Town and Country Dodge, Inc. v. Michigan Dept. of Treasury

• Decision Date: 09 November 1982
• Docket Number: 58069,Docket Nos. 58068,LINCOLN-MERCUR,INC
• Citation: 118 Mich.App. 778,325 N.W.2d 577
• Parties: TOWN AND COUNTRY DODGE, INC., Petitioner-Appellant, v. MICHIGAN DEPARTMENT OF TREASURY, Respondent-Appellee. STAR, Petitioner-Appellant, v. MICHIGAN DEPARTMENT OF TREASURY, Respondent-Appellee. 118 Mich.App. 778, 325 N.W.2d 577
• Court: Court of Appeal of Michigan — District of US

Page 577

325 N.W.2d 577

TOWN AND COUNTRY DODGE, INC., Petitioner-Appellant, v. MICHIGAN DEPARTMENT OF TREASURY, Respondent-Appellee.

STAR LINCOLN-MERCURY, INC., Petitioner-Appellant, v. MICHIGAN DEPARTMENT OF TREASURY, Respondent-Appellee.

Docket Nos. 58068, 58069.

118 Mich.App. 778, 325 N.W.2d 577

Court of Appeals of Michigan.

Submitted March 2, 1982.

Decided Aug. 24, 1982.

Rehearing Denied Oct. 7, 1982.

Released for Publication Nov. 9, 1982.

[118 MICHAPP 781] Lawrence J. Stockler, Detroit, for petitioner-appellant.

Frank J. Kelley, Atty. Gen., Louis J. Caruso, Sol. Gen., and Richard R. Roesch and Curtis G. Beck, Asst. Attys. Gen., for respondent-appellee.

Before CAVANAGH, P.J., and ALLEN and PENZIEN, ^* JJ.

ALLEN, Judge.

This consolidated appeal involves separate taxpayers, each of whom appeal by right from an order of the Tax Tribunal granting summary[118 MICHAPP 782] judgment in favor of respondent Michigan Department of Treasury. In docket no. 58068, Town and Country Dodge was found liable for a single business tax deficiency of $3,956.10 for the 1976 and 1977 tax years. In docket no. 58069, Star Lincoln-Mercury was found liable for a single business tax deficiency of $14,849.11 for the 1976-1979 inclusive tax years. Except for the amount of liability and the tax years involved, the facts and issues of each appeal are identical.

Petitioners are operators of new car dealerships who challenge assessments made by the respondent pursuant to the Single Business Tax Act, M.C.L. Sec. 208.1 et seq., M.S.A. Sec. 7.558(1) et seq. The controversy involves the meaning of the term "interest", as that term is used in Sec. 9 of the act, M.C.L. Sec. 208.9; M.S.A. Sec. 7.558(9). Some of the sales made by the petitioners to their customers involve dealer financing. Customers who engage in financing through the petitioners execute notes to the petitioners and incur the obligation to pay an amount in excess thereof which represents the cost of financing (finance charge). The petitioners assign the notes to financial institutions at a price which is greater than the purchase price of the automobile, but less than the full face value of the note (i.e., at a discount).

The customers then pay the financial institution the full face value of the note in monthly installments, usually over a 48-month period. From time to time, the financial institution rebates to the dealer a small portion of the monthly payment. The small portion rebated is the amount by which the full face value of the note is discounted. It is this small portion rebated which is the subject of dispute in the instant case. The Department of Treasury characterizes this amount as a "rebate" or "finder's fee" which constitutes business income [118 MICHAPP 783] and is includable in computing the dealer's tax base for single business tax purposes. On the other hand, petitioners argue that the rebates represent a small portion of the interest on the notes and thus are deductible from their tax base pursuant to Sec. 9 of the act.

The Tax Tribunal ruled that the amount rebated was a small portion of the "finance charge" which the Tribunal defined as "the consideration over and above the cost of the car, i.e. the cost of credit". According to the Tribunal, the term "finance charge" and "interest" are mutually exclusive terms of art:

"Michigan case law further supports the distinction between interest and a finance charge. 'Interest' has been defined as 'the compensation allowed by law or fixed by the parties for the use or forbearance of money, or as damages for its detention', Marion v. City of Detroit, 284 Mich. 476, 280 N.W. 26 (1938); 'as a charge for the loan or forbearance of money * * * ', Balch v. Detroit Trust Co., 312 Mich. 146, 20 N.W.2d 138 (1945); and as stated in Coon v. Schlimme Dairy Co., 294 Mich. 51, 292 N.W. 560 (1940), 'interest is pay for the use of money'. Interest therefore is a charge which can be added when money (in some form or another) is loaned from one party to another.

"A finance charge or time-price differential is the difference in total amount paid for goods or services when and if the seller is willing to be paid over time rather than immediately (cash sale).

"When the petitioner discounts the paper to various assignees, what it receives back is simply a portion of that finance charge."

