Michigan Purchase Agreements by ima13050

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									                                STATE OF MICHIGAN
                    DEPARTMENT OF LABOR AND ECONOMIC GROWTH
                             MICHIGAN TAX TRIBUNAL


Continental Rental, Inc.,
               Petitioner,

v                                                        MTT Docket No. 297569

Michigan Department of Treasury
              Respondent.                                Tribunal Judge Presiding
                                                         Jack Van Coevering


                                    OPINION AND JUDGMENT


This matter having been heard before Administrative Law Judge Thomas A. Halick, and a Proposed

Judgment having been issued on January 28, 2005, and no exceptions or written arguments having been

filed, and the Tribunal, pursuant to Section 26 of the Tax Tribunal Act, as amended by 1980 PA 437,

having given due consideration to the case file, does hereby adopt and incorporate by reference the

findings of fact and conclusions of law in the said Proposed Judgment as the final decision of the

Tribunal.

                                                         MICHIGAN TAX TRIBUNAL

Entered: April 28, 2005                                  By:     Jack Van Coevering




                                                  ***

                               STATE OF MICHIGAN
                    DEPARTMENT OF LABOR AND ECONOMIC GROWTH
                             MICHIGAN TAX TRIBUNAL
                                NONPROPERTY TAX
MTT Docket No. 297569
Opinion & Judgment
Page 2


Continental Rental, Inc.
       Petitioner,

v                                                                           MTT Docket No. 297569

Michigan Department of Treasury,                                    Administrative Law Judge Presiding
       Respondent.                                                         Thomas A. Halick




                              PROPOSED OPINION AND JUDGMENT

Petitioner appeals an assessment of use tax upon “reinstatement fees” received from consumers under

“rental purchase agreements.” This appeal was decided on briefs and stipulated facts. The Tribunal

holds that the final assessment is affirmed.




        Assessment No.                Tax                  Penalty                  Interest

             J985731              $28,008.00                None            To be calculated as
                                                                            provided by law.


Findings of Fact

The Joint Stipulation dated March 16, 2004 contains the following facts:

        1. Petitioner, Continental Rental, Inc., is a Michigan corporation with its principal office

            located in Bay City, Michigan.

        2. For the tax periods January 1, 1996 through August 31, 1999 Petitioner did not include

            “reinstatement fees” in its rental receipts when calculating its use tax.
MTT Docket No. 297569
Opinion & Judgment
Page 3

      3. For the tax periods January 1, 1996 through August 31, 1999, the amount of unpaid use tax

         on reinstatement fees at issue in this appeal is $27,984.60 plus interest provided by law.

      4. For purposes of this appeal, Petitioner does not dispute the assessment of $23.40 in use tax

         attributable to delivery charges.

      5. Petitioner operates rental purchase stores, otherwise known as “rent-to-own” stores, in the

         State of Michigan.

      6. Petitioner enters into Rental Purchase Agreements with its customers for the use of

         consumer durable property such as televisions, stereos, camcorders, computers, furniture

         and appliances.

      7. The Michigan Rental-Purchase Agreement Act, MCL 445.953(1)(f), provides that Rental-

         Purchase Agreements shall be in the form of a written statement and shall include, among

         other things, the lessee’s right to reinstate and the amount or method of determining the

         amount of any penalty or other charge for reinstatement as established in Section 8 of the

         Act, MCL 445.958.

      8. Section 8 of the Act, MCL 445.958, provides:

             (1) A lessee who fails to make timely periodic payments shall have the right to reinstate

                 the original rental-purchase agreement without losing any rights or options

                 previously acquired under the rental-purchase agreement if both of the following

                 apply:

                       (a) The lessee has not missed more than 3 periodic payments.
MTT Docket No. 297569
Opinion & Judgment
Page 4

                         (b) More than 1 periodic scheduled payment has been missed and the lessee

                             has surrendered the item to the lessor during the time in which payments

                             were missed.




