Town & Country Dodge, Inc. v. Department of Treasury

Allen, J.

This consolidated appeal involves separate taxpayers, each of whom appeal by right from an order of the Tax Tribunal granting sum*782mary judgment in favor of respondent Michigan Department of Treasury. In docket no. 58068, Town and Country Dodge was found liable for a single business tax deficiency of $3,956.10 for the 1976 and 1977 tax years. In docket no. 58069, Star Lincoln-Mercury was found liable for a single business tax deficiency of $14,849.11 for the 1976-1979 inclusive tax years. Except for the amount of liability and the tax years involved, the facts and issues of each appeal are identical.

Petitioners are operators of new car dealerships who challenge assessments made by the respondent pursuant to the Single Business Tax Act, MCL 208.1 et seq.; MSA 7.558(1) et seq. The controversy involves the meaning of the term "interest”, as that term is used in § 9 of the act, MCL 208.9; MSA 7.558(9). Some of the sales made by the petitioners to their customers involve dealer financing. Customers who engage in financing through the petitioners execute notes to the petitioners and incur the obligation to pay an amount in excess thereof which represents the cost of financing (finance charge). The petitioners assign the notes to financial institutions at a price which is greater than the purchase price of the automobile but less than the full face value of the note (i.e., at a discount).

The customers then pay the financial institution the full face value of the note in monthly installments, usually over a 48-month period. From time to time, the financial institution rebates to the dealer a small portion of the monthly payment. The small portion rebated is the amount by which the full face value of the note is discounted. It is this small portion rebated which is the subject of dispute in the instant case. The Department of Treasury characterizes this amount as a "rebate” or "finder’s fee” which constitutes business income *783and is includable in computing the dealer’s tax base for single business tax purposes. On the other hand, petitioners argue that the rebates represent a small portion of the interest on the notes and thus are deductible from their tax base pursuant to § 9 of the act.

The Tax Tribunal ruled that the amount rebated was a small portion of the "finance charge” which the tribunal defined as "the consideration over and above the cost of the car, i.e., the cost of credit”. According to the tribunal, the term "finance charge” and "interest” are mutually exclusive terms of art:

"Michigan case law further supports the distinction between interest and a finance charge. 'Interest’ has been defined as 'the compensation allowed by law or fixed by the. parties for the use or forbearance of money, or as damages for. its detention’, Marion v Detroit, 284 Mich 476; 280 NW 26 (1938); 'as a charge for the loan or forbearance of money * * *, Balch v Detroit Trust Co, 312 Mich 146; 20 NW2d 138 (1945); and as stated in Coon v Schlimme Dairy Co, 294 Mich 51; 292 NW 560 (1940), 'interest is pay for the use of money’. Interest therefore is a charge which can be added when money (in some form or another) is loaned from one party to another.
"A finance charge or time-price differential is the difference in total amount paid for goods or services when and if the seller is willing to be paid over time rather than immediately (cash sale).
"When the petitioner discounts the paper to various assignees, what it receives back is simply a portion of that finance charge.”

1975 PA 228, § 3(3), as amended (Michigan Single Business Tax Act, hereafter "SBT”), being MCL 208.3(3); MSA 7.558(3), defines "business income” as follows:

*784" 'Business income’ means federal taxable income, except that for a person other than a corporation it means that part of federal taxable income derived from business activity. For a partnership, business income includes payments and items of income and expense which are attributable to business activity of the partnership and separately reported to the partners.”

Section 9(1) of the statute, MCL 208.9(1); MSA 7.558(9)(1), defines the term "tax base”:

" 'Tax base’ means business income, before apportionment, or allocation as provided in chapter 3, even if zero or negative, subject to the adjustments in subsections (2) to (9).”

Pursuant to § 9, subsection (7)(b), MCL 208.9(7)(b); MSA 7.558(9)(7)(b), a taxpayer may in determining "tax base” deduct all interest to the extent that such interest was included in arriving at the taxpayer’s federal taxable income.

Thus, the sole issue involved in the proceedings before the Michigan Tax Tribunal and the issue now before this Court on appeal is whether the amount of payment made by the financial institution to the dealer was interest income excludable from the petitioners’ single business tax base, SBT § 9(7)(b), or whether the income was to be properly considered as business income includable in such tax base, SBT § 9(1). Resolution of this issue depends upon a clear understanding of the nature of the transaction involved.

