World Book, Inc. v. Department of Treasury

Decision Date30 March 1999
Docket NumberDocket No. 109841,No. 6,6
Citation459 Mich. 403,590 N.W.2d 293
PartiesWORLD BOOK, INC., Plaintiff-Appellant, v. Revenue Division, DEPARTMENT OF TREASURY, State of Michigan, Defendant-Appellee. Calendar
CourtMichigan Supreme Court

Honigman, Miller, Schwartz & Cohn (by Patrick R. Van Tiflin and John S. Kane ) Lansing, MI, for appellant.

Jennifer M. Granholm, Attorney General, Thomas L. Casey, Solicitor General, and Ross H. Bishop, Assistant Attorney General Lansing, MI, for defendant-appellee.

Weisman, Trogan, Young & Schloss, P.C. (by Anthony V. Trogan ) Bingham Farms, MI; Brann & Isaacson, L.L.P., of counsel (by George S. Isaacson, Martin I. Eisenstein, and Roy T. Pierce ) Lewiston, ME, amicus curiae, for Direct Marketing Association, Inc.

Opinion

MARILYN J. KELLY, J.

In this tax dispute, plaintiff World Book, Inc., appeals from a Court of Appeals decision in favor of defendant Revenue Division of the Department of Treasury, state of Michigan. We are asked to decide two issues. The first is whether plaintiff's sales transactions involving Michigan customers are properly taxable under Michigan's Use Tax Act 1 as opposed to Michigan's General Sales Tax Act. 2 The second is whether, assuming the Use Tax Act applies, the absence of a bad debt deduction in the act results in a violation of the Commerce Clause of the United States Constitution. US Const, art I, § 8, cl 3.

We hold that plaintiff's transactions are properly taxable under the Use Tax Act. However, because we find that imposition of the defendant's liability for the taxes was improper in this case, we do not address the question of a Commerce Clause violation. Instead, we hold that plaintiff is not required to pay its customers' use taxes where World Book used reasonable business care in trying to collect them.

I. FACTS

Plaintiff is a Delaware corporation with its principal office in Illinois. It maintains no permanent facilities in Michigan. Instead, it markets encyclopedias and other educational material to its customers through the use of salespersons who make door-to-door sales calls in Michigan. The salespersons take orders for the encyclopedias and accept deposits from customers. Orders are then sent to plaintiff's headquarters in Illinois and, if approved, shipped from the inventory in Illinois to the customer by common carrier.

Both parties acknowledge that plaintiff's transactions involving Michigan customers are subject either to Michigan's Use Tax Act or General Sales Tax Act. Normally this would end the matter, as the rates under both taxing schemes are the same 3 and the provisions of each statute are complementary and supplementary. Elias Bros. Restaurants, Inc. v. Treasury Dep't, 452 Mich. 144, 153, 549 N.W.2d 837 (1996). However, a distinction crucial to the instant case exists: The General Sales Tax Act includes a provision allowing bad debts to be deducted from the gross proceeds used to calculate sales tax liability. MCL 205.54i; MSA 7.525(9). 4 The Use Tax Act does not contain such a provision.

Plaintiff filed tax returns taking the bad debt deduction for 1988-91, the pertinent years. The defendant, ruling that plaintiff's transactions involving Michigan customers are taxable under the Use Tax Act, issued an assessment notice that additional payment was required. Plaintiff paid the tax under protest and filed an action in the Court of Claims. The Court of Claims agreed with plaintiff's contention that its sales to Michigan customers come within the General Sales Tax Act and that plaintiff was entitled to the deduction.

Following the defendant's appeal, the Court of Appeals reversed the judgment of the Court of Claims in a unanimous opinion. 222 Mich.App. 203, 564 N.W.2d 82 (1997). It concluded that the appropriate test for determining whether a retail sale takes place in Michigan, for purposes of the General Sales Tax Act, is whether the sale was consummated within the state. After deciding that the transactions in the instant case took place in Illinois, the Court of Appeals held that the Use Tax Act applies to plaintiff's sales. It then held that the failure of the act to provide a bad-debt deduction is not a violation of the Commerce Clause of the United States Constitution. This Court granted plaintiff's application for leave to appeal. 458 Mich. 860, 587 N.W.2d 638 (1998).

II. ANALYSIS
A. Correct Tax Characterization

The first question is whether the Court of Appeals was correct in finding that plaintiff's transactions involving Michigan customers were taxable under the Use Tax Act.

Under the General Sales Tax Act, persons "engaged in the business of making sales at retail" must pay an annual tax "for the privilege of engaging in that business...." MCL 205.52(1); MSA 7.522(1). "Sale at retail" is defined in relevant part as:

a transaction by which the ownership of tangible personal property is transferred for consideration, if the transfer is made in the ordinary course of the transferor's business.... [MCL 205.51(b); MSA 7.521(b).]