               (2) A lessee shall not be charged a reinstatement fee due to missed payments unless the

                   lessee has missed more than 1 periodic payment. A reinstatement fee shall equal the

                   outstanding balance of any missed payments plus 5% of the balance of the missed

                   payments or $5.00, whichever is less. A delivery fee not to exceed the original

                   delivery fee may be charged if redelivery of an item is necessary.

               (3) If reinstatement occurs pursuant to this section, the lessor shall provide the lessee

                   with either the same item leased by the lessee prior to reinstatement or a substitute

                   item is provided, the lessor shall provide the lessee with all of the information

                   required in section 3.




   9. “Rights or options previously acquired under the rental-purchase agreement,” as described in

   Section 8(1) of the Act, include the right to acquire ownership of the rental property through

   periodic rental payments, i.e., accrued equity.

   10. Exhibit A is a true and authentic copy of the statutory form rental-purchase agreement set forth

   in MCL 445.970.

   11. Exhibit B is a true and authentic copy of representative Rental Purchase Agreement used by
MTT Docket No. 297569
Opinion & Judgment
Page 5

   Petitioner.

   12. Under the Rental Purchase Agreements utilized by Petitioner, the lessee may terminate the lease

   at any time, simply by returning the leased merchandise. Lessor may terminate the lease if lessee

   defaults in making any timely payments stated in the lease.

   13. Under the Rental Purchase Agreements utilized by Petitioner and consistent with the Michigan

   Rental-Purchase Agreement Act, if the lessee defaults on the lease, the lessee may elect to reinstate

   or renew the lease without any loss of rights or options previously acquired under the lease.

   14. Under the Rental Purchase Agreements utilized by Petitioner and consistent with the Michigan

   Rental-Purchase Agreement Act, to reinstate the lease, the lessee must pay a reinstatement fee

   equaling 5% of the balance of missed payments or $5.00, whichever is less.

   15. At the time a reinstatement fee is paid, there is no Rental Purchase Agreement in effect.

   16. In practice, upon default and termination of the Rental Purchase Agreement, Petitioner’s lessees

   are not obligated to reinstate the lease and pay a reinstatement fee for continued use of the leased

   property. Rather than reinstate the lease, lessees may, at their option, enter into new Rental

   Purchase Agreements for the same item at a lesser price.

   17. Lessees who choose to enter into new Rental Purchase Agreements at a lesser price lose any

   equity which accrued under the original agreement, while lessees who chose to reinstate the original

   Rental Purchase Agreement by paying the reinstatement fee maintain any equity which accrued

   under the original agreement.

   18. Exhibit C consists of true and authentic copies of representative Rental Purchase Agreements
MTT Docket No. 297569
Opinion & Judgment
Page 6

   and Cancellation Information sheets demonstrating two lessee’s decisions after termination of the

   original Rental Purchase Agreement to enter into new Rental Purchase Agreements for the same

   item(s) at a lesser price in lieu of reinstating the original agreement.

   19. The termination and reinstatement process involves the following actions by Petitioner: (1) a

   telephone call to the customer to determine the customer’s intent upon default; (2) the return of the

   merchandise to Petitioner, either picked up by Petitioner or returned by customer; (3) inspection by

   Petitioner of the returned items for working condition, correct serial number and model number; (4)

   the removal of the terminated Rental Purchase Agreement to the canceled file; (5) the entry of the

   returned item into inventory; (6) if the customer exercises his/her reinstatement option within the

   reinstatement period, the same or comparable item is returned to the customer; (7) a new rental

   Purchase Agreement is drafted reflecting the rights under the prior Agreement such that the number

   of payments required to own the item are reduced by the payments made under the original

   Agreement; and (8) the reinstatement fee is charged.

   20. If, upon calling the customer about the default and termination of the Agreement, the customer

   states that he/she cannot make the current payment but commits to making the payments current

   within the reinstatement period, (1) the date of expected payment is noted in the customer’s file; (2)

   the customer is allowed to keep the item until such date; and (3) upon payment of the outstanding

   balance and the reinstatement fee, the Agreement is returned to active status on the computer

   system.

