In Menard Inc. v. Department of Treasury
, the Michigan Court of Appeals interpreted the plain language of the Michigan “bad debt” statute to conclude that retailers could not recover sales taxes they previously paid that were attributable to a bad debt held by a third party lender.
Menard Inc., Sears, and Art-Van entered into agreements with lenders to issue private label credit cards. After a consumer used the card for a purchase, the retailer would remit the sales tax on the purchase to the state treasury. The lender would reimburse the retailer for all or a portion of the purchase and the sales tax. The Michigan bad debt statute allows “taxpayers” to recover an overpayment when anticipated sales proceeds are not received. So when consumers fail to pay their credit card bills, the lenders can write off the bad debts. The retailers believed the statute also applied to them and attempted to recover the sales taxes attributable to the bad debt amounts. Menard, Sears, and Art-Van argued they were entitled to recover the sales taxes on the basis that the retailers and lenders could collectively be considered the “taxpayer” entitled to recover under the statute. Two Michigan circuit courts agreed with this view and two Michigan circuit courts disagreed. The Michigan Court of Appeals consolidated the cases and resolved the issue.
The court emphasized that the legislature has to express tax exemptions or deductions in unambiguous terms, that the language of the statute must be strictly construed against the taxpayer, and that the retailers had the burden of proving the exemption or deduction applied to them. With these principles in mind, the court underscored that the statute in question, MCL 205.54i, permitted retailers and lenders to execute an agreement designating “which” party could claim the deduction. Additionally, the legislature defined the term “taxpayer” to include the person who directly remitted the tax to the state treasury department “or” the lender holding the account receivable for which the bad debt is recognized. The court believed these provisions reflected the legislature’s intent to treat the retailer and lender as two different entities for purposes of recovering on bad debts under the statute. According to the court, the retailers therefore could not prove there was a clearly stated exemption or deduction in their favor. The court also pointed out that the statute did not entitle retailers to a refund after the lenders had already reimbursed the retailers for the value of the goods, including the tax.
The two lower court cases that had granted relief in favor of the retailers were reversed and remanded for entry of judgment in favor of the state. The two cases granting relief for the state were affirmed.