918 N.W.2d 662
Mich.2018Background
- Ally and Santander (finance companies) bought retail installment contracts from dealerships that had collected and remitted Michigan sales tax on vehicle sales; the lenders obtained the right to collect payments and repossess vehicles on default.
- After defaults, lenders repossessed and resold many vehicles for less than the unpaid contract balances and charged off the shortfalls as bad debts for federal income tax under 26 U.S.C. § 166.
- Lenders sought refunds under Michigan’s bad-debt statute, MCL 205.54i, for the portion of previously remitted sales tax attributable to the uncollected debt; the Department of Treasury denied the claims on three grounds.
- The Department’s denials rested on (1) an interpretation that MCL 205.54i excludes all debts associated with repossessed property from being ‘‘bad debt,’’ (2) a requirement that claims be supported by validated RD-108 title forms, and (3) a conclusion that Ally’s election forms did not cover accounts written off before the election forms were executed.
- The Court of Claims and the Court of Appeals upheld the Department on all three grounds; the Michigan Supreme Court reviewed de novo and affirmed in part, reversed in part, and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Meaning of “repossessed property” in MCL 205.54i — whether repossession bars any refund for accounts tied to repossessed vehicles | Lenders: exclusion covers only the value of the repossessed property; the unrecovered portion of the account remains deductible/refundable as bad debt | Dept: ‘‘repossessed property’’ excludes the entire account attached to a repossessed vehicle, so no refund for any debt associated with repossession | Reversed Court of Appeals: ‘‘repossessed property’’ means the value actually recovered by repossession (the property’s value); unrecovered portion can qualify as bad debt under MCL 205.54i and §166. |
| Requirement to submit validated RD-108 forms as proof of tax payment | Lenders: RD-108s often are held by dealers and costly to obtain; alternative internal records should suffice | Dept: validated RD-108 is the best evidence that sales tax was paid and its amount; statute empowers Dept to require evidence it deems necessary | Affirmed: Department did not abuse discretion in requiring validated RD-108s; plaintiffs lacked a rational basis to show the requirement was arbitrary. |
| Validity/applicability of Ally’s written election forms (designating lender to claim refunds) to accounts written off before execution of the forms | Ally: ‘‘currently existing or created in the future’’ includes accounts previously written off because write-offs are bookkeeping designations and accounts remain ‘‘existing’’ and collectible | Dept: forms only apply prospectively to accounts existing at execution and future accounts; do not apply to accounts already written off | Reversed Court of Appeals: election language covers the written-off accounts; written-off accounts are still ‘‘currently existing’’ for purposes of the election requirement. |
Key Cases Cited
- People v. Pinkney, 501 Mich 259 (statutory interpretation; de novo review)
- SBC Health Midwest, Inc. v. City of Kentwood, 500 Mich 65 (rules on narrow construction of tax exemptions and statutory interpretation limits)
- Mich. United Conservation Clubs v. Lansing Twp., 423 Mich 661 (statutory construction principles)
- Menard, Inc. v. Dep’t of Treasury, 302 Mich App 467 (explaining bad-debt provision allows recovery when expected proceeds are not received)
- Citizens’ Acceptance Corp. v. United States, 462 F.2d 751 (discussing bad debt deduction for amounts reported as income but ultimately uncollected)