Petitioner’s Contentions
MTT Docket No. 297569
Opinion & Judgment
Page 7

Petitioner claims that the reinstatement fees are not a cost associated with the privilege of using, storing

or consuming tangible personal property but, rather, are a cost associated with the privilege of

reinstating intangible rights, i.e., accrued equity and contractual rights under the rental purchase

agreement. The object of the reinstatement fee is to acquire “intangible rights” and is not within the

scope of the imposition of the Use Tax Act, MCL 205.91; MCL 205.93(1), which applies to “tangible

property” only.




Petitioner claims that the reinstatement fee is not part of the original rental purchase agreement, but is

only paid upon default and termination of the original agreement. The customer need not pay the

reinstatement fee, but may acquire the property by electing to enter a new rental-purchase agreement at

a lesser purchase price. Petitioner argues that the reinstatement fee is a transaction separate from the

original agreement, and therefore, is not part of the “price” charged for using, storing or consuming

tangible property.




Petitioner argues in the alternative that the reinstatement fees are for the service of reinstating the rental-

purchase agreement, and are not a cost associated with the privilege of using, storing or consuming

tangible personal property.




Petitioner cites Catalina Marketing Sales Corp v Dep’t of Treasury, 470 Mich 13, 678 NW2d 619

(2004), which adopted the “incidental to service” test for determining when a contract for services and
MTT Docket No. 297569
Opinion & Judgment
Page 8

tangible goods is subject to sales tax. Petitioner argues that the reinstatement fee is separate from the

rental-purchase of the property, and is paid for the service of reinstating the rental-purchase agreement.

Furthermore, “the buyer’s objective in the transaction is to restore its rights and equity under the original

contract” and not “to obtain the tangible personal property, because such property can be obtained

without incurring the reinstatement fee and without the service of reinstating the contract.” (Petitioner’s

Brief, page 8.) The fee is not mandatory, but is only paid if the agreement is terminated upon default,

and only if the customer chooses to reinstate the contract.




With regard to Petitioner’s arguments, the Tribunal holds that in cases when the customer exercises its

statutory right to reinstate a contract after a default, the reinstatement fee is part of the purchase “price”

as defined in the Use Tax Act. It is of no consequence that the customer may choose another method of

acquiring the property that does not include a reinstatement fee.

Petitioner compares the reinstatement fees to amounts paid for service agreements that were held to be

non-taxable services in RCA Service Co Division, RCA Corp v Michigan Dep’t of Treasury, 135

Mich App 807; 355 NW2d 679 (1984). In that case, customers purchased service agreements for

maintenance and repair of equipment leased from RCA. The customers were not obligated to purchase

the service agreements from RCA's service division. The rental and service transactions were held to be

separate and distinct and the amount paid for the service agreement was not subject to use tax. The

court concluded that the maintenance services were not "necessary or incidental to complete

performance of the taxable transaction" and not included in the “price” under the use tax act. The
MTT Docket No. 297569
Opinion & Judgment
Page 9

Tribunal finds that reinstatement fees in the present case are qualitatively different than the charges for

service contracts in RCA. In our present case, customers pay the reinstatement fee as a minor incident

to leasing the property.




A key premise of Petitioner’s argument is that the reinstatement fees are paid for a separate service.

However the Tribunal finds, viewing the transaction as a whole, and consistent with the case law cited in

this opinion, the reinstatement fees are part of the “price” of the property and are not paid for a separate

service. Assuming arguendo that a “service” is involved in reinstating the contract, that service is

incidental to the predominant character of the transaction, which is the rental and sale of goods.




Respondent’s Contentions

Respondent contends that the reinstatement fees are included in the “price” paid in consummation and

complete performance of the transaction and are therefore subject to use tax. Under the use tax act,

“seller” means the person from whom a purchase is made. MCL 205.92(d). “Purchase” means

acquisitions for consideration through the transfer of title, and includes rentals. MCL 205.92(e). The

broad, statutory definition of “price” includes the reinstatement fees regardless of whether they are

called a “service cost” or “other expense.” MCL 205.92(f).




