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Ally Financial Inc. v. State Treasurer

Supreme Court of Michigan

July 20, 2018

ALLY FINANCIAL INC., Plaintiff-Appellee,
v.
STATE TREASURER, STATE OF MICHIGAN, and DEPARTMENT OF TREASURY, Defendants-Appellants. SANTANDER CONSUMER USA INC., Plaintiff-Appellant,
v.
STATE TREASURER, STATE OF MICHIGAN, and DEPARTMENT OF TREASURY, Defendants-Appellees. SANTANDER CONSUMER USA INC., Plaintiff-Appellant,
v.
STATE TREASURER, STATE OF MICHIGAN, and DEPARTMENT OF TREASURY, Defendants-Appellees.

          Argued on application for leave to appeal January 10, 2018.

          Chief Justice: Stephen J. Markman Justices: Brian K. Zahra Bridget M. McCormack David F. Viviano Richard H. Bernstein Kurtis T. Wilder Elizabeth T. Clement

         Ally Financial Inc. (Docket No. 154668) and Santander Consumer USA Inc. (Docket Nos. 154669 and 154670) (collectively, plaintiffs) brought separate actions in the Court of Claims against the State Treasurer, the State of Michigan, and the Department of Treasury (the department), seeking refunds under the bad-debt statute, MCL 205.54i, for taxes paid on vehicles financed through installment contracts. Santander's predecessor in interest and Ally entered into financing agreements with various automobile dealerships under which an automobile purchaser entered into an installment contract with the dealership and the dealership financed the purchase price and the sales tax and remitted that tax to the state. Plaintiffs in turn paid the particular dealership the purchase price and sales tax, and the dealership assigned the installment contract to plaintiffs, giving plaintiffs the right to collect the assigned installment contract payments and the right to repossess the vehicle if a purchaser defaulted on the contract payment. When plaintiffs determined that certain installment agreements were uncollectable after the automobile purchasers defaulted on their installment contracts, plaintiffs repossessed and resold many of the vehicles for amounts less than the purchasers owed under the individual installment contracts. Each plaintiff wrote off the outstanding balances as bad debts for federal income tax purposes under 26 USC 166, and each plaintiff filed refund requests under MCL 205.54i with the department for the prorated share of the previously paid Michigan sales tax attributable to the bad debts remaining on the delinquent accounts. The department denied plaintiffs' refund requests, reasoning that (1) plaintiffs were not entitled to any refunds for the debts associated with vehicles that were repossessed because MCL 205.54i excludes "repossessed property" from the statute's definition of "bad debt"; (2) plaintiffs failed to support their claims with the required RD-108 forms, and the alternative documentation provided by plaintiffs to support the amount of taxes paid was insufficient; and (3) Ally lacked appropriate election forms designating itself, rather than the various dealerships, as the party entitled to claim the tax refund. The court, Michael J. Talbot, C.J., agreed with the department's arguments and granted summary disposition in favor of defendants. Plaintiffs each appealed, and the appeals were consolidated. The Court of Appeals, Jansen, P.J., and K. F. Kelly and O'Brien, JJ., affirmed in a published decision. 317 Mich.App. 316 (2016). The Supreme Court ordered and heard oral argument on whether to grant plaintiffs' applications for leave to appeal or take other action. 500 Mich. 1010 (2017).

         In a unanimous opinion by Justice Viviano, the Supreme Court, in lieu of granting leave to appeal, held:

         Under MCL 205.54i, retailers and lenders may seek a refund for sales tax paid on gross proceeds that are uncollectible as a bad debt. Repossessed property, which is excluded from the definition of "bad debt" in MCL 205.54i(1)(a), includes only what the taxpayer has collected under an installment contract at the time of the default, that is, the portion of the debt related to the value of the repossessed property. The department therefore erred by interpreting "repossessed property" as meaning the value of the entire attached account before the property was repossessed. The department did not abuse its discretion by requiring plaintiffs to support their claims for tax refunds with validated RD-108 forms, but the department erred by rejecting Ally's election forms.

