Town & Country Dodge, Inc. v. Department of Treasury

• Decision Date: 28 December 1984
• Docket Number: Docket Nos. 70437,LINCOLN-MERCUR,No. 11,INC,70438 and 70554,11
• Citation: 420 Mich. 226,362 N.W.2d 618
• Parties: TOWN & COUNTRY DODGE, INC., Plaintiff-Appellant, v. DEPARTMENT OF TREASURY, Defendant-Appellee, STAR, Plaintiff-Appellant, v. DEPARTMENT OF TREASURY, Defendant-Appellee, MC INERNEY, INC., Petitioner-Appellant, v. DEPARTMENT OF TREASURY, Respondent-Appellee. Calendar
• Court: Michigan Supreme Court

Page 618

362 N.W.2d 618

420 Mich. 226

TOWN & COUNTRY DODGE, INC., Plaintiff-Appellant, v. DEPARTMENT OF TREASURY, Defendant-Appellee, STAR LINCOLN-MERCURY, INC., Plaintiff-Appellant, v. DEPARTMENT OF TREASURY, Defendant-Appellee, MC INERNEY, INC., Petitioner-Appellant, v. DEPARTMENT OF TREASURY, Respondent-Appellee.

Docket Nos. 70437, 70438 and 70554.

Calendar No. 11.

Supreme Court of Michigan.

Argued Jan. 5, 1984.

Decided Dec. 28, 1984.

Law Offices of Lawrence J. Stockler, P.C. by Lawrence J. Stockler, Detroit, for plaintiffs-appellants.

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

RYAN, Justice.

We are called upon to determine, within the context of automobile dealer financing, whether certain payments to dealerships by financial institutions are "interest" for the purpose of the Single Business Tax Act (SBTA), M.C.L. Sec. 208.1 et seq.; M.S.A. Sec. 7.558(1) et seq., and are thus excludable from the single business tax base. We decide that those payments are not interest and that the monies received are properly included in the tax base upon which the single business tax is assessed. ¹

I. Procedural History

Appellants operate automobile dealerships. Each appellant has been assessed a single business tax deficiency by the Michigan Department of Treasury. Each dealership appealed to the Michigan Tax Tribunal from a final determination of the single business tax deficiency assessed against it. In case No. 70437, Town and Country Dodge, Inc., was assessed a deficiency of $3,956.10 by final determination dated October 17, 1980, for the tax years 1976 to 1977. In case No. 70438, Star Lincoln-Mercury, Inc., was assessed a deficiency of $14,849.11 by final determination dated November 26, 1980, for the 1976 through 1979 tax years. In case No. 70554, McInerney, Inc., was assessed a deficiency of $18,945.50, by a final determination dated March 29, 1982, for the 1976 through 1978 tax years.

The dealerships filed appeals in the Michigan Tax Tribunal. ²

Town and Country Dodge moved for summary judgment in its case, and the defendant Department of Treasury moved for summary judgment in the Star-Lincoln Mercury case. In neither case did the movant specify the subrule of GCR 1963, 117 upon which it was relying. ³ The Tax Tribunal issued identical opinions in both cases, upholding the Department of Treasury's tax deficiency assessments. ⁴

McInerney also appealed its assessed tax deficiency to the Tax Tribunal. The Department of Treasury moved for summary judgment pursuant to GCR 1963, 117.2(1), asserting that the issue of law raised by the petition had previously been determined by the tribunal. On July 16, 1982, the Tax Tribunal granted summary judgment against petitioner McInerney based, inter alia, on the authority of that tribunal's decisions in Town & Country Dodge, Inc., and Star Lincoln-Mercury.

Town and Country Dodge and Star Lincoln-Mercury filed claims of appeal with the Court of Appeals, and those cases were consolidated on appeal there. The Court of Appeals affirmed the decisions of the Michigan Tax Tribunal, Judge M.F. Cavanagh, dissenting. 118 Mich.App. 778, 325 N.W.2d 577 (1982). That Court also denied rehearing of those two cases on October 7, 1982, with Judge Cavanagh indicating that he would grant rehearing.

McInerney filed a delayed application for appeal with the Court of Appeals. On May 13, 1983, the Court of Appeals denied the delayed application for appeal based, inter alia, on the authority of Town & Country Dodge v. Dep't. of Treasury.

Town and Country Dodge, Star Lincoln-Mercury, and McInerney then sought leave to appeal to this Court. We granted leave to appeal, and further ordered all three cases to be argued and submitted to the Court together. 417 Mich. 1054, 335 N.W.2d 474 (1983).

II. Facts

Appellants transact business with their customers by at least three methods: (1) sale for cash, (2) sale with outside financing, and (3) sale with financing obtained from a third party through appellants. It is the third method of financing that gives rise to the issue here.

