General Motors Corp. v. Department of Treasury
466 Mich. 231, 644 N.W.2d 734 (2002)
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Rule of Law:
A manufacturer's discretionary promise to consider customer complaints for post-warranty repairs, if included in materials provided at the time of sale, constitutes consideration. Consequently, the value of this promise is part of the 'gross proceeds' from the retail sale, subject to sales tax at purchase, and exempt from use tax when the repairs are later performed.
Facts:
- When customers purchase a new General Motors (GM) vehicle, they receive a limited manufacturer's warranty and an owner's manual.
- The owner's manual outlines a 'Customer Satisfaction Procedure' inviting customers to seek resolution for problems encountered 'during or after the warranty periods'.
- Pursuant to this informal 'goodwill adjustment policy,' GM, on a discretionary basis, sometimes pays for replacement parts for vehicles even after the written limited warranty has expired.
- GM's internal accounting procedures estimate the future costs of this goodwill policy and factor those costs into the retail price of its vehicles.
- During the audit period of 1986 through 1992, GM provided Michigan customers with approximately $82 million worth of components and parts under this goodwill policy.
- The Michigan Department of Treasury conducted an audit and determined that the value of these parts was subject to a use tax.
Procedural Posture:
- The Michigan Department of Treasury audited General Motors (GM) and assessed $5.5 million in use taxes and interest for the period from 1986 to 1992.
- GM appealed the assessment to the Michigan Court of Claims, which is a court of first instance for claims against the state.
- The Court of Claims granted summary disposition in favor of the Department of Treasury.
- GM, as appellant, appealed the decision to the Michigan Court of Appeals, an intermediate appellate court.
- The Court of Appeals affirmed the trial court's ruling on the use tax issue.
- The Michigan Supreme Court, the state's highest court, granted GM's application for leave to appeal.
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Issue:
Does General Motors' discretionary 'goodwill adjustment policy,' which provides for post-warranty repairs, constitute consideration that is part of the initial retail vehicle sale, thereby exempting the parts provided under the policy from Michigan's use tax?
Opinions:
Majority - Weaver, J.
No. The goodwill adjustment policy constitutes consideration that is part of the initial retail vehicle sale, exempting the parts provided under the policy from use tax. Michigan's Use Tax Act exempts property from use tax if a sales tax was already paid on that property in a retail sale. The central question is whether the goodwill policy was part of the 'consideration' in the initial vehicle sale. Consideration is a bargained-for exchange, and courts do not inquire into its sufficiency. The owner's manual, provided at the time of sale, offers customers the opportunity for dialogue and possible resolution of complaints even after the warranty period, which is a benefit that constitutes valid consideration. This promise is not illusory because GM has an implied duty, enforceable under the UCC, to act in good faith when reviewing customer complaints. Because this promise is part of the consideration for the sale and its costs are factored into the vehicle's retail price, it is subject to the General Sales Tax Act at the time of purchase. Therefore, imposing a use tax on the parts later provided would result in impermissible double taxation, or 'pyramiding,' which the statutory exemption is designed to prevent.
Dissenting - Cavanagh, J.
Yes. The goodwill adjustment policy does not constitute consideration and the parts provided under it are subject to use tax. For consideration to exist, there must be a bargained-for exchange. Customers have little to no knowledge of the specifics of the goodwill policy and are not induced to purchase a vehicle because of it; therefore, it is not bargained for. The promise is too vague and discretionary to create any legally enforceable right for the customer. The policy is better understood as a promotional program to enhance customer satisfaction and loyalty, similar to giving away free samples. Because promotional items are generally subject to use tax and the policy was not transferred for valid consideration at the retail sale, the Department of Treasury's assessment of use tax is proper. The majority's holding creates an overly 'lax interpretation of consideration' that could improperly shield any cost a manufacturer bakes into its prices from use tax.
Analysis:
This decision clarifies and arguably broadens the definition of 'consideration' for tax law purposes, establishing that a discretionary, non-guaranteed promise from a seller can be legally sufficient consideration if it is part of the initial transaction and creates an obligation of good faith. The ruling provides significant protection to manufacturers and retailers against the 'pyramiding' of taxes on post-sale customer satisfaction programs. It affirms that the economic reality of a transaction—that consumers ultimately pay for such programs in the initial purchase price—should guide the tax treatment, preventing the same value from being taxed once as part of a sale and again as a 'use' of property.
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