                          STATE OF MICHIGAN

                           COURT OF APPEALS



CAPITAL ONE, N.A.,                                                 UNPUBLISHED
                                                                   August 14, 2018
              Plaintiff-Appellant,

v                                                                  No. 340635
                                                                   Court of Claims
STATE TREASURER, STATE OF MICHIGAN,                                LC No. 16-000201-MT
and DEPARTMENT OF TREASURY,

              Defendants-Appellees.


Before: MURPHY, P.J., and GLEICHER and LETICA, JJ.

PER CURIAM.

       The Court of Claims summarily dismissed Capital One’s challenge to the denial of its
request for a sales tax refund on “bad debt” by the State Treasurer, State of Michigan, and
Department of Treasury (defendants). Although the Court of Claims erroneously determined
that Capital One presented invalid election forms designating it as the party entitled to claim a
deduction and erroneously interpreted the exclusion of repossessed property from the definition
of “bad debt,” the court properly dismissed the complaint because Capital One failed to produce
supporting evidence requested by defendants. We affirm.

                                      I. BACKGROUND

        In May 2012, Capital One purchased approximately $30 billion in credit card loans from
HSBC Bank of Nevada, N.A., including HSBC’s private label credit card (PLCC) portfolio. A
PLCC is a store-branded credit card that can only be used at that retailer, like a Best Buy or
Kohl’s charge. See MCL 205.54i(1)(d). When a customer makes a purchase using a PLLC, he
or she finances both the cost of the item and the sales tax. The lender does not submit the sales
tax to the state piecemeal as the debt is repaid, but upfront when the purchase is made.

        When a customer defaults wholly or in part on his or her credit card debt and collection
efforts fail, Capital One determines the debt to be worthless and uncollectible, or “bad debt.”
Capital One can then claim bad debt deductions on its federal and state income tax filings. On
September 27, 2013, Capital One submitted a letter to defendants requesting a refund pursuant to
MCL 205.54i “for the period of October 1, 2009 through June 30, 2013 in the amount of




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$8,691,658.20 relating to the pro rata portion of sales tax relating to unpaid balance of worthless
accounts which have been charged off for federal income tax purposes.”1

        Defendants did not deny Capital One’s refund request, but asked for
“[d]ocumentation . . . to substantiate how [Capital One] arrived at the amount of [its] request”
pursuant to MCL 205.54i(4), which provides, in relevant part, “Any claim for a bad debt
deduction under this section shall be supported by that evidence required by the department.”
Specifically, defendants requested documentation “to substantiate the account receivable has
been found worthless and has been written off for the . . . years in question” and proof that the
subject cards were PLCCs and not dual purpose cards that could be used at other retailers.
Defendants required “[e]vidence that the tax was paid on the original taxable transaction.” This
could be provided through “a sampling of customer account statements.” Defendants further
advised that the “statements should detail all items purchased during the period.” Finally,
defendants noted that bad debt does not include repossessed property. See MCL 205.54i(1)(a).2
Accordingly, defendants directed Capital One “to subtract repossessed property” from its refund
calculation.

        Capital One provided a large amount of information in response to defendants’ request,
but did not provide statements detailing each item purchased in its sampling of customer
accounts. Moreover, defendants rejected “election forms” designating Capital One as the proper
party to assert the bad debt deduction that were signed only after the customer had defaulted on
the debt and the lender had charged off the account. Such election forms are required by MCL
205.54i(3), which provides:

          After September 30, 2009, if a taxpayer who reported the tax and a lender execute
          and maintain a written election designating which party may claim the deduction,
          a claimant is entitled to a deduction or refund of the tax related to a sale at retail
          that was previously reported and paid if all of the following conditions are met:

          (a) No deduction or refund was previously claimed or allowed on any portion of
          the account receivable.


1
  To “charge off” means that “the creditor has given up on trying to collect an unpaid debt” and
has notified the credit bureaus to add this negative mark on the customer’s credit report. See <
https://www.experian.com/blogs/ask-experian/category/credit-advice/report-advice/charge-off/>
(accessed August 3, 2018).
2
    MCL 205.54i(1)(a) defines bad debt, in relevant part, as:
          any portion of a debt that is related to a sale at retail taxable under this act for
          which gross proceeds are not otherwise deductible or excludable and that is
          eligible to be claimed, or could be eligible to be claimed if the taxpayer kept
          accounts on an accrual basis, as a deduction pursuant to section 166 of the internal
          revenue code, 26 USC 166. A bad debt shall not include . . . repossessed
          property.



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       (b) The account receivable has been found worthless and written off by the
       taxpayer that made the sale or the lender on or after September 30, 2009.