Respondent claims RAB 1988-39 supports its position that taxable rental receipts include “all charges,

even though separately itemized by the lessor.”
MTT Docket No. 297569
Opinion & Judgment
Page 10




Respondent argues that if the tribunal determines that the fees in question are paid pursuant to a

transaction that is a combination of a sale of tangible goods and a service, the reinstatement fees are

subject to tax under either the “incidental to service” or “predominant factor” tests. If there is a service

performed in this case, it is incidental to the sale of a good and therefore the cost of that service is

subject to use tax.




Conclusions of Law

The Tribunal concludes that the “reinstatement fees” are part of the “price” paid for the use and

consumption of goods under the use tax act. MCL 205.92(f). The term “price” is broadly defined to

include all consideration paid as a part of the transaction involving tangible property, including the

“reinstatement fee” in this case. The definition is intended to prevent taxpayers from assigning the

consideration to various “services” or costs associated with the transaction and thereby shifting the

taxable price of the tangible goods to non-taxable “services” or associated costs or fees. For the tax

years in question, “price” means, in relevant part:

        The aggregate value in money of anything paid or delivered, or promised to be paid or
        delivered, by a consumer to a seller in the consummation and complete performance
        of the transaction by which tangible personal property or services are purchased or
        rented for storage, use or other consumption in this state, without a deduction for the
        cost of the property sold, cost of materials used, labor or service cost, interest or
        discount paid, or any other expense…The tax imposed under this act shall not be
        computed or collected on rental receipts if the tangible personal property has previously
        been subjected to a Michigan sales or use tax when purchased by the lessor. MCL
        205.92(f). [Emphasis added]
MTT Docket No. 297569
Opinion & Judgment
Page 11




The fee paid to reinstate the contract is part of “the consummation and complete performance of the

transaction” involving the rental and purchase of tangible personal property. Although the contract is in

default and terminated before the fee is paid, the consumer has a statutory right to reinstate the contract

by paying the fee. Furthermore, the reinstatement fee is a non-deductible “service cost” or “other

expense” and therefore included in the definition of “price.”




The analysis would end here unless it is determined that the act of reinstating the contract is a non-

taxable service that is separate from the taxable rental or sale of goods. The actions taken to reinstate

the contract, described in Stipulation 19, are part and parcel of a transaction in tangible personal

property, and are not considered as a separate service for use tax purposes. However, even if the

reinstatement of the contract were held to be a service, which it is not, that service would be merely

incidental to the transaction in goods. Any value ascribed to the alleged service would be included in the

taxable price. The Tribunal concludes that the minor, incidental act of reinstating the agreement is

materially different than the separate and distinct maintenance services that were held to be non-taxable

in RCA, supra. Furthermore, Kal-Aero, Inc v Dep’t of Treasury, 123 Mich App 46; 333 NW2d 171

(1983), held that flight instruction services and pilot services were non-taxable and separate from the

taxable rental of aircraft. The substantial services in Kal-Aero were notably different than the minor,

incidental act of reinstating the contract in this case.
MTT Docket No. 297569
Opinion & Judgment
Page 12

In Catalina Marketing Sales Corp v Dep’t of Treasury, 470 Mich 13, 678 NW2d 619 (2004), the

taxpayer provided advanced marketing services to manufacturers of consumer products, which included

the specialized printing of paper coupons that were dispensed to consumers at check out lanes in retail

stores. The Michigan Supreme Court analyzed the transaction as a mixed contract for goods and

services. The sole issue before the Supreme Court was whether the “coupon checkout program”

constituted sales at retail of tangible personal property under the sales tax act. MCL 205.521 and MCL

205.51(b). The court applied the “incidental to services test” for “categorizing a business relationship

that involves both the provision of services and the transfer of tangible personal property.” Id, 14.

