Supreme Court Affirms Department of Taxes’ Finding that Citibank and Sears Were Not Entitled to Sales Tax Refunds from Bad Debts

In Citibank (South Dakota), N.A. v. Dept. of Taxes / Sears, Roebuck & Co v. Dept. of Taxes, 2016 VT 69 (June 17, 2016), the Vermont Supreme Court affirmed the Vermont Department of Taxes’ conclusion that the parties were not entitled to sales tax refunds from bad debts.

Issue: Lender and retailer entered into an agreement to provide private label credit cards to finance purchases at retailer’s stores. During the period at issue, lender was not a vendor registered with the Department of Taxes for sales purposes. When customers made purchases and defaulted, lender was not able to collect the unpaid amounts, including the sales tax, from the retailer. Lender then charged off the amounts as uncollectable and took bad debt deductions on federal corporate tax returns in the three-year time period at issue. When lender filed claims with the Department for refunds of the sales tax paid on the bad debt, the Department denied the requests. Retailer also took sales tax bad debt deductions, but the Department disallowed them after an audit. Both retailer and lender appealed the assessments and requested a hearing. After the hearing, the Commissioner found that neither company was entitled to relief, as neither met the two requirements to get sales tax refunds – “[T]he credit claimant must be the retailer or person ‘required to collect the sales tax’ and must also be the one who is ‘unable to collect accounts receivable.’ These uncollected receivables must be those in connection with which the claimant ‘already remitted the tax to the commissioner.’” Both parties appealed, arguing that they satisfied §9780 because they collectively formed an “economic unit.”

Holding: With regard to the plaintiffs’ main argument, that they acted in concert to facilitate sales and should be entitled to relief for bad debts, the Court found that the Commissioner did not err in interpreting the regulations or in applying the regulations to the facts. The Court also noted that the same lender and retailer litigated this exact issue in other states and did not win in Georgia, Massachusetts, Michigan, or Minnesota. The Court also rejected the idea that failing to provide the lender an amount equal to the tax payment of the retailer on defaulted accounts violates the tax rate statute. Finally, while retailer alleged that it claimed the exclusion in good faith, the fact that it knew that bad debt relief was unavailable in other states after litigating the issue meant that it should have consulted the Department instead of just risking the deduction.