Home Depot USA, Inc. v. Ariz. Dep't of Revenue

• Decision Date: 02 October 2012
• Docket Number: No. 1 CA–TX 11–0004.,1 CA–TX 11–0004.
• Citation: 230 Ariz. 498,287 P.3d 97
• Parties: HOME DEPOT USA, INC., Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellee.
• Court: Arizona Court of Appeals

230 Ariz. 498

287 P.3d 97

HOME DEPOT USA, INC., Plaintiff/Appellant,

v.ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellee.

No. 1 CA–TX 11–0004.

Court of Appeals of Arizona, Division 1, Department T.

Oct. 2, 2012.

Steptoe & Johnson LLP by Pat DerdengerBennett Evan Cooper, Phoenix and Gibson, Dunn & Crutcher LLP by Randy M. Mastro^*, Jennifer H. Rearden^*, Georgia K. Winston^*, New York, NY, Evan S. Tilton^*,^*admitted pro hac vice, Dallas, TX, Attorneys for Plaintiff/Appellant.

Thomas C. Horne, Arizona Attorney General by Scot G. Teasdale, Assistant Attorney General, Phoenix, Attorneys for Defendant/Appellee.

OPINION

SWANN, Judge.

¶ 1 This is a transaction privilege tax case. Home Depot USA, Inc. (“Taxpayer”) challenges the superior court's entry of summary judgment denying its claim for a tax refund based on bad debt deductions under A.A.C. R15–5–2011(A). For the reasons that follow, we affirm the judgment.

FACTS AND PROCEDURAL HISTORY

¶ 2 Taxpayer operates retail home-improvement stores throughout the United States, including Arizona. This litigation arises out of Taxpayer's claim for tax refunds based on deductions for bad debts arising under its private-label credit card (“PLCC”) program.

¶ 3 Taxpayer entered contracts with three related companies—General Electric Capital Corporation, GE Capital Financial, Inc., and Monogram Credit Card Bank of Georgia (the “Finance Companies”)—for the provision of PLCCs to its customers. The contracts contain substantially similar provisions, except that the Monogram program issued cards to general retail customers, and the other programsissued cards to business customers. Customers wishing to use a PLCC applied to one of the Finance Companies for credit. After reviewing an applicant's creditworthiness, the relevant company exercised its discretion to determine whether to extend credit and then established a credit account for approved customers.

¶ 4 When a PLCC customer makes a purchase from Taxpayer or one of its affiliated entities, the relevant Finance Company forwards to Taxpayer the amount of the purchase, including the amount of the transaction privilege tax that is built into the sale price, less a service fee. From this amount, Taxpayer pays the applicable transaction privilege tax to the State of Arizona. Taxpayer deducts the service fee on its federal income tax form as “other deductions,” not as “bad debts.” Meanwhile, the Finance Companies deduct losses from unpaid accounts as bad debts on their federal income tax returns.

¶ 5 In September 2003, Taxpayer filed a bad debt refund claim with the Arizona Department of Revenue (the “Department”) for $1,449,496.11 with respect to transaction privilege taxes paid from August 1, 2000, to July 31, 2003, on transactions in which PLCC customers had defaulted on purchases financed through the Finance Companies. Taxpayer based its refund calculation on the total taxable sales the Finance Companies had written off. To derive this figure, Taxpayer deducted from the total taxable sales the “subsequent collections,” “finance charges,” and “late fees,” and then eliminated nontaxable sales.

¶ 6 In August 2004, the Department denied the refund claim. Taxpayer exhausted its administrative remedies and appealed by filing a complaint in the Arizona Tax Court pursuant to A.R.S. § 42–1254(C). Taxpayer then filed a motion for partial summary judgment on its entitlement to the bad debt refund, and the Department filed a cross-motion for summary judgment. The tax court granted the Department's motion, denied Taxpayer's motion, and entered final judgment in March 2011. This appeal followed.

DISCUSSION

¶ 7 Summary judgment is warranted if “the pleadings, deposition, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Ariz. R. Civ. P. 56(c)(1). We review the tax court's summary judgment rulings de novo. Walgreen Ariz. Drug Co. v. Ariz. Dep't of Revenue, 209 Ariz. 71, 72, ¶ 6, 97 P.3d 896, 897 (App.2004). We also review de novo issues of statutory interpretation and the tax court's application of the law. Open Primary Elections Now v. Bayless, 193 Ariz. 43, 46, ¶ 9, 969 P.2d 649, 652 (1998); State Comp. Fund v. Yellow Cab Co., 197 Ariz. 120, 122, ¶ 5, 3 P.3d 1040, 1042 (App.1999).

