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Citibank (South Dakota), N.A. v. Department Of Taxes Sears, Roebuck & Co.

Supreme Court of Vermont

June 17, 2016

Citibank (South Dakota), N.A.
v.
Department of Taxes Sears, Roebuck & Co.
v.
Department of Taxes

         Supreme Court On Appeal from Superior Court, Washington Unit, Civil Division Mary Miles Teachout, J.

          Joslyn L. Wilschek of Primmer Piper Eggleston & Cramer PC, Montpelier, and Michael J. Bowen of Akerman LLP, Jacksonville, Florida, for Plaintiffs-Appellants.

          William H. Sorrell, Attorney General, Will S. Baker and Mary L. Bachman, Assistant Attorneys General, Montpelier, for Defendant-Appellee.

          PRESENT: Dooley, Skoglund, Robinson and Eaton, JJ., and Kupersmith, Supr. J. (Ret.), Specially Assigned

          DOOLEY, J.

         ¶ 1. Citibank (South Dakota), N.A., ("lender") and Sears, Roebuck and Co. ("retailer") (collectively "plaintiffs") appeal from a superior court decision[1] affirming the determination of the Vermont Department of Taxes ("Department") that the parties, who had partnered to operate a private label credit card program through retailers' stores, were not entitled to sales tax refunds related to bad debts. The Department denied lender's refund requests because it is not a registered vendor under Vermont law that remitted the sales tax it seeks to recover, and denied retailer's deductions because it did not incur the bad debt at issue. On appeal, plaintiffs argue that because they acted in combination to facilitate the sales giving rise to the bad debts, they are not barred from obtaining relief. We affirm.

         ¶ 2. The parties have stipulated the following facts. Lender entered into an agreement with retailer-among others-to provide retailer's customers with private label credit cards that would allow them to finance their purchases at retailer's stores. When a customer charged a purchase on a lender credit card, pursuant to their agreement, lender would pay retailer the amount charged; that is, the sale amount plus any applicable sales tax. As required by 32 V.S.A. §§ 9775-9776, retailer would report all taxable sales to the Department and remit all applicable sales tax.

         ¶ 3. During the period between June 1, 2004 and June 30, 2007 (the period), the dates at issue for both parties' requests for bad debt refunds, lender was not a vendor registered with the Department for sales tax purposes under 32 V.S.A. § 9707 and therefore was not permitted to collect and remit sales tax to the Department on sales of tangible personal property.

         ¶ 4. Several of retailer's Vermont customers made purchases using the credit card but defaulted and failed to pay lender. Lender determined that the unpaid balances of these accounts, which included money that had been applied to the sales taxes collected by retailer and then remitted to the Department, were uncollectable. Under its agreement with retailer, lender could not collect the unpaid amounts, including the sales tax amounts, from retailer. Lender charged off these accounts as uncollectable in its financial records and took bad debt deductions for these accounts on its federal corporate income tax returns during the period, pursuant to 26 U.S.C. § 166. Lender then filed seven claims with the Department for the period between February 1, 2004 and June 30, 2007, requesting refunds of the sales tax paid on the bad debt accounts pursuant to 32 V.S.A. § 9780 in the amount of $866, 364. The Department denied the requests.

         ¶ 5. Meanwhile, throughout the period, retailer took sales tax bad debt deductions on its monthly sales tax returns for sales that were fully taxable, but where the customer had not repaid the purchase price to lender. The Department audited retailer, disallowed the deductions, and assessed the company $350, 215-not including penalties and interest-in improperly claimed bad debt deductions.

         ¶ 6. Retailer and lender appealed the Department's assessments and requested a hearing before the Commissioner of the Department pursuant to 32 V.S.A. § 9777(a). The Commissioner affirmed the respective refund request denial and tax assessment in written decisions. The Commissioner considered the "plain language" of 32 V.S.A. § 9780, which authorizes her to exclude from sales tax liability sales that have been cancelled or that result in bad debts:

The Commissioner may provide by regulation for the exclusion from taxable receipts, amusement charges of amounts representing sales where the contract of the sale has been cancelled, the property returned on the receipt or charge has been ascertained to be uncollectable or, in the case the tax has been paid upon that receipt or charge, for refund or credit of the tax so paid.

         Vt. Stat. Ann. tit. 32, § 9780. She noted that 10 060 033 Vermont Code Regulation § 1.9780 [hereinafter SUT Regulation][2] implements § 9780 and provides that:

A. Where the seller or person required to collect tax is unable to collect accounts receivable in connection with which he or she has already remitted the tax to the commissioner, that person or seller may apply to the commissioner for a refund or credit. Bad debt shall be defined as in Section 166 of the Internal Revenue Code. 26 U.S.C. § 166.
. . .
C.A claimant seeking recovery for bad debt shall deduct the debt on the return for the period during which the bad debt is written off as uncollectable in that claimant's books and records and is eligible to be deducted for federal income tax purposes.
D. If a claimant takes a deduction for bad debt, and the debt is subsequently collected in whole or in part, the tax on the amount so collected must be paid and reported on the return ...

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