Can retailers claim a credit or deduction for the sales taxes paid on uncollectible transactions from retailer-issued credit cards? The majority of jurisdictions that have broached the subject have decided against the retailers.
But Home Depot recently prevailed on the issue to the tune of nearly $5 million.
The Michigan Supreme Court ruled Oct. 22 that it would not hear an appeal in a case that granted Home Depot Inc. a $4.9 million sales tax refund ( Home Depot USA Inc. v. Michigan Department of Treasury , No. 145412 (Mich. Sup. Ct., 10/22/12).
The ruling follows a Michigan Court of Appeals, holding last May, that Home Depot was entitled to claim the bad debt deduction for the sales taxes it paid on accounts that turned out to be worthless. The court found that Home Depot and the finance companies acted as a single unit, and the fact that the finance companies wrote off the bad debts satisfied the statutory requirement that the amount be charged as uncollectible on the taxpayer’s records.
The win comes after Home Depot has litigated in several states the question of its entitlement to sales tax refunds generated from charges on private-label credit cards, where the bad debts were written-off by third-party finance companies.
Cases in Alabama, Arizona, Indiana, Kentucky, New Jersey, New York, Ohio, Oklahoma, and Washington have all been decided against the home improvement retailer. In the majority of these cases, the courts explained that Home Depot had established a credit card program with third parties where it received full payment, up front, for the credit accounts, including the sales tax. Because the store had no direct interest in whether or not the customers paid their accounts, it could not claim the bad debt deduction for the sales tax on the bad accounts.
The courts also rejected arguments that the service fees paid by Home Depot to the finance companies were reimbursements for unpaid accounts, or that the retailer should be considered a single taxpayer unit with the finance company, finding instead that the transactions were at arm’s length.
In a similar case decided last June in Maine, the court found that Sears could not claim a bad debt sales tax credit for amounts written off by a third-party creditor, stating that only a retailer who charged off the accounts as worthless could qualify for the credit, reports a Bloomberg BNA Weekly State Tax Report.
California, with respect to accounts held by a lender, allows either the retailer or lender, provided a proper election has been made, to deduct, or claim a refund of sales or use tax that the retailer has previously reported and paid. Effective Jan. 1, 2013, California amends the election requirement to state that a proper election is established when the retailer that reported the tax and the lender prepare and retain an election form, signed by both parties, designating which party is entitled to claim the deduction or refund. ( A.B. 2688 )
For additional information on the treatment of sales and use tax bad debts, see Bloomberg BNA’s Sales and Use Tax Navigator at 4.8.
By Nancy Emison
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