         1. MCL 205.52(1) of the general sales tax act (GSTA), MCL 205.51 et seq., requires retailers to pay a 6% tax on gross sale proceeds, which includes purchases on credit; the sales tax is due at the time of purchase, not when each installment payment is made. MCL 205.54i provides that retailers and lenders may seek a refund for sales tax paid on gross proceeds that are uncollectible as a bad debt. To that end, MCL 205.54i(2) provides that a taxpayer may deduct the amount of bad debts from his or her gross proceeds used for computation of the tax. Under MCL 205.54i(1)(a), the term "bad debt" means any portion of a debt that is related to a sale at retail taxable under the GSTA and that can be claimed as a deduction pursuant to 26 USC 166; the term specifically does not include, among other things, repossessed property. MCL 205.54i(1)(a) and 26 USC 166 both contemplate that a debt can be divisible; the term "repossessed property" encompasses only what the taxpayer has collected-that is, the value of the repossessed property-it does not refer to the entire value of the account before the property was repossessed. By including "repossessed property"-but not the attached account-in the list of exclusions from "bad debt," MCL 205.54i(1)(a) plainly indicates that only the portion of the debt related to the value of the repossessed property is excluded. Reading the other items in MCL 205.54i(1)(a) that are excluded from the definition of "bad debt" together with the excluded "repossessed property," it is also clear that the Legislature did not intend to impose a sales tax on consideration that becomes worthless. Further, § 320 of the Streamlined Sales and Use Tax Agreement (SSUTA), of which Michigan is a member state, further supports this interpretation. The SSUTA contains a list of bad-debt exclusions similar to that of MCL 205.54i(1)(a), which demonstrates that the exclusions are monetary amounts that must be subtracted from bad debt based on the consideration ultimately received; a majority of the other SSUTA member states similarly interpret the bad-debt language in their respective statutes. In this case, the department argued that MCL 205.54i does not permit tax refunds on any debts associated with repossessed property, including the amounts the taxpayer did not recover in a sale made on an installment contract. The Court of Appeals erred by upholding the department's interpretation because "repossessed property" encompasses only that portion of the debt related to the value of the repossessed property, not the value of the entire attached account.

         2. MCL 205.54i(4) provides that any claim for a bad-debt deduction under MCL 205.54i must be supported by that evidence required by the department. In that regard, the department requires taxpayers to provide validated RD-108 forms supporting their claims for tax refunds, reasoning that the Secretary of State will only issue that validated form once the sales tax is paid and that the form therefore provides the best evidence that the sales tax was paid and of the amount that was paid. When an agency is granted discretion by a statute, courts will uphold the agency's exercise of the discretion if it is supported by a rational basis. In this case, the department did not abuse its discretion by requiring plaintiffs to provide validated RD-108 forms supporting their respective claims for tax refunds. Except in certain circumstances, plaintiffs failed to provide RD-108 forms, and the internal records provided by plaintiffs did not establish that the taxes were actually remitted. Accordingly, because plaintiffs failed to establish that there was no rational basis for the department's requirement that RD-108 forms accompany any tax-refund request under MCL 205.54i, the Court of Appeals correctly upheld the department's decision to require those forms.

         3. MCL 205.54i(1)(e) provides that bad-debt refunds may be claimed by a taxpayer, defined as a retailer who remitted the sales tax to the department or the lender holding the account receivable. To that end, MCL 205.54i(3) requires that a lender seeking a refund under the statute provide a written election form, specifying that it, rather than the taxpayer, may claim the refund. To claim a bad-debt deduction or refund under the statute, MCL 205.54i(2) requires that the debt must have been charged off as uncollectible in the records of the entity claiming the deduction or refund. In this case, Ally paid the dealerships the entire cost, including sales tax, of the purchased vehicles in exchange for the right to collect under the installment contracts. Ally provided election forms to the department for 2012 through 2014, which specified that Ally was entitled to claim any sales tax refunds as a result of bad debt on any and all accounts currently existing or created in the future which had been assigned from the retailer to the lender. Because accounts that are written off are still collectible and only deemed worthless for tax computation and accounting purposes, the Court of Appeals erred by holding that the accounts Ally had previously written off were not "currently existing" as stated in its election forms. Accordingly, the Court of Appeals erred by upholding the department's rejection of Ally's election forms.

         Affirmed in part, reversed in part, and remanded to the Court of Claims for further proceedings.

         BEFORE THE ENTIRE BENCH

          OPINION

          VIVIANO, J.

