Sims v. Firestone Tire & Rubber Co., TREASURY--REVENUE

• Citation: 397 Mich. 469,245 N.W.2d 13
• Decision Date: 01 November 1975
• Docket Number: No. 4,TREASURY--REVENUE,4
• Parties: Philip C. SIMS et al., Plaintiffs-Appellants, v. The FIRESTONE TIRE & RUBBER COMPANY, a Foreign Corporation, and Ned's Auto Supply Company, a Michigan Corporation, Defendants-Appellees, v. STATE of Michigan, DEPARTMENT OFDIVISION and Sydney Goodman, Commissioner of Revenue, Third-Party Defendants-Appellees. ,
• Court: Michigan Supreme Court

Page 13

245 N.W.2d 13

397 Mich. 469

Philip C. SIMS et al., Plaintiffs-Appellants, v. The FIRESTONE TIRE & RUBBER COMPANY, a Foreign Corporation, and Ned's Auto Supply Company, a Michigan

Corporation, Defendants-Appellees, v. STATE of Michigan, DEPARTMENT OF TREASURY--REVENUE DIVISION and Sydney Goodman, Commissioner of Revenue,

Third-Party Defendants-Appellees.

No. 4, Nov. Term, 1975.

Supreme Court of Michigan.

Aug. 26, 1976.

Covington, Jackson & Sewell, Joseph Covington, Detroit, for plaintiffs-appellants.

Poole, Littell & Sutherland by Richard D. Grow and Jonathan R. Harris, Detroit, for defendants-appellees.

Walter Briggs Connolly, Jr., Asst. Counsel, Akron, Ohio, for Firestone Tire & Rubber Co., defendant-appellee.

Frank J. Kelley, Atty. Gen., Robert A. Derengoski, Sol. Gen., Richard R. Roesch, Asst. Atty. Gen., Lansing, for third-party defendant-appellees.

LINDEMER, Justice.

Plaintiffs, on behalf of themselves and a class of similarly situated individuals, originally filed a complaint against 'The Firestone Store' and the State of Michigan to recover $10,000,000. Plaintiffs alleged that they were unlawfully subjected to payments of 'sales taxes' on services. Each of the four named plaintiffs alleged the occurrence of a specific transaction at which he was taxed, the cumulative amount of which was less than $4.00. On November 2, 1972, plaintiffs filed an amended complaint. One day later Circuit Judge James Montante granted an accelerated judgment to the Department of Revenue of the State of Michigan stating as a reason that the circuit court of Wayne County had no jurisdiction over that defendant. The remaining defendants, now correctly identified as The Firestone Tire & Rubber Company and Ned's Auto Supply Company, then filed a third-party complaint against the State of Michigan, Department of Treasury--Revenue Division and the Commissioner of Revenue alleging that all taxes collected by Firestone and Ned's had been remitted to the State of Michigan and because of this fact, if plaintiffs are entitled to recover against Firestone, then Firestone should be able to recover against the State. On September 17, 1973, Judge Montante entered an order granting defendants' motion for accelerated judgment and/or summary judgment and one day later he entered a judgment dismissing the third-party complaint. Plaintiffs appealed to the Court of Appeals the order of September 17, 1973, granting the summary judgment in favor of Firestone and Ned's. Attorneys for all parties stipulated that the State of Michigan, Department of Treasury is no longer involved as a party to this lawsuit. On November 7, 1974, the Court of Appeals affirmed the decision of the trial judge. 56 Mich.App. 440, 224 N.W.2d 103 (1974). Plaintiffs' application for leave to appeal was granted July 23, 1975. We agree with the Court of Appeals that the trial judge properly dismissed the complaint.

The Legislature's power to impose a sales tax is limited by Const.1963, art. 9, § 8, which read in 1973:

'The legislature shall not impose a sales tax on retailers at a rate of more than four percent of their gross taxable sales of tangible personal property.'

The general sales tax act of 1933, as amended, M.C.L.A. § 205.51, Et seq.; M.S.A. § 7.521, Et seq. contains the statutory scheme which implements the constitutional provision. Section 2 of that act, M.C.L.A. § 205.52; M.S.A. § 7.522, imposes the sales tax as follows:

'There is hereby levied upon and there shall be collected from all persons engaging in the business of making sales at retail, as hereinbefore defined, an annual tax for the privilege of engaging in such business equal to 4% Of the gross proceeds thereof, plus the penalty and interest when applicable as hereinafter provided, less deductions allowed in sections 4 and 4a.'

The constitutional and statutory language impose the direct legal incidence of the tax upon the retailer for the 'privilege' of engaging in retail business. Federal Reserve Bank of Chicago v. Department of Revenue, 339 Mich. 587, 64 N.W.2d 639 (1954). For the purposes of the act the retailer, not the consumer, is the taxpayer.

