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S T A T E O F M I C H I G A N

C O U R T O F A P P E A L S

CAPITAL ONE, N.A.,

Plaintiff-Appellant,

UNPUBLISHED

August 14, 2018

v No. 340635

Court of Claims

STATE TREASURER, STATE OF MICHIGAN, 

and DEPARTMENT OF TREASURY,

LC No. 16-000201-MT

Defendants-Appellees.

Before: MURPHY, P.J., and GLEICHER and LETICA, JJ.

PER CURIAM.

The Court of Claims summarily dismissed Capital One’s challenge to the denial of its 

request for a sales tax refund on “bad debt” by the State Treasurer, State of Michigan, and 

Department of Treasury (defendants). Although the Court of Claims erroneously determined 

that Capital One presented invalid election forms designating it as the party entitled to claim a 

deduction and erroneously interpreted the exclusion of repossessed property from the definition 

of “bad debt,” the court properly dismissed the complaint because Capital One failed to produce 

supporting evidence requested by defendants. We affirm.

I. BACKGROUND

In May 2012, Capital One purchased approximately $30 billion in credit card loans from 

HSBC Bank of Nevada, N.A., including HSBC’s private label credit card (PLCC) portfolio. A 

PLCC is a store-branded credit card that can only be used at that retailer, like a Best Buy or 

Kohl’s charge. See MCL 205.54i(1)(d). When a customer makes a purchase using a PLLC, he 

or she finances both the cost of the item and the sales tax. The lender does not submit the sales 

tax to the state piecemeal as the debt is repaid, but upfront when the purchase is made.

When a customer defaults wholly or in part on his or her credit card debt and collection 

efforts fail, Capital One determines the debt to be worthless and uncollectible, or “bad debt.” 

Capital One can then claim bad debt deductions on its federal and state income tax filings. On 

September 27, 2013, Capital One submitted a letter to defendants requesting a refund pursuant to 

MCL 205.54i “for the period of October 1, 2009 through June 30, 2013 in the amount of 
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$8,691,658.20 relating to the pro rata portion of sales tax relating to unpaid balance of worthless 

accounts which have been charged off for federal income tax purposes.”1

Defendants did not deny Capital One’s refund request, but asked for 

“[d]ocumentation . . . to substantiate how [Capital One] arrived at the amount of [its] request” 

pursuant to MCL 205.54i(4), which provides, in relevant part, “Any claim for a bad debt 

deduction under this section shall be supported by that evidence required by the department.” 

Specifically, defendants requested documentation “to substantiate the account receivable has 

been found worthless and has been written off for the . . . years in question” and proof that the 

subject cards were PLCCs and not dual purpose cards that could be used at other retailers. 

Defendants required “[e]vidence that the tax was paid on the original taxable transaction.” This 

could be provided through “a sampling of customer account statements.” Defendants further 

advised that the “statements should detail all items purchased during the period.” Finally, 

defendants noted that bad debt does not include repossessed property. See MCL 205.54i(1)(a).2 

Accordingly, defendants directed Capital One “to subtract repossessed property” from its refund 

calculation.

Capital One provided a large amount of information in response to defendants’ request, 

but did not provide statements detailing each item purchased in its sampling of customer 

accounts. Moreover, defendants rejected “election forms” designating Capital One as the proper 

party to assert the bad debt deduction that were signed only after the customer had defaulted on 

the debt and the lender had charged off the account. Such election forms are required by MCL 

205.54i(3), which provides:

After September 30, 2009, if a taxpayer who reported the tax and a lender execute 

and maintain a written election designating which party may claim the deduction, 

a claimant is entitled to a deduction or refund of the tax related to a sale at retail 

that was previously reported and paid if all of the following conditions are met:

(a) No deduction or refund was previously claimed or allowed on any portion of 

the account receivable.

 1 To “charge off” means that “the creditor has given up on trying to collect an unpaid debt” and 

has notified the credit bureaus to add this negative mark on the customer’s credit report. See <

https://www.experian.com/blogs/ask-experian/category/credit-advice/report-advice/charge-off/> 

(accessed August 3, 2018).

2 MCL 205.54i(1)(a) defines bad debt, in relevant part, as:

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. A bad debt shall not include . . . repossessed 

property.
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(b) The account receivable has been found worthless and written off by the 

taxpayer that made the sale or the lender on or after September 30, 2009.

As a result, defendants authorized a refund of only $6,600.46.

