Home Depot U.S.A., Inc. v. North Carolina Department of Revenue
| Decision Date | 06 November 2015 |
| Docket Number | 11 CVS 2261 |
| Court | Superior Court of North Carolina |
| Parties | HOME DEPOT U.S.A., INC., Petitioner, v. NORTH CAROLINA DEPARTMENT OF REVENUE, Respondent. |
Alston & Bird, LLP by Ryan P. Ethridge, and Gibson, Dunn & Crutcher, LLP by John D. W. Partridge, Randy M. Mastro, and Jennifer H. Rearden for Petitioner Home Depot U.S.A., Inc.
North Carolina Department of Justice by Tenisha S. Jacobs for Respondent North Carolina Department of Revenue.
{1} THIS MATTER is before the Court on the Petition for Judicial Review ("Petition") of a Final Agency Decision in a contested tax case arising under a section of the North Carolina Sales and Use Tax Act ("the Act") known as the "bad-debt refund statute." N.C. Gen. Stat. § 105-164.13(15) (2013). For the reasons discussed below, the Court AFFIRMS the Final Agency Decision of the North Carolina Department of Revenue, and the Petition is DISMISSED.
{2} This matter involves a dispute between Petitioner Home Depot U.S.A., Inc. ("Home Depot") and Respondent North Carolina Department of Revenue ("Department") in which Home Depot seeks tax refunds for bad-debt deductions arising under its private-label credit card ("PLCC") program. Home Depot seeks a refund of sales tax in the form of a bad-debt deduction for three tax periods.
{3} North Carolina's bad-debt refund statute provides that "accounts of purchasers, representing taxable sales, on which the tax imposed by this Article has been paid, that are found to be worthless and actually charged off for income tax purposes may, at corresponding periods, be deducted from gross sales." Id. Home Depot claims that its PLCC accounts meet the criteria for a bad-debt deduction under section 105-164.13(15). The Department disagrees that Home Depot is entitled to a bad-debt deduction because the third-party banks, not Home Depot, maintain the PLCC accounts and charge off the debts on their income-tax returns.
{4} Home Depot acknowledges that under the PLCC program, third-party banks maintained credit accounts with customers who used PLCCs to make purchases from Home Depot. The company further acknowledges that the third-party banks reimbursed Home Depot for the purchase price and the associated sales tax in PLCC transactions, but retained a service fee. Home Depot treats the service fees as an ordinary business expense on its tax returns but contends that the fees fully allocate the financial responsibility for the consumers' nonpayment to Home Depot, thus entitling Home Depot to the benefit of the deduction. Home Depot contends that the bad-debt refund statute, as the Department applies it, unconstitutionally discriminates between retailers that provide direct customer credit and retailers that contract with third-party banks to offer customer credit through PLCC accounts.
{5} On February 21, 2006, the Department issued a Notice of Sales and Use Tax Assessment to Home Depot for the period of December 1, 2000, through November 30, 2003, in the amount of $2, 608, 945.64. Home Depot requested a redetermination of various portions of the tax amount in letters dated February 28, 2006, and March 1, 2006. (R. at 198–99, 200–05.)[1]
{6} On March 1, 2006, Home Depot remitted a check in the amount of $740, 184.81 for full payment of all undisputed portions of the Department's audit. (R. at 15.)
{7} Home Depot requested refunds on the basis that it was entitled to bad-debt deductions of $156, 756.33 for the period of August 1, 2003, through January 31, 2004, and $1, 804, 664.90 for the period of January 1, 2004, through January 31, 2007. (R. at 15.) The Department denied Home Depot's refund requests, and Home Depot requested further review by the Department.
{8} On May 15, 2009, the Department issued a Notice of Final Determination, which stated that the refund requests in connection with Home Depot's bad-debt-deduction claim had been properly denied. (R. at 26–28.)
{9} On July 14, 2009, Home Depot filed a petition for a contested case hearing before the Office of Administrative Hearings. (R. at 13.)
{10} After a discovery period, both Home Depot and the Department moved for summary judgment. Following a hearing, Administrative Law Judge Melissa Owens Lassiter granted summary judgment for the Department on August 12, 2010. Home Depot U.S.A., Inc., OAH No. 09 REV 4211 (N.C. Dep't of Revenue Aug. 12, 2010). Home Depot appealed.
{11} On January 13, 2011, the Department entered its Final Agency Decision, which upheld the ALJ's grant of summary judgment for the Department. Home Depot U.S.A., Inc. (Final Agency Decision), OAH No. 09 REV 4211 (N.C. Dep't of Revenue Jan. 13, 2011).
{12} Home Depot filed its Petition on February 11, 2011.
{13} The matter was designated as a complex business case on February 14, 2011, and assigned to this Court on March 16, 2011.
{14} Home Depot contended, in part, that it was denied discovery necessary to litigate its equal-protection claims. Ultimately, motion practice on that discovery issue was resolved by the Court's December 31, 2014, Order. The parties then filed their respective briefs, and the Court heard oral argument on the merits of the Petition on June 23, 2015.
{16} In exercising judicial review over a final agency decision, this Court acts in the capacity of an appellate court. Mann Media, Inc. v. Randolph Cty. Planning Bd., 356 N.C. 1, 12, 565 S.E.2d 9, 17 (2002). The Court's scope of review includes inquiries into whether the evidence supports the agency's findings of fact, whether the findings support the agency's conclusions of law, and whether the conclusions of law are proper statements and applications of the law. ACT-UP Triangle v. Comm'n for Health Servs., 345 N.C. 699, 706, 483 S.E.2d 388, 392 (1997).
{17} Issues of law receive de novo review, which requires the Court to "consider[] the matter anew[] and freely substitute[] its own judgment for the agency's." N.C. Dep't of Env't & Nat. Res. v. Carroll, 358 N.C. 649, 659, 599 S.E.2d 888, 894 (2004) () (quoting Mann Media, 356 N.C. at 13, 565 S.E.2d at 17). Challenges to the agency's fact findings are reviewed under the whole-record test, which binds the Court to accept fact findings of the administrative agency that are supported by substantial evidence, in view of the entire record. Id. at 663, 599 S.E.2d at 897. "Any finding of fact not specifically rejected [by the agency] . . . shall be deemed accepted for purposes of judicial review of the final decision." N.C. Gen. Stat. § 150B-36(b1) (repealed 2011).
{18} Home Depot asserts four primary arguments: (1) that the Department improperly applied the controlling statutory language of the bad-debt refund statute, (2) that the Department's statutory construction is inconsistent with the statute's purpose, (3) that Home Depot and the third-party banks satisfied the statutory requirements for a bad-debt deduction by operating as a "unit, " and (4) that the Department's position violates Home Depot's constitutional guarantees of equal protection and due process. Each of these arguments raises legal issues that the Court addresses de novo.
{19} Home Depot also challenges the following statement in the Final Agency Decision, which was labeled as a conclusion of law: "Petitioner's contention that the service fees are evidence that it bore the risk of loss on uncollectible PLCC accounts is without merit." Final Agency Decision, OAH No. 09 REV 4211, at 7 (Conclusions of Law ¶ 21). The Court believes that this statement presents a mixed finding of law and fact. Accordingly, the Court employs the whole-record test to review the factual determination that the service fees did not evidence Home Depot's bearing the risk of loss for bad debts.
{20} The Court finds that there is substantial record evidence to support the following findings of fact from the Final Agency Decision:
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