It is a generally accepted principle of economics that the cost of production (raw materials, labor, overhead and taxes are examples of such costs) is included in the market price which must be paid by the consumer of the product. The Legislature has recognized this principle. Section 23 of the general sales tax act reads in part:

'No person engaged in the business of selling tangible personal property at retail shall advertise or hold out to the public in any manner, directly or indirectly, that the tax herein imposed is not considered as an element in the price to the consumer. Nothing contained in this act shall be deemed to prohibit any taxpayer from reimbursing himself by adding to his sale price any tax levied hereunder.' M.C.L.A. § 205.73; M.S.A. § 7.544.

Thus while retailers are considered to be the taxpayers, the law allows them to shift the economic burden of any tax levied to the shoulders of the consumers.

In essence, appellants argue that the economic burden of the sales tax can only be shifted to the consumer in connection with sales of Tangible personal property. Appellants object to the practice of the retailer in adding 4% To the cost of a service rendered. Specifically, plaintiffs object to paying a sales tax on such items as a wheel rotation or a wheel balance. Plaintiffs argue that a wheel rotation involves the transfer of no tangible personal property and a wheel balance involves the transfer of tangible personal property (wheel weights) but that the value of the tangible personal property is so minor that it plays no part in the actual price of the service. Firestone contends that § 2 of the act requires that taxes be paid on these transactions and that § 23 of the act permits the taxpayer to pass the burden of the tax onto the consumer. In addition to levying a 4% Tax on the sales of tangible personal property, § 2 of the act imposes upon retailers the duty to keep separate records and further imposes a penalty for the failure to keep separate records.

'Any person engaged in the business of making sales at retail who is at the same time engaged in some other kind of business, occupation, or profession not taxable under this act, shall keep books to show separately the transactions used in determining the tax herein levied. In the event of such person failing to keep such separate books, there shall be levied upon him the tax hereinbefore mentioned equal to 4% Of the entire gross proceeds of both or all of his businesses. The taxes levied hereunder shall be a personal obligation of the taxpayer.' M.C.L.A. § 205.52; M.S.A. § 7.522.

Given the constitutional provision, art. 9, § 8, we believe that any amount in excess of 4% Of sales of tangible personal property must be construed to be a penalty rather than a tax, otherwise the constitutional provision would be violated. The constitutional provision does not prohibit the Legislature from penalizing the retailer over and above the tax imposed. The question we must resolve is: Does the statutory scheme of the general sales tax act allow a retailer to reimburse himself for any penalty imposed under the act?

Plaintiffs argue that the penalty imposed by § 2 is personal to Firestone and it cannot be passed onto the consumers. Allowing Firestone to reimburse itself at the consumers' expense effectively shifts the economic burden of the penalty onto the consumer. The retailer, therefore, would be able to relieve himself of the duty to keep separate records imposed by the statute and also relieve himself of the economic burden of the penalty provision. Plaintiffs argue that this amounts to unjust enrichment on the part of defendants by permitting them to avoid personal liability for failure to maintain required bookkeeping procedures and the cost of complying with the statute regarding such bookkeeping.

In discussing unjust enrichment the Court of Appeals said:

'The defendants have not unjustly enriched themselves because they have retained none of the sums complained of but have transmitted them as a tax to the State of Michigan. To permit recovery against the defendants would therefor subject them to the payment of the penalty for doing that which they were authorized by both statute and rule.' Sims, supra, 56 Mich.App. 444, 224 N.W.2d 105.

The reimbursement provision of § 23 permits the taxpayer to add to the sales price of his product 'any Tax levied' by the act. Section 1(m) of the act, M.C.L.A. § 205.51; M.S.A. § 7.521, defines the word Tax as including 'all taxes, interest or penalties levied under this act.' Given the broad definition of the word 'tax', we believe retailers who had to pay the penalty imposed by § 2 for failing to keep separate records, were justified in utilizing the reimbursement scheme contained in § 23.

Several comments about § 23 are in order. First, the statutorily-imposed tax brackets are the only means the retailer can use to reimburse himself. Secondly, the language 'no other person other than the State may enrich himself or gain any benefit from the collection or payment of such tax' means that any reimbursement of the tax charged to the customer must be remitted to the State. If use of the tax bracket scheme results in a retailer being reimbursed in excess of his tax liability he must nonetheless remit the excess reimbursements to the State. On the other hand the language 'nor shall use of the above brackets relieve the retailer from liability for payment of the full amount of the tax levied by this act' means that if the statutory scheme fails to produce reimbursement in sufficient amounts to meet the tax liability, the retailer must, out of its own pocket, make up the difference in the tax liability. Finally, it must be noted that the statutory tax bracket scheme fluctuates above and below the 4% Constitutional limit. The...