Capital One filed suit in the Court of Claims seeking to recover its full sales tax refund 

request. After discovery, the parties filed cross-motions for summary disposition. Capital One 

asserted that the plain language of MCL 205.54i did not require election forms to be executed 

before the bad debts were charged off as uncollectible and allowed for partial recovery on 

repossessed property, and that defendants’ request for detailed statements including all items 

purchased was improper. Defendants, on the other hand, contended that the statutory definition 

of “bad debt” excluded repossessed property, that Capital One failed to prove it actually paid 

sales tax on any of the accounts at issue, and that its election forms were insufficient. The circuit

court agreed with defendants that Capital One’s written elections were insufficient, that Capital 

One failed to submit sufficient evidence to show actual sales tax paid, and that all repossessed 

property was excluded from the definition of bad debt. The court therefore dismissed Capital 

One’s complaint.

II. STANDARDS OF REVIEW

We review de novo a lower court’s resolution of a summary disposition motion. Zaher v 

Miotke, 300 Mich App 132, 139; 832 NW2d 266 (2013). “A motion under MCR 2.116(C)(10) 

tests the factual support of a plaintiff's claim,” and we must review the evidence in favoring of 

the nonmoving party to determine if it created a genuine issue of material fact for the factfinder’s 

review. Id. (quotation marks and citations omitted). We also review de novo a trial court’s 

interpretation of a statute. Id. at 140.

III. SUFFICIENCY OF ELECTIONS FORMS

Capital One continues to contend that its election forms were valid and supported its sales 

tax refund request. Capital One concedes that the subject election forms were not executed until 

after it or HSBC charged off the bad debt. The Michigan Supreme Court recently considered 

this issue in Ally Fin Inc v State Treasurer, ___ Mich ___; ___ NW2d ___ (Docket Nos. 154668, 

154669, and 154670, decided July 20, 2018), and determined that belatedly executed election 

forms are sufficient under the statute. Id., slip op at 22.

Ally, slip op at 6, explained:

MCL 205.54i permits retailers and lenders to seek a refund for sales taxes 

paid on a “bad debt,” as defined by the statute. 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. The statute further provides that 

any claim “shall be supported by that evidence required by the department.” 

[Citations omitted.]

In relation to election forms, the Court explained:
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Under MCL 205.54i, two entities can potentially claim a bad-debt 

refund—the retailer that remitted the sales tax to the Department or the lender 

holding the account receivable. The statute requires that the party seeking a tax 

refund for a bad debt must provide the Department with a written election 

document designating whether the retailer or the lender may claim the refund. 

MCL 205.54i(3) provides:

After September 30, 2009, if a taxpayer who reported the tax and a lender 

execute and maintain a written election designating which party may claim 

the deduction, a claimant is entitled to a deduction or refund of the tax 

related to a sale at retail that was previously reported and paid if all of the 

following conditions are met:

(a) No deduction or refund was previously claimed or allowed on any 

portion of the account receivable.

(b) The account receivable has been found worthless and written off by the 

taxpayer that made the sale or the lender on or after September 30, 2009. 

Ally, slip op at 20.]

Here, just as in Ally, slip op at 21, defendants contended that Capital One did not 

“execute and maintain” the written election as the debts were charged off as uncollectible years 

before the forms were signed. To explain its decision that charged-off debts were still 

“maintained,” the Supreme Court in Ally, slip op at 21-22, explained:

Some background on when and how accounts must be written off is 

helpful in addressing this issue. In order to claim a bad-debt deduction or refund 

under the statute, the debt must have been charged off as uncollectible in the 

records of the entity claiming the deduction or refund. MCL 205.54i(2) provides:

In 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 amount of gross proceeds 

deducted must be charged off as uncollectible on the books and records of 

the taxpayer at the time the debt becomes worthless and deducted on the 

return for the period during which the bad debt is written off as 

uncollectible in the claimant’s books and records and must be eligible to be 

deducted for federal income tax purposes.

