IPT 2017 Sales Tax Symposium San Antonio, Texas September from Bad Debt

Transcription

1 IPT 2017 Sales Tax Symposium San Antonio, Texas September from Bad Debt

2 Presenters 2 Stephen P. Kranz McDermott Will & Emery LLP (202) skranz@mwe.com Blog: Michael J. Bowen Akerman LLP (904) Michael.bowen@akerman.com

3 Learning Objectives Understand the various ways that states treat bad debt in the transaction tax context Determine the key issues that may arise on audit relating to bad debt and best practices for avoiding or combating them Identify states with recent case law or legislation impacting the ability to claim the state bad debt deduction, credit or refund 3

4 Agenda 1. Basics and Types of Bad Debt 2. Transaction Walkthrough 3. Historic Results 4. Litigation, Audit Trends, and Legislation 5. Questions 4

5 The Overarching Principle Is a refund due under the law? o A matter of law If so, is that refund due to someone other than the State? o A matter of law If so, what is the amount of that refund due? o A matter of damages 5

6 The Basics Alternate Terminology Definition Inclusions/Exclusions 6

7 Types of Bad Debt NSF Checks Company-Issued Financing Credit Card Chargebacks Third-Party Factored Debt Private Label Credit Cards Co-Branded Credit Cards Third-Party Issued Credit (Visa/MC/Discover/AmEx) 7

8 8 Private Label Credit Cards

9 Bad Debt Credits Typical requirements: Retailer makes credit sale and collects/remits sales tax Customer defaults on debt Retailer charges-off debt under IRC 166 Clawback: If write-offs later collected, tax is due 9

10 10 Transaction Walkthrough

11 11 Transaction Walkthrough

12 12 Transaction Walkthrough

13 13 Transaction Walkthrough

14 14 Transaction Walkthrough

15 15 Transaction Walkthrough

16 Historic Results Michigan Bad debt exemption requires a properly completed form documenting tax paid. Bad debt exemption does not include value attributed to repossessed property. See Ally Financial, Inc. v. State Treasurer, 317 Mich. App. 316 (Sept. 20, 2016). 16

17 Historic Results Washington Retailer not entitled to bad debt deduction debt held by affiliated entity that issued private label credit cards on behalf of Retailer. Washington Department of Revenue stated: If business contracts with financial company to provide private label credit card program, and Financial company becomes exclusive owner of credit card accounts and solely bears the risk of all credit losses; Business is not entitled to resulting bad debt deduction. Also applies when companies file a federal consolidated return. 17 See Wash. DOR Det. No (released Dec. 2016).

18 Historic Results Illinois Governor signed new bad debt clarification provisions extending the bad debt deduction to private label credit cards. Regulations promulgated earlier this year. Favorable to retailers because debt written off on books, and held by private label credit cards is now eligible for a deduction or refund from the state s Retailers Occupation Tax. See Ill. SB 507 (2015); 86 Ill. Adm. Code

19 Historic Results Illinois Retailers can assign right to receive sales tax refunds attributable to uncollected debt to third-party financing company. [B]ecause the retailers would have been permitted to obtain a refund had they not assigned the accounts, Citibank, by stepping into the retailers shoes via assignment, should also be permitted to obtain a refund. Citibank N.A. v. Dept. of Revenue, Ill. App. Ct., No 13 L (11/2/2016). 19

20 Historic Results 20 Tennessee Retailer cannot receive a bad debt deduction for purchases made using its store credit cards when it has been paid in full by the credit card company. Retailer argued that the relevant Tennessee statute doesn't require the dealer claiming the deduction to be the entity that charges off the bad debts. Court provided that this wasn't supported by plain language of the statute and that such an interpretation would unjustly enrich the retailer. Tennessee Supreme Court denied retailer s request to review the Court of Appeal s decision. Sears, Roebuck & Co. v. Dep t of Revenue, No. M COAR3- CV (Tenn. Ct. App.), review denied (Sept. 2016).

21 Historic Results Vermont Neither the bank who issues private label credit cards nor the retailer is allowed to deduct bad debts. Both Citibank and retailer claimed they were entitled to bad debt exclusion. Court ruled that the exclusion applies only to one who is both 1) required to collect the sales tax, and 2) actually suffers the loss associated with the uncollectible debt. Under the arrangement between the retailers and Citibank, neither party is entitled to the bad debt exclusion since neither meets both requirements. Citibank et. al v. Dept. of Taxes, 2016 VT 69, 149 A3d 149 (Vt. 2016). 21

22 Historic Results 22 North Carolina Retailer was not entitled to a bad debt deduction on accounts held and charged off as worthless by affiliated private label credit card. Third-party banks provided private label credit cards for the retailer. Court determined that bad debt refund statute applies to accounts between the retailer and its customers but not to accounts held by a third party. Although taxpayer and banks had a contractual relationship that involved a certain degree of collaboration, decision making and agreement, the relationship did not create a single tax-paying unit. Credit Card agreement clearly indicated that the bank was the sole and exclusive owner of all accounts and related information. Banks were entitled to the bad debt deduction, not the retailer. Home Depot U.S.A., Inc. v. Dep t of Revenue, No. 11 CVS 2261 (N.C. Sup. Ct., Nov. 2015); see also Office Depot, Inc. v. Dep t of Revenue (OAH, Nov. 2015).

23 Historic Results Historic Progeny Bad Results: Alabama, Arizona, Indiana, Kentucky, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Tennessee, Vermont, Washington Good Results: Illinois, Michigan, Missouri, North Carolina 23

24 24 Historic Results

25 Litigation Election States o California, Texas, Pennsylvania Law Changes o Michigan, New York Legal Wins o Michigan 25

26 Audit Trends in PLCC Deduction o o On the bad debt line As a reduction of Gross or Net Sales Refund Claim o o Preference Statutory 26

27 The Next Steps 27 Legislative Efforts o Arizona (2017) o California (2017) o o o Georgia Florida Illinois o New Mexico (2017) o o Ohio Illinois o Tennessee (2017) o Wisconsin

28 The Next Steps Better call Saul 28

29 Questions? 29 Stephen P. Kranz McDermott Will & Emery LLP (202) Blog: Michael J. Bowen Akerman LLP (904)