$14.7M use tax case: What is the value of employee feedback?

How much is employee feedback valued?

Is it a pointless exercise or a useful tool? There are endless debates around the water cooler and in the boardroom about this one.

How much is employee feedback valued for tax purposes?

The Michigan Department of Treasury and Ford Motor Co. are duking this one out in court.

Our story:

Ford Motor Co. leased vehicles to its own employees and retirees, and those of Ford’s subsidiaries.

Here’s how it worked in the late 1990s and early 2000s: Ford sold vehicles to its financing arm, Ford Credit. Ford Credit, in turn, leased the vehicles back to Ford at a yearly lease rate of 28.8 percent of the wholesale delivered price. Ford then subleased the vehicles to the employees and retirees at 20.8 percent of the wholesale delivered price.

But along with the apparently good deal the sublessees were getting, there was a small obligation.

Every now and then, they had to fill out a vehicle quality and performance report, a checklist of 35 items that took a few minutes to complete. The leases required this. The leases also stated that if you didn’t fill out the form when requested, you’d be in default of the lease.

Ford said most of the employed sublessees filled out the reports on company time.

Ford was required to pay Michigan use tax on the lease program based on the vehicles’ prices. The treasury department figured the price at the 28.8 percent lease rate. Ford claimed the 20.8 percent rate applied.

The version of the Use Tax Act in effect at the time, MCL 205.92(f) (later amended by 2004 PA 172), defined “price” as “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 … ”

In other words, the sublessees were providing some value by filling out the required reports, and that value was part of the vehicle’s price.

But what’s the value?

It’s peanuts, said Ford in the Court of Claims. It shouldn’t even figure into the price. There’s virtually no effort involved in filling out the report. But, if you insist on a value, let’s have a hearing to figure it out.

It’s $14,727,220.41, said the treasury department. That’s the difference between the 28.8 percent and the 20.8 percent lease rates. No need for a hearing, just do the math.

The Court of Claims liked the treasury department’s approach better.

Not so fast, said the Michigan Court of Appeals. Both positions are wrong.

The use tax act, said the COA, plainly requires us to put a price tag on filling out the vehicle reports. That can’t be ignored.

But figuring the price on the difference between the lease rates isn’t the way to do it:

When the services required under the sublease agreements are given a monetary value equal to the difference between the lease and the sublease rates, an illogical result is reached: because the lease and sublease rates are a percentage of the wholesale delivery prices of the vehicles, identical services provided by the sublessees receive different monetary values.

In other words, it is illogical that the services provided by a sublessee of a luxury vehicle would have a significantly higher monetary value than the services provided by a sublessee of an economy car. …

For example, the difference between the lease rate and the sublease rate for an $86,000 Range Rover is $6,880, while the difference between the lease rate and the sublease rate for an $8,653 Ford Focus is $692.

So, how much is employee feedback valued?

We’ll find out on remand.

The case is Ford Motor Co. v. Dep’t of Treasury.

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