As a result, defendants authorized a refund of only $6,600.46.

        Capital One filed suit in the Court of Claims seeking to recover its full sales tax refund
request. After discovery, the parties filed cross-motions for summary disposition. Capital One
asserted that the plain language of MCL 205.54i did not require election forms to be executed
before the bad debts were charged off as uncollectible and allowed for partial recovery on
repossessed property, and that defendants’ request for detailed statements including all items
purchased was improper. Defendants, on the other hand, contended that the statutory definition
of “bad debt” excluded repossessed property, that Capital One failed to prove it actually paid
sales tax on any of the accounts at issue, and that its election forms were insufficient. The circuit
court agreed with defendants that Capital One’s written elections were insufficient, that Capital
One failed to submit sufficient evidence to show actual sales tax paid, and that all repossessed
property was excluded from the definition of bad debt. The court therefore dismissed Capital
One’s complaint.

                                  II. STANDARDS OF REVIEW

        We review de novo a lower court’s resolution of a summary disposition motion. Zaher v
Miotke, 300 Mich App 132, 139; 832 NW2d 266 (2013). “A motion under MCR 2.116(C)(10)
tests the factual support of a plaintiff's claim,” and we must review the evidence in favoring of
the nonmoving party to determine if it created a genuine issue of material fact for the factfinder’s
review. Id. (quotation marks and citations omitted). We also review de novo a trial court’s
interpretation of a statute. Id. at 140.

                          III. SUFFICIENCY OF ELECTIONS FORMS

         Capital One continues to contend that its election forms were valid and supported its sales
tax refund request. Capital One concedes that the subject election forms were not executed until
after it or HSBC charged off the bad debt. The Michigan Supreme Court recently considered
this issue in Ally Fin Inc v State Treasurer, ___ Mich ___; ___ NW2d ___ (Docket Nos. 154668,
154669, and 154670, decided July 20, 2018), and determined that belatedly executed election
forms are sufficient under the statute. Id., slip op at 22.

       Ally, slip op at 6, explained:

               MCL 205.54i permits retailers and lenders to seek a refund for sales taxes
       paid on a “bad debt,” as defined by the statute. If lenders such as plaintiffs seek
       the tax refund, they must provide a written election form, specifying that they,
       rather than the taxpayer, may claim the refund. The statute further provides that
       any claim “shall be supported by that evidence required by the department.”
       [Citations omitted.]

       In relation to election forms, the Court explained:



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              Under MCL 205.54i, two entities can potentially claim a bad-debt
       refund—the retailer that remitted the sales tax to the Department or the lender
       holding the account receivable. The statute requires that the party seeking a tax
       refund for a bad debt must provide the Department with a written election
       document designating whether the retailer or the lender may claim the refund.
       MCL 205.54i(3) provides:

          After September 30, 2009, if a taxpayer who reported the tax and a lender
          execute and maintain a written election designating which party may claim
          the deduction, a claimant is entitled to a deduction or refund of the tax
          related to a sale at retail that was previously reported and paid if all of the
          following conditions are met:

          (a) No deduction or refund was previously claimed or allowed on any
          portion of the account receivable.

          (b) The account receivable has been found worthless and written off by the
          taxpayer that made the sale or the lender on or after September 30, 2009.
          Ally, slip op at 20.]

       Here, just as in Ally, slip op at 21, defendants contended that Capital One did not
“execute and maintain” the written election as the debts were charged off as uncollectible years
before the forms were signed. To explain its decision that charged-off debts were still
“maintained,” the Supreme Court in Ally, slip op at 21-22, explained:

               Some background on when and how accounts must be written off is
       helpful in addressing this issue. In order to claim a bad-debt deduction or refund
       under the statute, the debt must have been charged off as uncollectible in the
       records of the entity claiming the deduction or refund. MCL 205.54i(2) provides:

               In computing the amount of tax levied under this act for any month, a
          taxpayer may deduct the amount of bad debts from his or her gross proceeds
          used for the computation of the tax. The amount of gross proceeds
          deducted must be charged off as uncollectible on the books and records of
          the taxpayer at the time the debt becomes worthless and deducted on the
          return for the period during which the bad debt is written off as
          uncollectible in the claimant’s books and records and must be eligible to be
          deducted for federal income tax purposes.

       A write-off is simply an internal recognition by a lender that an account is
       worthless after attempts at collection have failed. As the Supreme Court of
       Wisconsin has explained, “When a lending institution ‘writes off’ a ‘bad debt,’ it
       is merely indicating that the debt is uncollectible. That is, it is no longer an asset
       of the institution. A ‘write off’ does not mean that the institution has forgiven the
       debt or that the debt is not still owing.” [Mitchell Bank v Schanke, 268 Wis 2d
       571, 582 n 7; 2004 WI 13; 676 NW2d 849 (2004).]



