Opinion ID: 1708719
Heading Depth: 1
Heading Rank: 3

Heading: single business tax

Text: 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), enacted as 1975 PA 228, MCL 208.1 et seq.; MSA 7.558(1) et seq., was new and experimental legislation in this state. The single business tax (SBT) is best understood as a value added tax, although it is not a pure value added tax. Haughey, The Economic Logic of the Single Business Tax, 22 Wayne L Rev 1017, 1024-1027 (1976); McKim, The Single Business Tax Taxpayer, 22 Wayne L Rev 1043 (1976); Haughey, The Michigan Single Business Tax  Background and Objectives, 55 Mich St Bar J 262, 266-267 (1976). The SBT imposes a specific tax of 2.35% on the adjusted tax base of every person with business activity in this state. MCL 208.31(1); MSA 7.558(31)(1). Tax base is defined as business income subject to the adjustments in subsections (2)(9). MCL 208.9(1); MSA 7.558(9)(1). Business income is further defined as federal taxable income. MCL 208.3(3); MSA 7.558(3)(3). The SBTA, § 9, allows certain adjustments to business income, either subtractions from or additions to, prior to the computation of the tax. MCL 208.9; MSA 7.558(9). See, generally, 1 CCH Michigan Tax Reporter, ¶¶ 15-001  19-507. In calculating the tax base, the starting point is business income, to which § 9 adjustments are made. One such adjustment requires the addition to business income of compensation, MCL 208.9(5); MSA 7.558(9)(5), as well as dividends, interest, and royalties paid by the taxpayer, to the extent deducted from federal taxable income, MCL 208.9(4)(d), (f), (g); MSA 7.558(9)(4)(d), (f), (g). Another adjustment, the one here at issue, allows for the subtraction from business income, to the extent included in federal taxable income, of dividends, interest, and royalty income. MCL 208.9(7)(a), (b), (c); MSA 7.558(9)(7)(a), (b), (c). See, generally, Kasischke, Computation of the Michigan Single Business Tax: Theory and Mechanics, 22 Wayne L Rev 1069 (1976). The subtraction of the taxpayer's interest income from business income is [c]onsistent with value added theory, since receipt of this income does not result from use of capital by the recipient. Kasischke, supra, 22 Wayne L Rev, p 1081. Thus, the issue in this case is whether the money received by the appellants from the financial institutions is interest within the meaning of § 9 of the SBTA. If the amount paid to the dealer, in whatever form, by the financing institution is interest income, then that sum was properly deducted from business income on appellants' SBT return and the subsequent tax deficiency assessments by the defendant were improper because the amount rebated was properly excludable from the appellants' tax base upon which the single business tax is computed. However, if the money is not interest income, it is business income that is properly included in appellants' single business tax base, upon which the tax is computed. The parties have taken divergent positions in their respective accounts of the facts concerning the transaction in dispute and that disparity is aggravated because, in their travels upward through the appellate system, the dealerships have changed their version of the facts at each level of appeal. We think, however, that the shifting factual claims of the parties are not such as to create a genuine issue concerning any material fact, GCR 1963, 117.2(3), and that these cases were correctly resolved in the Tax Tribunal as a matter of law. In Town & Country Dodge, Inc, and Star Lincoln-Mercury, Inc, the Tax Tribunal stated that the appellants sold or assigned the financing paper to various institutions at a discount, and, in return, the assignee (financial institution) rebated to the appellants a small portion of the monthly payments made by the customer pursuant to the original time-price differential financing agreement. In McInerney, Inc, the Tax Tribunal stated that McInerney assigned the contract of sale to various lending institutions at a discount, and that McInerney received in return a portion of the time-price differential charge from the assignee. Although, as we have said, the small sum of money returned to appellants on each deal has been variously characterized by the parties and the tribunals below as a kickback, as a rebate, as a finder's fee, as a credit, as interest paid to appellants, as a discount, and as a refund on interest that appellants have paid, for the sake of discussion we will refer to that sum as a rebate. Since the rendition of the Tax Tribunal's decisions, appellants have asserted, in the Tax Tribunal, the Court of Appeals, and this Court, that the Tax Tribunal's description of the transaction at issue is incorrect, although appellants have done very little at any stage to clarify the facts surrounding the transaction. The majority of the Court of Appeals, in Town & Country Dodge and Star Lincoln-Mercury, found that the sums rebated to the appellants are in the nature of a finder's fee or a kickback. 118 Mich App 786. The majority also stated that even if the finance charges constituted interest to the financial institution that received monthly payments from the customer, the money rebated to appellants was not interest since the rebates were not payment for the use or loan of money. Dissenting Judge CAVANAGH concluded that the rebates were indeed interest and that the failure to treat the payments as interest would violate the public policy of the SBT. In this Court, appellants filed what they termed Response to Counter-Statement of Facts. Therein, appellants raise for the first time the topic of floor plan financing. The facts of the transaction in issue, as asserted in this Response, are significantly different than those that were asserted by appellants' counsel previously. Appellants now state that the financial institutions involved are those that finance the purchase of the vehicles by the appellants under a floor plan system, that financial institutions are reluctant to get involved in floor plan financing unless they in turn receive the assignment of the time-price differential purchases and financing agreements between the dealer and his customers, that the retail purchase of the vehicles by the customers from the appellants is where the financial institutions make their profit, not from floor plan financing, and that the interest that appellants pay on their floor plan financing to the financial institutions is an interest expense which is included in the tax base for the computation of the single business tax. Moreover, appellants now assert that when they assign their customers' notes and security agreements to the financial institutions involved what they receive in return is a partial refund of the floor plan financing interest they have previously paid. Appellants characterize this rebate as a credit to the appellants' interest expense. Appellants further state that this refund of the floor plan financing is properly included as interest income since it is the opposite side of the T account in the appellants' ledger. The refund of this interest on floor plan financing is reflected in the appellants' accounting journal as interest income since it is a credit to interest expense. Appellants assert that the following occurs: A. The financial institutions involved, which participate with the Appellants in the floor plan financing, are then given their appropriate share of the assignment of loan documents from Appellants' customers whereby a greater profit is made by such financial institutions. B. The Appellants are able to obtain floor plan financing by assigning the documents as executed by their customers to the financial institutions involved. C. That the Appellants, as automobile dealers participating in the floor plan financing, pay interest expense which is included in the gross amount for which the basis of the Single Business Tax is computed. D. That pursuant to Generally Accepted Accounting Principles (GAAP), the refund of the interest expense is now credited with the interest refund making it, in effect, `interest income' which is now deleted from the total basis which is determined for the computation of the Single Business Tax. Response to Counter Statement of Facts, p 3. (Emphasis added.) It is regrettable that the appellants' counsel has repeatedly, throughout the course of this litigation, altered the description of facts which are said to underlie a typical third-party financing agreement, even to the point of offering a new version of the facts before this Court. Upon careful consideration, however, we are persuaded that, under any of the factual patterns described at various stages of this litigation, the sums rebated to the dealerships by the financial institutions in the third-party financing arrangements are not sums paid for the use of or forbearance from use of money and, consequently, are properly includable in appellants' tax base for SBT purposes.