On January 16, 2020, the Supreme Court of Washington, in an en banc decision, held that a retailer was entitled to take bad debt deductions for sales and Business and Occupation (“B&O”) taxes when its customers defaulted on purchases made using private label credit cards.

The retailer contracted with banks to offer private label credit

The Arizona Superior Court denied Home Depot a bad debt deduction related to customer credit card transactions. Home Depot USA Inc. v. Arizona Department of Revenue, TX 2006-000028 (Dec. 10, 2010). The court reviewed three conditions that must be met under Arizona law in order for a bad debt to be deducted: 

  1. The transaction upon which the bad debt deduction is being taken was reported as taxable;
  2. The debt arose from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money; and 
  3. All or a portion of the debt is worthless. Id.

In determining whether Home Depot could claim the deduction associated with its private label credit card transactions, the court relied on a decision of the Arizona Appeals Court and interpreted the first and second conditions as  limited only to those persons who made the sale and originally reported the tax. Id. (DaimlerChrysler Services North America, LLC v. Arizona Dep’t. of Revenue, 210 Ariz. 297, 302 (Ariz. App. 2005)). While Home Depot made the sales and reported the tax, it did not incur the bad debt directly. The finance company paid Home Depot the amount of each transaction, less a negotiated percentage that included the overall cost of bad debt for all transactions.


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