Summary
distinguishing Matz v. Department of Treasury, 155 Mich. App. 778, 401 N.W.2d 62 ( per curiam)
Summary of this case from Nebraska Rev. Dept. v. LoewensteinOpinion
Docket No. 126707.
Decided December 7, 1992, at 9:15 A.M.
Howard Howard (by Patrick R. Van Tiflin and Todd D. Chamberlain), for the plaintiff.
Frank J. Kelley, Attorney General, Thomas L. Casey, Solicitor General, and Russell E. Prins, Terry P. Gomoll, and Richard R. Roesch, Assistant Attorneys General, for the defendant.
Before: REILLY, P.J., and HOLBROOK, JR., and MARILYN KELLY, JJ.
This case involves an interpretation of Michigan's Single Business Tax Act (SBTA) for the purpose of determining whether certain arrangements known as "repo" transactions are "sales" as defined under the act. MCL 208.1 et seq.; MSA 7.558(1) et seq. Plaintiff appeals as of right from an order of the Court of Claims which ruled that the transactions in question were not sales, thus denying plaintiff requested tax refunds. On appeal, plaintiff again argues that its repo transactions constituted sales under the act. We disagree and affirm.
I
Plaintiff is a Pennsylvania corporation doing business in over thirty-five states, including Michigan. It operates a pickle processing plant in Holland, Michigan. In 1988, after recharacterizing its repo transactions as sales, plaintiff filed amended single business tax returns seeking refunds for the tax years 1984 through 1987. The alleged sales arose from the "purchase" of securities, certificates of deposit and commercial paper through repurchase (repo) agreements.
At the beginning of each business day, plaintiff's Cash Administrator, who worked in its Money and Banking Department, determined the cash needs of the company for that day. In the event of excess cash, the Cash Administrator contacted various financial institutions to determine which offered the highest yield. Then, the company's excess funds were wired to the institution offering the highest yield. The next day, the institution wired the funds back to plaintiff's account along with the previous day's earnings on them. The wireback was done automatically, without further contact from plaintiff. The securities, themselves, never changed hands.
II
The single business tax is a form of value-added tax which imposes a tax on the value added to a product at each step of its production and distribution. Trinova Corp v Treasury Dep't, 433 Mich. 141, 149; 445 N.W.2d 428 (1989), aff'd 498 US ___; 111 S Ct 818; 112 L Ed 2d 884 (1991). When calculating tax liability under the SBTA, a taxpayer must apportion its tax base according to the amount of activity it conducts inside as contrasted with outside the state. MCL 208.41; MSA 7.558(41). The tax base is the taxpayer's business income before apportionment. MCL 208.9(1); MSA 7.558(9)(1). The tax base is apportioned to Michigan by multiplying the tax base by:
Michigan Property Michigan Payroll Michigan Sales __________________ + _________________ + _______________ Total Property Total Payroll Total Sales __________________________________________________________ 3
MCL 208.45(1); MSA 7.558(45)(1). If the taxpayer's total sales increase, and the other factors remain constant, the taxpayer will owe less in single business taxes. See MCL 208.46; MSA 7.558(46); MCL 208.49; MSA 7.558(49); MCL 208.51; MSA 7.558(51).
A "sale" under the SBTA is defined as
the gross receipts arising from a transaction or transactions in which gross receipts constitute consideration: (a) for the transfer of title to, or possession of, property that is stock in trade or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the tax period or property held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business, or (b) for the performance of services, which constitute business activities other than those included in (a), or from any combination of (a) or (b). [MCL 208.7(1); MSA 7.558(7)(1).]
III
In this case, when plaintiff amended its single business tax returns, it increased its total sales by denominating its repo transactions as sales rather than as interest bearing investments. Plaintiff's amended returns increased the total sales factor by the entire amount of the repo transaction, which includes the return of capital and interest. These calculations resulted in a lower apportionment percentage attributable to Michigan.
The trial court ruled that the repo transactions did not involve stock in trade held by plaintiff primarily for sale to customers in the ordinary course of its business. In fact, the gain received from the transactions arose from plaintiff's attempts to avoid holding idle cash. The court recognized that plaintiff had created a profitable Department of Money and Banking. However, the department was formed for astute business operation, not for the sale of securities.
On appeal, plaintiff argues that the transactions in question involved the use of stock in trade. It asserts that the repo transactions were not merely collateralized loans but sales. It points out that express contractual language in the repurchase agreements or confirmation letters clearly established that plaintiff owned the securities. They contained such indicia of ownership as being alienable and vesting title and the risk of loss in plaintiff.
IV
We recently ruled in a case factually similar that receipts from the redemption and sale of certificates of deposit and other securities do not constitute sales under the SBTA. USX Corp v Treasury Dep't, 187 Mich. App. 256; 466 N.W.2d 294 (1991). In USX, the plaintiff "purchased" investment securities including certificates of deposit, commercial paper, stocks and bonds. The securities were acquired from those who issued them, then redeemed or resold to banks or investors. Id., 258.
In USX, we indicated there was insufficient evidence to categorize these transactions as sales. The trial court found that the plaintiff was neither in the business of selling securities to third parties nor licensed or registered as a dealer in marketable securities. The plaintiff's major lines of business were other than the sale of securities. The only evidence presented showed that the plaintiff was purchasing and selling securities for its own account. Id.
Plaintiff in this case admits that the facts underlying USX and this case are similar. In both, the alleged sales occurred soon after the alleged purchases. Plaintiffs' major lines of business were other than the sale of securities. Each created a department dealing only with the investment of excess cash. One distinction in this case is that the alleged sales frequently were evidenced by a repurchase agreement requiring the sellers to repurchase identical securities at a later specified date. In USX, the plaintiff had no such commitment.
Some of the repurchase agreements or confirmation letters stipulated as exhibits in this case identified the transactions in issue as purchases and sales. One confirmation letter stated that plaintiff had the same rights as the seller in the securities. However, we must consider the real nature of the transactions without regard to the terms applied to them by the parties. Central Discount Co v Revenue Dep't, 355 Mich. 463, 467; 94 N.W.2d 805 (1959).
Unlike the plaintiff in USX, plaintiff in this case could not sell the securities to third parties. It could retrieve them and sell them on the market only if the financial institutions where it invested failed to reacquire the securities at maturity pursuant to the repurchase agreements. The financial institutions never failed to reacquire the securities.
We agree with those courts which classify repo transactions as collateralized loans rather than purchases and sales. See Hammond Lead Products, Inc v Indiana Tax Comm, 575 N.E.2d 998 (Ind, 1991); Massman Construction Co v Director of Revenue, State of Missouri, 765 S.W.2d 592 (Mo, 1989). We disagree with plaintiff that Matz should control our decision. Matz v Treasury Dep't, 155 Mich. App. 778; 401 N.W.2d 62 (1986). Matz is clearly distinguishable from this case; it did not involve the short term investment of excess daily cash. Matz stands for the proposition merely that income from government securities flows through mutual funds to the original investors. Id.
Our classification of plaintiff's repo transactions as collateralized loans not sales is consistent with our ruling in USX. We find no reason to treat the transactions in this case differently from those in USX. Therefore, we conclude that the trial court did not err in ruling that plaintiff's repo transactions did not fall within the definition of sales under the SBTA.
Affirmed.