A hypothetical example of a dealer financed sale (also known as indirect financing) will be helpful. Assume that buyer (B) purchases a car from dealer (D) for $7,301 paying in cash or trade-in $1,501, leaving a balance due of $5,800 to be paid over a 48-month period at 14.35% interest. The total finance charge ($1,855.04) plus the balance due on *785the car ($5,800) is $7,655.04. B signs a note for $7,655.04 spread over 48 monthly installments of $159.48, agrees to D’s assignment of the note to a financial institution (FI) and that he (B) will repay the note in 48 monthly payments of $159.48 to FI. D then takes the note to FI which discounts the finance charge of $1,855.04 by one-half of one percent, viz.: $9.48. FI issues a check to D for $5,800 and B makes 48 monthly payments of $159.48 each to FI. From time to time, usually quarterly, FI rebates to D a portion of the $9.48. While the amount returned on a single transaction is small, the combined amount of rebates on a number of transactions can be substantial.1

It is the treatment of the $9.48 for single business tax purposes which is the subject matter of the instant dispute. Petitioners contend that since the payment by B to FI is interest, so too, a rebate of a part thereof by FI to D is interest. The Attorney General, representing respondent Department of Treasury, argues that assuming, arguendo, the finance charge paid by D to FI is interest, the rebate of a portion of such charge by FI to D is not interest income excludable from D’s single business tax base under § 9(7)(b). We agree with the Attorney General.

Under Michigan law, interest has been variously defined as "the compensation allowed by law or fixed by the parties for the use or forbearance of money”, Marion v Detroit, 284 Mich 476, 484; 280 NW 26 (1938), or "a charge for the loan or forbearance of money”, Balch v Detroit Trust Co, 312 Mich 146, 152; 20 NW2d 138 (1945). In short, it is a sum "paid for the use of money”, Coon v *786Schlimme Dairy Co, 294 Mich 51, 56; 292 NW 560 (1940), or "for the delay in the payment of money”, Drennan v Herzog, 56 Mich 467, 469; 23 NW 170 (1885). Under any of the foregoing definitions, the sums rebated to petitioner dealers were not a repayment for the use of or the loan of money. The dealers did not advance money to the buyers. It was the financial institution which made the loan. Furthermore, in case of default in payment by the buyer, the financial institution had no recourse against the dealer.

The Attorney General argues, and we agree, that the sums rebated to D by FI are payments for the services performed by D in filling out the papers and bringing the business to a named financial institution. It is in the nature of a finder’s fee. In common parlance it is a "kickback”, though we dislike that term because it implies something illegal. There is nothing illegal in discounting a note as a reward or incentive for supplying the business. It is a well recognized legitimate business practice. Basically, rebates made by lending institutions to automobile dealers are payments for labor and services rendered. As such, the payments are business income, properly included in the tax base under § 9(1) of the statute.

The single business tax is designed to tax what a business has added to the economy, as distinguished from the income tax which taxes that which is derived from the economy. Stockler v Dep’t of Treasury, 75 Mich App 640; 255 NW2d 718 (1977), lv den 402 Mich 802 (1977), app dis 435 US 963 (1978). In that respect, it is the antithesis of the income tax which adds interest to the tas; base but allows deductions for labor and services. See Constitutionality of the Michigan Single Business Tax, 25 Wayne L Rev 1309 (1979). Because *787the payments made by the lending financial institutions to the dealers in the instant case are basically payments for performing the paper work and bringing the notes to the lending institutions, they are in the nature of business income includable under § 9(1) in the tax base. Though paid out of funds which the lending institution received as income, the payment itself is for services rendered. To hold otherwise elevates form over the realities of the marketplace.

Contributing to the problem in the instant case is the breadth of the Tax Tribunal’s opinion. According to the Tax Tribunal, the total amount of the note over and above the cost of the automobile is a finance charge or time-price differential, no part of which is interest. We think the Tax Tribunal painted with too broad a brush. As noted in the hypothetical example cited earlier, payments made by the buyer to the lending institution are payments for the buyer’s use of money. As such, they certainly are, if not interest, at least in the nature of interest to the lending institution. But the payment by the buyer of interest to the lending institution is not dispositive of whether the rebate by the lending institution to the dealer of a portion of said payment is interest income. Instead, it is a payment for labor and services rendered which add to the economy. As such, it is not excludable under § 9(7)(b) of the statute.