In a typical transaction, the vehicle is sold to the customer, after negotiation, and the total price for the vehicle is determined by the price of the vehicle, together with its options and accessories. A contract is then formed between the dealer and the customer for the sale of a particular vehicle. After the contract has been agreed upon, the proper paperwork necessary to effect transfer of title is completed.

When a purchaser eschews, for whatever reason, either a cash deal or private financing of the automobile, the appellants assist the customer in financing the purchase by entering a time-price differential agreement with the customer. The customer agrees to pay for the vehicle over a certain period of time. The time-price differential charge includes the cash price of the vehicle, plus financing charges. The contract is then sold or assigned to a financial institution.

It was represented to us in oral argument that, in order to induce automobile financial institutions to agree to finance a dealer's inventory under so-called floor plan financing agreements, dealers sometimes, but may not always, sell or assign individual time-price differential purchase agreements to the financing institution which carries the dealer's floor plan financing. When a time-price differential purchase agreement is assigned to a financial institution by a dealer, the dealer is "repaid," in some fashion, a small sum by the financial institution on each purchase agreement. That amount has been variously characterized by the parties as a kickback, a rebate, a credit, a finder's fee, a discount, a commission, or a refund of interest paid. The correct characterization of the money received by the appellants from the financial institutions is critically important to this litigation. Appellants claim that the money they receive from the financial institutions is "interest income." ⁵

At one point in this litigation, the appellant Town and Country Dodge offered the following example of a typical transaction of the kind described above:

"Customer A buys a Lincoln Continental or a Chrysler New Yorker for $10,000. He puts down a deposit of $2,000.00. $8,000 is to be financed over three (3) years at 16%. This means if customer has $8,000 there are no time-price differential charges and if the customer does not have $8,000 then it is financed at 16%. It is $26.57 time-price differential charge per $100 or a total of $2,125.60 of time-price differential charge, making total payments to the dealer on the contract of $10,125.60. See Thorndike Encyclopedia Banking and Financial Tables, Rev Ed as published by Warren, Goham & Lamont, 1980 ed, p 18-2, for Finance Charge Tables.

"The Dealer takes the contract and predicated upon a three (3) year contract, is now going to discount this $10,125.60 note to the appropriate financial institution. A draft is drawn on the bank account of the financial institution or the finance institution remits its own check for the amount of $8,000 plus a portion of the time-price differential charge. For example, there has been no evidence to indicate this, but for which the appellants would be willing to so prove that approximately in the year of 1979, $70,000 per year was the amount of time-price differential charge being retained by the dealer when it has discounted its note and assign [sic ] its contract to the financial institution. Consequently, the dealer would then have a draft in the amount of $8,210 of its own, discounting the note, leaving the difference of the time-price differential charge as profit to the financial institution. In turn, the buyer would pay the financial institution directly on a thirty-six (36) monthly installment basis, in dividing the $10,125.60 by thirty-six (36) months or approximately $281.27 monthly payments. At this point, there is only one (1) check given or taken upon a draft by the dealer and there are no more funds being received by the dealer from the financial institution. The buyer bought a car. The dealer discounted the paper to the financial institution. The buyer instead of paying off the installment purchase to the dealer is now making the installment plan payment to the financial institution. THUS, THERE IS NO LENDING OF MONEY TO THE BUYER. IT IS A PURCHASE OF A VEHICLE WITH A DISCOUNTING OF NOTE AND AN ASSIGNMENT OF A CONTRACT FROM THE DEALER TO THE FINANCIAL INSTITUTION. As 'Friday' would say in the program 'Dragnet', these are the facts Your Honors, these are the facts and just the facts and nothing but the facts.

"In the event that the time-price differential agreement is paid off on a shorter basis, or that there is a default by the buyer resulting in a loss to the financial institution, there is a proportionate share of the time-price differential charge charged back to the dealer, that is there is a recourse as to that proportion of three (3) years time-price differential charge that has been retained by the dealer. For example, if the note is paid within two (2) years then the dealer has a charge back of the one (1) year time-price differential charge that he has retained, inasmuch as such time-price differential charge has not been earned and in fact has been prepaid. To meet the requirements of Regulation Z or the Truth in Lending Act, a refund or discount to the buyer is required for such prepayment." Motion for Rehearing (Town & Country Dodge, Inc. and Star Lincoln-Mercury, Inc.), Court of Appeals, pp. 3-4. (Emphasis in original.)

III. Single Business Tax

The characterization of the relatively small sum of money that the dealer receives back from the financial institution on each "deal" is the crux of this litigation. If that money is "interest income," it is subtracted from the appellant's single business tax base.

The Single Business Tax Act (SBTA...