1975 P.A. 228, Sec. 3(3), as amended, (Michigan Single Business Tax Act, hereafter "SBT"), being M.C.L. Sec. 208.3(3); M.S.A. Sec. 7.558(3), defines "business income" as follows:

[118 MICHAPP 784] " 'Business income' means federal taxable income, except that for a person other than a corporation it means that part of federal taxable income derived from business activity. For a partnership, business income includes payments and items of income and expense which are attributable to business activity of the partnership and separately reported to the partners."

Section 9(1) of the statute, M.C.L. Sec. 208.9(1); M.S.A. Sec. 7.558(9)(1), defines the term "tax base":

" 'Tax base' means business income, before apportionment, or allocation as provided in chapter 3, even if zero or negative, subject to the adjustments in subsections (2) to (9)."

Pursuant to Sec. 9, subsection (7)(b), M.C.L. Sec. 208.9(7)(b); M.S.A. Sec. 7.558(9)(7)(b), a taxpayer may in determining "tax base" deduct all interest to the extent that such interest was included in arriving at the taxpayer's federal taxable income.

Thus, the sole issue involved in the proceedings before the Michigan Tax Tribunal and the issue now before this Court on appeal is whether the amount of payment made by the financial institution to the dealer was interest income excludable from the petitioners' single business tax base, SBT Sec. 9(7)(b), or whether the income was to be properly considered as business income includable in such tax base, SBT Sec. 9(1). Resolution of this issue depends upon a clear understanding of the nature of the transaction involved.

A hypothetical example of a dealer financed sale (also known as indirect financing) will be helpful. Assume that buyer (B) purchases a car from dealer (D) for $7,301 paying in cash or trade-in $1,501, leaving a balance due of $5,800 to be paid over a 48-month period at 14.35% interest. The total finance charge ($1,855.04) plus the balance due on [118 MICHAPP 785] the car ($5,800) is $7,655.04. B signs a note for $7,655.04 spread over 48 monthly installments of $159.48, agrees to D's assignment of the note to a financial institution (FI) and that he (B) will repay the note in 48 monthly payments of $159.48 to FI. D then takes the note to FI which discounts the finance charge of $1,855.04 by one-half of one percent, viz: $9.48. FI issues a check to D for $5,800 and B makes 48 monthly payments of $159.48 each to FI. From time to time, usually quarterly, FI rebates to D a portion of the $9.48. While the amount returned on a single transaction is small, the combined amount of rebates on a number of transactions can be substantial. ¹

It is the treatment of the $9.48 for single business tax purposes which is the subject matter of the instant dispute. Petitioners contend that since the payment by B to FI is interest, so too, a rebate of a part thereof by FI to D is interest. The Attorney General, representing respondent Department of Treasury, argues that assuming, arguendo, the finance charge paid by D to FI is interest, the rebate of a portion of such charge by FI to D is not interest income excludable from D's single business tax base under Sec. 9(7)(b). We agree with the Attorney General.

Under Michigan law, interest has been variously defined as "the compensation allowed by law or fixed by the parties for the use or forbearance of money", Marion v. Detroit, 284 Mich. 476, 484, 280 N.W. 26 (1938), or "a charge for the loan or forbearance of money", Balch v. Detroit Trust Co., 312 Mich. 146, 152, 20 N.W.2d 138 (1945). In short, it is a sum "paid for the use of money", Coon v. [118 MICHAPP 786] Schlimme Dairy Co., 294 Mich. 51, 56, 292 N.W. 560 (1940), or "for the delay in the payment of money", Drennan v. Herzog, 56 Mich. 467, 469, 23 N.W. 170 (1885). Under any of the foregoing definitions, the sums rebated to petitioners dealers were not a repayment for the use of or the loan of money. The dealers did not advance money to the buyers. It was the financial institution which made the loan. Furthermore, in case of default in payment by the buyer, the financial institution had no recourse against the dealer.

The Attorney General argues, and we agree, that the sums rebated to D by FI are payments for the services performed by D in filling out the papers and bringing the business to a named financial institution. It is in the nature of a finder's fee. In common parlance it is a "kickback", though we dislike that term because it implies something illegal. There is nothing illegal in discounting a note as a reward or incentive for supplying the business. It is a well recognized legitimate business practice. Basically, rebates made by lending institutions to automobile dealers are payments for labor and services rendered. As such, the payments are business income, properly included in the tax base under Sec. 9(1) of the statute.

The single business tax is designed to tax what a business has added to the economy, as distinguished from the income tax which taxes that which is derived from the economy. Stockler v. Dep't of Treasury, 75 Mich.App. 640, 255 N.W.2d 718 (1977), lv. den. 402 Mich. 802 (1977), app. dis. 435 U.S. 963, 98 S.Ct. 1598, 56 L.Ed.2d 54 (1978). In that respect, it is the antithesis of the income tax which adds interest to the tax base but allows deductions for labor and services. See Constitutionality of the Michigan Single Business Tax, 25 Wayne L.Rev. 1309 (1979). Because [118 MICHAPP 787] the payments made by the lending financial institutions to the dealers in the instant case are basically payments for performing the paper...