A write-off is simply an internal recognition by a lender that an account is 

worthless after attempts at collection have failed. As the Supreme Court of 

Wisconsin has explained, “When a lending institution ‘writes off’ a ‘bad debt,’ it 

is merely indicating that the debt is uncollectible. That is, it is no longer an asset 

of the institution. A ‘write off’ does not mean that the institution has forgiven the 

debt or that the debt is not still owing.” [Mitchell Bank v Schanke, 268 Wis 2d 

571, 582 n 7; 2004 WI 13; 676 NW2d 849 (2004).] 
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Our Legislature has recognized that the debt is still owing—and may be 

collected—after it is written off and has required taxpayers to repay the amount 

deducted as bad debt on such amounts. Because written-off accounts still 

continue to be collectible and are only deemed worthless for tax computation and 

accounting purposes, the Court of Appeals erred by holding that Ally’s previously

written-off accounts were not “currently existing” at the time that the election 

forms were executed. [Emphasis in original.]

Ally is directly on point and negates defendants’ defense of their denial of Capital One’s 

refund in this regard. Accordingly, the Court of Claims erred in ruling that Capital One’s 

election forms were invalid. They were valid and supported Capital One’s refund claim.

IV. EVIDENTIARY SUPPORT

Capital One further challenges the Court of Claims’ determination that defendants 

properly directed it to produce documentation to show actual sales tax paid. In filing the 

requested documentation, Capital One provided a “taxable percentage” calculation to determine 

the sales tax it and its predecessor had paid,3 a method Capital One employs in several other 

states. Citing MCL 205.54i(4) (“[a]ny claim for a bad debt deduction under this section shall be 

supported by that evidence required by the department”), the Court of Claims concluded that 

defendants had discretion to request such documents. This ruling is supported by Ally.

In Ally, slip op at 4-5, the Department instructed the taxpayers, companies that financed 

vehicle purchases through installment contracts, to present “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.” The Supreme Court noted that the Department is “given discretion 

by the bad-debt statute to determine the evidence required for a party’s claim for a deduction or 

refund,” and that court must uphold the Department’s exercise of that discretion “if supported by 

a rational basis.” Id. at 18.

Defendants requested Capital One to provide “a sampling of customer account 

statements” that “should detail all items purchased during the period.” Instead, Capital One 

provided spreadsheets showing full account histories for a sample of 50 accounts and a 

spreadsheet with basic information about all accounts included in the refund claim. Capital One 

readily admits that these documents did not detail all items purchased as directed. But, Capital 

One argues, defendants’ request was unreasonable. Capital One had available to it the requested 

information and we discern no ground to conclude that defendants acted outside of their 

discretion. The Court of Claims, therefore, did not err in dismissing Capital One’s complaint on 

this ground.

 3 Capital One describes that a “taxable percentage” is an estimate of sales tax paid, calculated by 

reviewing all items purchased on an account and factoring out a proportion of the purchases to 

account for nontaxable sales.
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V. REPOSSESSED PROPERTY

Finally, Capital One insists that it may recoup sales tax paid on deficiencies after the sale 

of repossessed property. This issue was resolved in Ally in favor of Capital One’s position. 

The Court in Ally, slip op at 9-17, extensively analyzed the language employed in MCL 

205.54i(1)(a)’s definition of “bad debt,” as well the definition of such debt under 26 USC 166. 

The Court noted that that the statute excluded “repossessed property” from the definition. Ally, 

slip op at 10. The plaintiff taxpayers in Ally campaigned for an interpretation “refer[ring] to the 

value of the repossessed property”; the Department, on the other hand, interpreted the statute “as 

referring to the entire value of the account, i.e., the value of the account before it was 

repossessed.” Id. Under the taxpayers’ definition, “the uncollectible amount not recouped from 

the sale of the property would remain a refundable ‘bad debt,’ ” while under the Department’s 

definition, it would not. Id. at 10-11.

The Court held in favor of the taxpayers. In doing so, it reasoned that the Department’s 

interpretation would “impose a sales tax on consideration that later became worthless—it would 

tax uncollectible debt,” an unreasonable reading of the statutory language. Id. at 11. By citing 

only “repossessed property,” the Legislature intended “only the value of the repossessed property 

itself is to be excluded.” Id. By holding to the contrary, the Court of Claims erred in this case.

Although the Court of Claims erroneously determined that Capital One’s election forms 

were invalid and that Capital One was not entitled to a refund of that portion of the sales tax paid 

on repossessed items that resold for less than the debt amount, Capital One is not entitled to 

relief. The Court of Claims correctly determined that Capital One failed to produce supporting 

evidence requested by defendants. Accordingly, defendants were still entitled to summary 

dismissal of Capital One’s complaint.

We affirm.

/s/ William B. Murphy 

/s/ Elizabeth L. Gleicher 

/s/ Anica Letica