Internet Research Project Memo: Finance

Internet Research Project Memo: Finance Company Sales Tax Applicability Facts: A Michigan finance company financed consumer purchases of automobiles from affiliated dealers, including the cost of sales tax. The finance company was independently responsible for assessing the credit worthiness of its borrowers. The finance company paid the dealers the full price of the car, including the sales tax. The dealers would then pay the sales tax to the state of Michigan, as required under the Michigan General Sales Tax Law.

Some of the debts ended up being uncollectable and the finance company added up the bad debt amounts and applied to the State of Michigan Sales Tax department for a refund of the sales tax paid to the dealers. The state's position was that the finance company was not the taxpayer.

Issue: Is a finance company that financed the entire purchase price of an automobile, including the sales tax, entitled to a refund of the sales tax paid if the debt is later deemed to be uncollectable? Is the finance company considered the taxpayer? Reasoning: The Michigan General Sales Tax Act, PA 167 of 1933, provides that a taxpayer is any person subject to the general sales tax.

It also stipulates that sales tax applies to "A conditional sale, installment lease sale, or other transfer of property, if title is retained as security for the purchase but is intended to be transferred later." Furthermore, the sales tax applies to "all persons engaged in the business of making sales at retail, 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." In Daimler Chrysler Services North America LLC v.

Department of Treasury, Michigan Court of Appeals, No. 264323 (2006), the Court was called upon to address a similar issue. The creditor, Daimler Chrysler, overpaid tax revenue to the treasury for motor vehicles sold to consumers by its affiliated dealers and sought relief under the bad-debt provision of the General Sales Tax, which allowed taxpayers to recover overpayment when expected sales proceeds were not received.

The trial court determined that Daimler Chrysler was not a taxpayer, and determined that there was no nexus between the bad debt and the retail sales of the automobiles by the dealers. The Court disagreed with the trial court's decision and held that Daimler Chrysler was a taxpayer under the bad-debt provision, that there was a nexus between Daimler Chrysler's pad debt and the retail sales, and that Daimler Chrysler could recover under the bad-debt provision. Analysis: Following the reasoning in Daimler Chrysler v.

Department of Treasury, it seems clear that the Michigan Finance Company is a taxpayer under the Michigan General Sales Tax Act. In that case, as in the case at issue, the Department of the Treasury's position was that only one entity could be considered a taxpayer in each transaction, and that entity had to be the actual retailer, because it was the entity responsible directly to the treasury for payment of the tax.

Michigan law prohibited parties from participating in motor vehicle finance unless they were a either an installment dealer of automobiles or a finance company. Because the finance company was within the scope of businesses who could participate in a retail sales finance contract for automobiles, and it did so in direct cooperation with its affiliated dealers, it was acting as part of a joint venture in the sale of the automobiles. Therefore, it was one of the entities contemplated as a taxpayer under the Michigan General Sales Tax Act.

Though the statutory language changed after the events in Daimler Chrysler, it still encompassed parties participating in any part of the retail transaction. Given that the majority of car sales involve finance companies, it is clear that a finance company would be a foreseeable, perhaps even an expected part of a retail automobile sales contract. Furthermore, the finance contract was certainly within the scope of the finance company's ordinary business, which was to provide financing for retail automobile sales.

In addition, because the finance company worked exclusively with its own affiliated dealerships, it is clear that the dealerships and the finance companies were working together as a unit for the automobile retail sales. Most importantly, because the tax was aimed at all persons and businesses engaged in retail sales, the applicability of the tax ultimately rests on whether the finance company was an entity engaged in retail sales. Clearly, the entire purpose of the finance company was to.