         Plaintiffs are financing companies that seek tax refunds under Michigan's bad-debt statute, MCL 205.54i, for taxes paid on vehicles financed through installment contracts. Defendant Department of Treasury (the Department) denied the refund claims on three grounds: (1) MCL 205.54i excludes debts associated with repossessed property, (2) plaintiffs failed to provide RD-108 forms evidencing their refund claims, and (3) the election forms provided by plaintiff Ally Financial Inc. (Ally), by their terms, did not apply to the debts for which Ally sought tax refunds. The Court of Claims and the Court of Appeals affirmed the Department's decision on each of these grounds. We hold that the Court of Appeals erred by upholding the Department's decision on the first and third grounds but agree with the Court of Appeals' decision on the second ground. Accordingly, we reverse the Court of Appeals as to the first and third grounds, affirm its decision as to the second ground, and remand to the Court of Claims for further proceedings not inconsistent with this opinion.

         I. FACTS AND PROCEDURAL HISTORY

         Plaintiffs, Ally and Santander Consumer USA Inc. (Santander), are financing companies seeking refunds for bad debts associated with vehicles that plaintiffs financed through installment contracts. Santander's predecessor in interest and Ally entered into financing agreements with various auto dealerships. Under the financing agreements, purchasers would enter into installment contracts with the dealerships under which the dealerships would finance the entire purchase price and the sales tax and remit the tax to the state. The dealerships would then assign the installment contracts to plaintiffs in exchange for the full amount of the purchase price and sales tax. Plaintiffs would obtain the right to collect under the contracts and repossess the vehicles upon default.

         Over time, some of the vehicle owners defaulted on their installment contracts. When collection efforts failed, plaintiffs deemed a number of these agreements to be worthless and uncollectable. Plaintiffs repossessed and resold many of the vehicles, but the sale price at times would not recoup the entire amount of the outstanding debt. Plaintiffs wrote the outstanding balances off their books as bad debts for federal income tax purposes under 26 USC 166. Plaintiffs also filed refund requests with the Department to recoup under MCL 205.54i the prorated share of the previously paid Michigan sales tax attributable to the bad debts remaining on these accounts.

         The Department denied plaintiffs' refund requests. First, the Department determined that plaintiffs were not entitled to any refunds for debts associated with repossessed vehicles because MCL 205.54i excludes "repossessed property" from its definition of bad debt.[1] Second, the Department advised plaintiffs that they were required to support their claims with RD-108 forms, which dealers submit to the Secretary of State along with the sales tax due in exchange for a vehicle title and a validated copy of the form. Plaintiffs argued that they generally do not have copies of this form and offered alternative documentation as to the amount of taxes paid. The Department rejected plaintiffs' documentation and insisted that RD-108 forms were required to prove that taxes were actually paid. Finally, the Department concluded that Ally lacked appropriate election forms designating itself, rather than the dealership, as the party entitled to claim the tax refund.

         Plaintiffs first appealed the Department's decision by requesting an informal conference. The referee at the conference recommended that the refund requests be denied, and the Department followed the recommendation. Plaintiffs appealed this decision in the Court of Claims. The Court of Claims granted summary disposition to defendants, agreeing that "bad debts" do not include repossessed property and that plaintiff Ally did not have valid election forms. It also upheld the Department's decision to require the RD-108 forms, explaining that the Legislature gave the Department discretion to determine what evidence was required to support a refund claim.

         The Court of Appeals consolidated plaintiffs' cases on appeal and affirmed. Regarding the proper interpretation of "repossessed property," the Court of Appeals agreed with the Department that MCL 205.54i does not permit refunds on any debts associated with repossessed property. In reaching this conclusion, the Court looked to a prior unpublished opinion of the Court of Appeals, DaimlerChrysler Servs of North America, LLC v Dep't of Treasury.[2] Neither opinion, however, offered a substantive analysis of MCL 205.54i. Instead, the Court of Appeals here concluded summarily that "[t]he Department's interpretation is consistent with the plain and unambiguous language of the bad debt statute."[3] Regarding the Department's decision to require RD-108 forms, the Court of Appeals agreed with the Court of Claims that MCL 205.54i conferred discretion upon the Department to require these forms as evidence of plaintiffs' claims.[4] Finally, the Court upheld the Department's determination that the election forms provided by Ally did not satisfy the statute.[5]

         Following plaintiffs' appeal in our Court, we ordered arguments on the application, directing the parties to address:

