Retailers and banks continue to get whipsawed on sales tax bad debt deductions where a retailer provides a private label credit card program in conjunction with a third party bank. The Kentucky Board of Tax Appeals ruled that a retailer was not entitled to a bad debt deduction because it was not the party that wrote off the bad debts on its books and records. Home Depot USA, Inc. v. Kentucky Fin. and Admin. Cabinet, No. K10-R-25 (Oct. 17, 2012).

The Arizona Court of Appeals reached the same conclusion in Home Depot USA, Inc. v. Arizona Dep’t of Revenue, 287 P.3d 97 (Oct. 2, 2012). In a prior case, the same Arizona court rejected the bank’s bad debt refund claim because it was not the retailer that actually paid the tax. DaimlerChrysler Servs. N. Am., LLC v. Ariz. Dep’t of Revenue, 110 P.3d 1031 (Ariz. Ct. App. 2005). In other words, neither party in a typical private label credit card arrangement is able to claim a sales tax bad debt deduction in Arizona. The state is unjustly enriched, in our view, by retaining sales tax paid by the retailer on transactions where the consumer never actually pays for the goods.

Retailers have prevailed in some states on bad debt claims. The Michigan Supreme Court, for example, rejected the state’s appeal from an unpublished decision of the Michigan Court of Appeals granting the retailer’s bad debt refund claim. Home Depot USA, Inc. v. Michigan Dep’t of Treasury, No. 301341, 2012 WL 1890219 (Mich. Ct. App. May 24, 2012), appeal denied, 821 N.W.2d 664 (Mich. Oct. 22, 2012). Other states, such as California, have remedied the unjust enrichment to the state by legislatively permitting the retailer and/or bank to make an election allowing one of the parties to claim the bad debt refund. See Cal. Rev. & Tax. Code §§ 6055, 6203.5.