Under this test, if the goods are merely incidental to the services, there is no “sale at retail” of tangible

personal property and the transaction is not subject to sales tax. It was undisputed that, if the transaction

was found to be taxable, the taxpayer was either subject to sales tax or use tax. The Tribunal holds that

the principles of Catalina apply to this use tax case. In this case, the alleged services are incidental to

the goods, and therefore taxable, whereas in Catalina, the goods (paper coupons) were held to be

incidental to the substantial services, and therefore not taxable. In either case, the Tribunal must consider

the “nature of the product and service” as part of the “incidental to service” test. Catalina, supra, p 25,

citing Bd of Regents, and 85 CJS 2d, Taxation, sec. 2018, p 976. On remand, the Tax Tribunal held

that the transaction was predominantly a nontaxable service, not a retail sale of property, and cancelled

the sales tax assessment. Catalina held that a court must examine the following:


1 Although this case is a use tax case, and Catalina is a sales tax case, both parties agree that the test in Catalina is
applicable here. It was undisputed that Catalina either owed use tax or sales tax, if the transaction was found to be
MTT Docket No. 297569
Opinion & Judgment
Page 13

    1) what the buyer sought as the object of the transaction2

    2) what the seller or service provider is in the business of doing

    3) whether the goods were provided as a retail enterprise with a profit-making motive

    4) whether the tangible goods were available for sale without the service

    5) the extent to which the intangible services have contributed to the value of the physical item

    6) any other factors relevant to the particular transaction




Considering the above factors, and upon examination of the totality of the transaction in this case, the

Tribunal concludes that the renter or purchaser seeks to use or own the property. In the event of a

default under the rental agreement, the renter has a statutory right to reinstate the contract by paying the

“reinstatement fee.” The fee is paid in pursuit of renting or owning the property, not to procure a service.

Petitioner is in the rent-to-own business, with a profit-making motive, and is not in the business of

reinstating defaulted contracts. The reinstatement of the contract is not a “service” in the nature of those

involved in RCA or Kal-Aero. Assuming arguendo a service is involved, it is merely incidental to the

sale of goods, and therefore taxable under Catalina.




taxable.
2 The Tribunal notes that the real object test “is subsumed within the incidental to service test articulated by the
Court of Appeals in Bd of Regents, supra.” Catalina, p 22.
MTT Docket No. 297569
Opinion & Judgment
Page 14

Although the tangible goods are available without paying the reinstatement fee (by entering a new

contract), this factor alone, in this context, does not defeat the Tribunal’s conclusion that the transaction

is essentially and predominantly a rental or sale of goods. In cases where the contract is reinstated, the

fee must be paid and is hence part of the taxable “price” paid for the property. The reinstatement fee is

not paid for a separately identifiable service such as in RCA, supra, where maintenance services were

held to be separate from the lease.




Finally, the value of the alleged service of reinstating the contract is insignificant in relation to the value of

the “physical item.” The fee is statutorily limited to the lesser of 5% of the unpaid balance or $5.00. All

of these factors establish that transaction in this case is taxable transaction in tangible property.




Catalina cited University of Michigan Board of Regents v Dep’t of Treasury, 217 Mich App 665;

553 NW2d 349 (1996), which involved sales tax on replacement copies of diplomas and upon

photocopies sold at the university library. The issue was whether there was a taxable “sale at retail.” The

court held that the diplomas were incidental to substantial services involved in reviewing the university

records and producing a diploma containing highly personalized information. With regard to the coin

operated copy machines, the court held that the university was not in the business of selling photocopies

for profit, but the photocopies were an incidental part of library and educational services. The university

was not engaged in the business of making “sales at retail” under MCL 205.52(1) and the transactions

were not subject to sales tax. The differences between the University of Michigan case and the
MTT Docket No. 297569
Opinion & Judgment
Page 15

present case are manifest. Petitioner is a “seller” under the use tax act (MCL 205.92(d)) and the

transaction involves a “purchase” or “rental” of property under MCL 205.92(e). The dispute here is

whether the alleged “services” related to the reinstatement fee are incidental to or separate from the

rental and sale of goods. Assuming arguendo that the transaction involves a separately identifiable

service, the totality of the transaction is principally for the rental or sale of tangible personal property.