(1) whether MCL 205.54i prohibits partial or full tax refunds on bad debt accounts that include repossessed property; (2) whether the Court of Appeals erred in giving the Department of Treasury's interpretation of MCL 205.54i respectful consideration in light of MCL 24.232(5); (3) how this Court should review the Department's decision to require RD-108 forms pursuant to MCL 205.54i(4) and, under that standard, whether the decision was appropriate; and (4) whether the Court of Appeals erred in holding that Ally Financial's election forms did not apply to accounts written off prior to the retailers' execution of the forms.[6]

         II. STANDARD OF REVIEW

         We review de novo questions of statutory interpretation.[7] While we have historically held that tax exemptions and deductions must be construed narrowly in favor of the government, [8] we have also explained "that this requirement does not permit a 'strained construction' that is contrary to the Legislature's intent."[9]

         III. ANALYSIS

         MCL 205.54i permits retailers and lenders to seek a refund for sales taxes paid on a "bad debt," as defined by the statute.[10] If lenders such as plaintiffs seek the tax refund, they must provide a written election form, specifying that they, rather than the taxpayer, may claim the refund.[11] The statute further provides that any claim "shall be supported by that evidence required by the department."[12] For the reasons expressed below, we hold that two of the three bases provided by the Department for rejecting plaintiffs' refund claims in this case were erroneous.[13]

         A. MEANING OF "REPOSSESSED PROPERTY" WITHIN MCL 205.54i

         Determining the meaning of "repossessed property" under MCL 205.54i requires careful application of our rules of statutory interpretation. When interpreting unambiguous statutory language, "the statute must be enforced as written. No further judicial construction is required or permitted."[14] "[O]ur goal is to give effect to the Legislature's intent, focusing first on the statute's plain language."[15] We must "examine the statute as a whole, reading individual words and phrases in the context of the entire legislative scheme."[16] In doing so, we "consider the entire text, in view of its structure and of the physical and logical relation of its many parts."[17]

         The term "repossessed property" in MCL 205.54i is nestled within an intricate tax scheme. Consequently, its context within the GSTA is critical to uncovering its meaning. The starting point is the GSTA, which requires retailers to pay a 6% tax on all sale proceeds. The relevant statute, MCL 205.52(1), provides:

Except as provided in section 2a, there is levied upon and there shall be collected from all persons engaged in the business of making sales at retail, [18] by which ownership of tangible personal property is transferred for consideration, an annual tax for the privilege of engaging in that business equal to 6% of the gross proceeds of the business, plus the penalty and interest if applicable as provided by law, less deductions allowed by this act.

         The tax is exacted based on the "gross proceeds" of businesses making retail sales. "Gross proceeds" is defined by statute to mean "sales price, "[19] which in turn "means the total amount of consideration, including cash, credit, property, and services, for which tangible personal property or services are sold, leased, or rented, valued in money, whether received in money or otherwise . . . ."[20] Thus, the tax is levied on the monetary value of the consideration a retail seller receives, whether that consideration comes in the form of money or not.

         By its plain terms, "gross proceeds" encompasses purchases on credit.[21] When the buyer charges on credit, the tax becomes due at the completion of the contract for purchase and not when each installment payment is made.[22] Because the tax is due immediately, a seller may end up paying taxes on credit sales that never result in the actual receipt of any or all of the agreed upon consideration. In such cases, the seller has paid taxes on a buyer's mere promise to pay.

         The GSTA addresses this situation by creating a framework for sellers to recoup the sales tax paid based on "gross proceeds" that turn out to be worthless.[23] MCL 205.54i(2) provides that "[i]n computing the amount of tax levied under this act for any month, a taxpayer may deduct the amount of bad debts from his or her gross proceeds used for the computation of the tax." The statute provides the following definition of "bad debt" in MCL 205.54i(1)(a):

'Bad debt' means any portion of a debt that is related to a sale at retail taxable under this act for which gross proceeds are not otherwise deductible or excludable and that is eligible to be claimed, or could be eligible to be claimed if the taxpayer kept accounts on an accrual basis, as a deduction pursuant to section 166 of the internal revenue code, 26 USC 166.

         Thus a "bad debt" is equal to whatever the seller can deduct from its federal taxes under 26 USC 166, which provides:

(a) General rule.-
(1) Wholly worthless debts.-There shall be allowed as a deduction any debt which becomes worthless within the taxable year.
(2) Partially worthless debts.-When satisfied that a debt is recoverable only in part, the Secretary may allow such debt, in an amount not in excess of the part charged ...

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