The Single Business Tax Act does not define the term "interest”. However, § 2(2) of the statute, MCL 208.2; MSA 7.558(2), provides that a term used in the act "and not defined differently, shall have the same meaning as when used in comparable context in the laws of the United States relating to federal income taxes in effect for the tax year unless a different meaning is clearly re*788quired”. In Deputy v du Pont, 308 US 488; 60 S Ct 363; 84 L Ed 416 (1940), the United States Supreme Court defined interest for federal income tax purposes in language virtually identical to the definition of interest found in Marion v Detroit, supra, and other Michigan cases cited earlier in this opinion.

"In Old Colony R Co v Comm’r of Internal Revenue, 284 US 552; 52 S Ct 211; 76 L Ed 484 [1932], this Court had before it the meaning of the word 'interest’ as used in the comparable provision of the [November 23] 1921 Act (42 Stat 227). It said, p 560 '* * * as respects "interest”, the usual import of the term is the amount which one has contracted to pay for the use of borrowed money.’ It there rejected the contention that it meant 'effective interest’ within the theory of accounting or that 'Congress used the word having in mind any concept other than the usual, ordinary and everyday meaning of the term.’ p 561. It refused to assume that the Congress used the term with reference to 'some esoteric concept derived from subtle and theoretic analysis.’ p 561.
"We likewise refuse to make that assumption here. It is not enough, as urged by respondent, that 'interest’ or 'indebtedness’ in their original classical context may have permitted this broader meaning. We are dealing with the context of a revenue act and words which have today a well-known meaning. In the business world 'interest on indebtedness’ means compensation for the use or forbearance of money. In absence of clear evidence to the contrary, we assume that Congress has used these words in that sense. In sum, we cannot sacrifice the 'plain, obvious and rational meaning’ of the statute even for 'the exigency of a hard case.’” 308 US 497-498. (Emphasis added; footnotes omitted.)

We repeat. Petitioner automobile dealers did not loan the money in the situation before us. The loan was made by the various lending institutions who were repaid by the purchasers. Thus, under *789federal law the rebates were not for repayment of loans or use of money by the dealers. Instead, the rebates were for services performed.

Finally, we observe that the single business tax became effective January 1, 1976. During the six years it has been in existence, sums paid to automobile dealers by lending institutions who have loaned money to purchasers on terms similar to those in the instant case have always been treated as a legitimate finder’s fee or a payment for services constituting business income under §9(1) of the statute. Although appellate tribunals are not bound by an administrative body’s interpretation of statutes falling within its powers to administer, Lorraine Cab v Detroit, 357 Mich 379, 384; 98 NW2d 607 (1959), administrative interpretation given a statute over a period of years is entitled to great weight, Wyandotte Bank v Banking Comm’r, 347 Mich 33, 48; 78 NW2d 612 (1956), and should not be overruled without the most cogent of reasons. Raven v Wayne County Bd of Comm’rs, 52 Mich App 196, 200; 217 NW2d 116 (1974).

Petitioners raise several additional issues all of which pertain to the constitutionality of the single business tax.2 None of those issues were raised in the Tax Tribunal. As a general rule, failure to raise an issue below precludes appellate review even if the claim may be of merit. Oakland County v Detroit, 81 Mich App 308, 313; 265 NW2d 130 (1978), lv den 403 Mich 810 (1978); Penner v Seaway Hospital, 102 Mich App 697, 706; 302 NW2d 285 (1981). The rationale for the rule is to give this Court the benefit of the lower court’s *790input. Recently, in Eyde v Lansing Twp, 105 Mich App 370, 376; 306 NW2d 797 (1981), this Court held that the Tax Tribunal had the authority to pass upon constitutional issues. Accordingly, we decline to consider the constitutional issues raised.

Affirmed. No costs, a question of public importance being involved.

E. C. Penzien, J., concurred.

The total rebate of $9.48 when spread over 48 payments amounts to only some $.17 per payment. However, the amount is greater in the initial years of the repayment schedule and gradually declines as the note is paid.

The additional issues are: (1) does the SBT act violate the United States Constitution by levying a tax on the privilege of engaging in business; (2) does the SBT act impose double taxation on income in violation of Const 1963, art 9, § 3; and (3) does the SBT act constitute a graduated income tax in violation of Const 1963, art 9, § 7?