As it is a "privilege tax," the sales tax is imposed directly on the seller. However, the seller may pass it on to the purchaser and collect it at the point of sale. Sims v. Firestone Tire & Rubber Co., 397 Mich. 469, 245 N.W.2d 13 (1976); Detroit & Cleveland Navigation Co. v. Dep't of Revenue, 342 Mich. 234, 238, 69 N.W.2d 832 (1955).

In contrast with the General Sales Tax Act, the Use Tax Act provides for an excise tax for the "privilege of using, storing, or consuming tangible personal property in this state at a rate equal to 6%[ 5] of the price of the property or services specified...." MCL 205.93(1); MSA 7.555(3)(1). The Use Tax Act places the ultimate liability on the consumer. MCL 205.97; MSA 7.555(7). However, sellers with sufficient connection to Michigan are required to collect the tax and remit it to the Department of Treasury. MCL 205.95(a); MSA 7.555(5)(a); MCL 205.97; MSA 7.555(7). 6

The provisions of the General Sales Tax Act and the Use Tax Act are complementary. Elias Bros Restaurants, Inc, supra at 153, 549 N.W.2d 837. Thus, as a general rule, property for which a consumer has already paid a use tax is not subject to the provisions of the General Sales Tax Act. Id. at 153, n. 19, 549 N.W.2d 837. Similarly, the Use Tax Act does not apply to property sold in Michigan on which Michigan sales tax has already been paid, if the tax was due and paid on the retail sale to a consumer. MCL 205.94(a); MSA 7.555(4)(a). Also, use tax is not owed on goods already subjected to certain other sales or use taxes in another state. MCL 205.94(e); MSA 7.555(4)(e).

Plaintiff urges the Court of Claim's rationale that, because plaintiff engages in "sufficient local activity" in Michigan, its sales come within the purview of the General Sales Tax Act, regardless of where they occur. However, as the Court of Appeals noted, the question of "substantial activity" relates to whether an out-of-state taxpayer has sufficient nexus with the taxing state for it constitutionally to impose any tax at all. See, e.g., Beitzel v. Dep't of Revenue, 2 Mich.App. 311, 313-314, 139 N.W.2d 780 (1966), and Kellogg Co. v. Dep't of Treasury, 204 Mich.App. 489, 516 N.W.2d 108 (1994). See also Scripto, Inc. v. Carson, 362 U.S. 207, 80 S.Ct. 619, 4 L.Ed.2d 660 (1960). Nexus is not in dispute here. Finding that sufficient local activity exists to justify imposition of a tax does not assist in deciding which tax to impose, given the choice of two taxes.

Defendant requests that we hold that the definition of "sale at retail" under the General Sales Tax Act includes only sales consummated within Michigan. It argues that such a finding would be consistent with the act's definition of a taxable "sale at retail:" "a transaction by which the ownership of tangible personal property is transferred for consideration...." MCL 205.51(1)(b); MSA 7.521(1)(b). Defendant also argues that the requested holding comports with the concept that the sales tax is imposed upon sellers for the privilege of selling personal property at retail within Michigan. Detroit & Cleveland Navigation Co, supra at 238, 69 N.W.2d 832. We agree.

We find that the United States Supreme Court decision in Oklahoma Tax Comm. v. Jefferson Lines, Inc., 7 provides appropriate guidance here. The Court's primary focus in Oklahoma Tax Comm. was on whether the state could constitutionally impose a sales tax on the purchase of a bus ticket to be used in interstate travel. However, the Court also discussed the general nature of what properly constitutes an in-state sale for taxing purposes:

A sale of goods is most readily viewed as a discrete event facilitated by the laws and amenities of the place of sale, and the transaction itself does not readily reveal the extent to which completed or anticipated interstate activity affects the value on which a buyer is taxed. We have therefore consistently approved taxation of sales without any division of the tax base among different States, and have instead held such taxes properly measurable by the gross charge for the purchase, regardless of any activity outside the taxing jurisdiction that might have preceded the sale or might occur in the future. [Citations omitted.]

Such has been the rule even when the parties to a sales contract specifically contemplated interstate movement of the goods either immediately before, or after, the transfer of ownership. The sale, we held, was "an activity which ... is subject to the state taxing power" so long as taxation did not "discriminat[e]" against or "obstruc[t]" interstate commerce, and we found a sufficient safeguard against the risk of impermissible multiple taxation of a sale in the fact that it was consummated in only one State. As we put it in [McGoldrick v. Berwind-White Coal Mining Co., 309 U.S. 33, 60 S.Ct. 388, 84 L.Ed. 565 (1940) ] a necessary condition for imposing the tax was the occurrence of "a local activity,...

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