In Catalina, supra, the Supreme Court considered cases applying the “predominant factor test” used

to determine when a mixed contract is a “transaction in goods” subject to the Uniform Commercial

Code.3 In Higgins v Lauritzen Well Drilling, 209 Mich App 266; 530 NW2d 171 (1995), Lauritzen

drilled a well and installed pipe and an electrical pump. The court found that the transaction was

predominantly for the substantial services involved in drilling the well and installing the pipe and the

pump, and therefore was not a “transaction in goods” governed by the Uniform Commercial Code.

MCL 440.2102. Although the tangible property was considerable, the specialized knowledge, skill, and

equipment needed to drill the well were the predominant part of the transaction for purposes of the

UCC.




In another UCC case, the Michigan Supreme Court held that when a court examines mixed contracts it

must consider whether “their thrust, their purpose, reasonably stated, is the rendition of service, with

goods incidentally involved…or is a transaction of sale, with labor incidentally involved….” Neibarger v
MTT Docket No. 297569
Opinion & Judgment
Page 16

Universal Cooperatives, Inc, 439 Mich 512; 486 NW2d 612 (1992). In Neibarger, the Court held

that a contract for the sale and installation of an automated dairy milking system was predominantly a

commercial sale of goods. The installation of the equipment in Neibarger is qualitatively and

quantitatively different from the reinstatement of the rent-to-own contract in our present case. If the

substantial services involved in Neibarger did not prevent the transaction from being predominantly a

sale of goods, then certainly the minor act of reinstating the contract here is not a separate, non-taxable

service. The transaction in this case is a sale or rental of goods and the reinstatement fee is a means to

those ends.




The Tribunal finds that the Florida case cited by Petitioner is not on point, its reasoning is not

persuasive, and is not consistent with Michigan law. Dep’t of Revenue v B&L Concepts, Inc, 612

So2d 720 (1993). That case held that the late fees and order processing fees were not taxable because

they were “incidental” to the taxable rental of goods. However, under Michigan law, the conclusion that

the amounts are “incidental” to the sale means the fees would be taxable. Catalina, supra.

Furthermore, the fees in B&L Concepts are factually distinguishable from the reinstatement fees at issue

here.




Petitioner cites an Illinois General Information Letter No. ST 97-0125-GIL, March 5, 1997, which

states that certain “late fees” charged in relation to rent-to-own transactions are not taxable in a “true


3 Catalina, footnote 7.
MTT Docket No. 297569
Opinion & Judgment
Page 17

lease situation.” In Illinois, the taxation of the late fees depends upon whether the transaction is

characterized as a “true lease” or a “conditional sale” under Illinois law. The letter ruling concluded that

more information was needed in order to give a definitive answer. The Tribunal declines to adopt the

reasoning of the Illinois General Information Letter, and instead follows the binding authorities cited

herein.




The Tribunal notes that other states have taken the position that similar reinstatement fees charged by

rent-to-own businesses are subject to sales or use tax. “Charges for guaranteed replacement program

and in-home collection, as well as late fees and reinstatement fees, were also taxable.” Virginia Public

Document Ruling No. 94-90, 03/25/1994 [italics added]. Also see, Texas Policy Letter Ruling No.

9607440L, 07/02/1996, which ruled that, “The lessee must pay a late fee to renew the lease agreement.

In this case, the reinstatement fee is part of the selling price of the new lease agreement and is taxable as

part of the selling price of the new lease.”


                                                 Judgment

IT IS ORDERED that Final Assessment No. J985731 is AFFIRMED.


IT IS FURTHER ORDERED that the parties shall have 21 days from date of entry of this Proposed

Opinion and Judgment to file exceptions and written arguments with the Tribunal consistent with Section

81 of the Administrative Procedures Act (MCL 24.281). The exceptions and written arguments shall be

limited to the stipulated facts. This Proposed Opinion and Judgment, together with any exceptions and
MTT Docket No. 297569
Opinion & Judgment
Page 18

written arguments, shall be considered by the Tribunal in arriving at a final decision in this matter

pursuant to Section 26 of the Tax Tribunal Act [MCL 205.726; MSA 7.650(26)].

                                                  MICHIGAN TAX TRIBUNAL

Entered: January 28, 2005                         By:      Thomas A. Halick
                                                           Adm. Law Judge

								
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