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               Our Legislature has recognized that the debt is still owing—and may be
       collected—after it is written off and has required taxpayers to repay the amount
       deducted as bad debt on such amounts. Because written-off accounts still
       continue to be collectible and are only deemed worthless for tax computation and
       accounting purposes, the Court of Appeals erred by holding that Ally’s previously
       written-off accounts were not “currently existing” at the time that the election
       forms were executed. [Emphasis in original.]

        Ally is directly on point and negates defendants’ defense of their denial of Capital One’s
refund in this regard. Accordingly, the Court of Claims erred in ruling that Capital One’s
election forms were invalid. They were valid and supported Capital One’s refund claim.

                                 IV. EVIDENTIARY SUPPORT

        Capital One further challenges the Court of Claims’ determination that defendants
properly directed it to produce documentation to show actual sales tax paid. In filing the
requested documentation, Capital One provided a “taxable percentage” calculation to determine
the sales tax it and its predecessor had paid, 3 a method Capital One employs in several other
states. Citing MCL 205.54i(4) (“[a]ny claim for a bad debt deduction under this section shall be
supported by that evidence required by the department”), the Court of Claims concluded that
defendants had discretion to request such documents. This ruling is supported by Ally.

        In Ally, slip op at 4-5, the Department instructed the taxpayers, companies that financed
vehicle purchases through installment contracts, to present “RD-108 forms, which dealers submit
to the Secretary of State along with the sales tax due in exchange for a vehicle title and a
validated copy of the form.” The Supreme Court noted that the Department is “given discretion
by the bad-debt statute to determine the evidence required for a party’s claim for a deduction or
refund,” and that court must uphold the Department’s exercise of that discretion “if supported by
a rational basis.” Id. at 18.

        Defendants requested Capital One to provide “a sampling of customer account
statements” that “should detail all items purchased during the period.” Instead, Capital One
provided spreadsheets showing full account histories for a sample of 50 accounts and a
spreadsheet with basic information about all accounts included in the refund claim. Capital One
readily admits that these documents did not detail all items purchased as directed. But, Capital
One argues, defendants’ request was unreasonable. Capital One had available to it the requested
information and we discern no ground to conclude that defendants acted outside of their
discretion. The Court of Claims, therefore, did not err in dismissing Capital One’s complaint on
this ground.




3
  Capital One describes that a “taxable percentage” is an estimate of sales tax paid, calculated by
reviewing all items purchased on an account and factoring out a proportion of the purchases to
account for nontaxable sales.


                                                -5-
                                V. REPOSSESSED PROPERTY

       Finally, Capital One insists that it may recoup sales tax paid on deficiencies after the sale
of repossessed property. This issue was resolved in Ally in favor of Capital One’s position.

        The Court in Ally, slip op at 9-17, extensively analyzed the language employed in MCL
205.54i(1)(a)’s definition of “bad debt,” as well the definition of such debt under 26 USC 166.
The Court noted that that the statute excluded “repossessed property” from the definition. Ally,
slip op at 10. The plaintiff taxpayers in Ally campaigned for an interpretation “refer[ring] to the
value of the repossessed property”; the Department, on the other hand, interpreted the statute “as
referring to the entire value of the account, i.e., the value of the account before it was
repossessed.” Id. Under the taxpayers’ definition, “the uncollectible amount not recouped from
the sale of the property would remain a refundable ‘bad debt,’ ” while under the Department’s
definition, it would not. Id. at 10-11.

         The Court held in favor of the taxpayers. In doing so, it reasoned that the Department’s
interpretation would “impose a sales tax on consideration that later became worthless—it would
tax uncollectible debt,” an unreasonable reading of the statutory language. Id. at 11. By citing
only “repossessed property,” the Legislature intended “only the value of the repossessed property
itself is to be excluded.” Id. By holding to the contrary, the Court of Claims erred in this case.

        Although the Court of Claims erroneously determined that Capital One’s election forms
were invalid and that Capital One was not entitled to a refund of that portion of the sales tax paid
on repossessed items that resold for less than the debt amount, Capital One is not entitled to
relief. The Court of Claims correctly determined that Capital One failed to produce supporting
evidence requested by defendants. Accordingly, defendants were still entitled to summary
dismissal of Capital One’s complaint.

       We affirm.




                                                             /s/ William B. Murphy
                                                             /s/ Elizabeth L. Gleicher
                                                             /s/ Anica Letica




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