleged disparate treatment compared with the treatment given to Lee. Linnehan's motion to amend was denied as untimely. Linnehan then brought a declaratory judgment action separately in Hancock County. Linnehan's complaint asked the Court to (1) declare that the Lee advisory opinion was a correct interpretation of the law and that Linnehan was entitled to the same sales tax treatment; or (2) order the State Tax Assessor to issue substantially the same advisory ruling to Linnehan.
[¶ 15] The Hancock County Superior Court granted the Assessor's motion to dismiss on the grounds that Linnehan's petition for declaratory judgment failed to state a claim upon which relief may be granted due to lack of a justiciable controversy. The court also dismissed without comment Linnehan's claim that the Assessor had violated its rights to equal protection. Linnehan appealed the Hancock County decision.
[¶ 16] When the Superior Court acts in an intermediate appellate capacity, we ordinarily review final agency determinations directly. Davric Me. Corp. v. Me. Harness Racing Comm'n, 1999 ME 99, ¶ 7, 732 A.2d 289, 293. In tax cases, however, the Superior Court is instructed by 36 M.R.S. § 151 to "make its own determination as to all questions of fact or law, regardless of whether the questions of fact or law were raised during the reconsideration proceeding." Because the Superior Court is not acting in an appellate capacity, we review its determinations directly. Apex Custom Lease Corp. v. State Tax Assessor, 677 A.2d 530, 532 (Me.1996).
[¶ 17] There is no dispute that Atlantic charged-off the bad debts on its books and then received the federal and state income tax benefits resulting from the charge-offs. Further, there is no dispute that Atlantic is not, and never has been, a registered retailer for sales tax purposes, pursuant to 36 M.R.S. § 1754-B. Linnehan asserts that for purposes of obtaining the bad debt sales tax credit, Linnehan and Atlantic should be considered as one entity, as the Superior Court ...
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