I. A VENDOR MUST BE OWED A BAD DEBT TO CLAIM THE BAD DEBT DEDUCTION UNDER A.A.C. R15–5–2011 (A).

¶ 8 Arizona imposes a transaction privilege tax on the privilege of engaging in business in the state. Ariz. State Tax Comm'n v. Sw. Kenworth, Inc., 114 Ariz. 433, 436, 561 P.2d 757, 760 (App.1977). The legal incidence of the tax is on the seller, though the seller may pass the cost of the tax on to its customers. Karbal v. Ariz. Dep't of Revenue, 215 Ariz. 114, 117, ¶ 11, 158 P.3d 243, 246 (App.2007). In this case, Taxpayer is subject to the tax under the retail classification because it is in the business of selling tangible personal property at retail. SeeA.R.S. § 42–5061(A). The tax base for this classification is “the gross proceeds of sales or gross income derived from the business.” Id.

¶ 9 Under A.A.C. R15–5–2011, taxpayers may claim bad debt deductions against the transaction privilege tax under certain conditions. The regulation provides in relevant part:

A. The deduction of a bad debt shall be allowed from gross receipts if the following conditions apply:

1. The gross receipts from the transaction on which the bad debt deduction is being taken have been 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 part of the debt is worthless.

¶ 10 The crux of this appeal is whether A.A.C. R15–5–2011(A) (2) requires that the taxpayer be the creditor in the “debtor-creditor relationship.” The principles of statutory construction apply to interpretations of regulations. Kimble v. City of Page, 199 Ariz. 562, 565, ¶ 19, 20 P.3d 605, 608 (App.2001). Accordingly, “we look to the plain language as the most reliable indicator of meaning,” and “give effect to each sentence and word so that provisions are not rendered meaningless.” Powers v. Carpenter, 203 Ariz. 116, 118, ¶ 9, 51 P.3d 338, 340 (2002); Comm. for Pres. of Established Neighborhoods v. Riffel, 213 Ariz. 247, 249, ¶ 8, 141 P.3d 422, 424 (App.2006). We strictly construe tax deductions. Ariz. Dep't of Revenue v. Raby, 204 Ariz. 509, 511, ¶ 16, 65 P.3d 458, 460 (App.2003).

¶ 11 The Taxpayer–Finance Company contracts provide that the Finance Companies own all the credit accounts established for Taxpayer's PLCC customers and are entitled to receive all payments made by cardholders on accounts. Each contract provides: “All credit losses on Accounts shall be solely borne at the expense of [the Finance Company] and shall not be passed on to Retailer except for any chargebacks[.]” Taxpayer therefore does not suffer any direct loss associated with delinquent accounts, nor does it stand to benefit if those accounts are ultimately collected.

¶ 12 Taxpayer contends that because A.A.C. R15–5–2011(A) does not expressly require that the taxpayer actually be the creditor for purposes of establishing the debtor-creditor relationship, the tax court improperly engrafted a fourth condition onto the regulation by requiring that the taxpayer suffer the bad debt loss.

¶ 13 We rejected a similar proposed construction of A.A.C. R15–5–2011 in DaimlerChrysler Services North America, LLC v. Arizona Department of Revenue, 210 Ariz. 297, 110 P.3d 1031 (App.2005). In DaimlerChrysler, the appellant finance company also argued that the regulation does not specify who may take the deduction. Id. at 301, ¶ 10, 110 P.3d at 1035. We held that though A.A.C. R15–5–2011 contains no express requirement that the taxpayer be a retailer, its use of the term “gross receipts”—defined under A.R.S. § 42–5001(7) as being derived from the “retail sales of retailers”—necessarily implied such a requirement. Id. at 302, ¶ 16, 110 P.3d at 1036. We concluded that the finance company could not take the deduction because it was not a retailer. Id. at 303, ¶¶ 19–20, 110 P.3d at 1037.

¶ 14 As in DaimlerChrysler, we interpret A.A.C. R15–5–2011(A) with an eye toward coordination among related provisions, including A.A.C. R15–5–2011(F).¹ According to subsection (F), “[a]ny recovery of a bad debt subsequent to a bad debt deduction shall be reported as taxable gross receipts when received.” If we were to adopt Taxpayer's argument, then Taxpayer would reap the benefit of the bad debt deduction while simultaneously avoiding the risk of future tax liability on amounts later collected. Taxpayer's proposed application of Arizona's regulatory scheme would therefore render subsection (F) meaningless—a construction that our rules of interpretation direct us to avoid.

¶ 15 Construing a provision similar to subsection (F), an Oklahoma appellate court held that Oklahoma's refund law “implicitly requires the owner of the bad debt account to be the entity allowed the deduction where it also requires the owner to report subsequent collections of bad debt accounts as income.” In re Sales Tax Claim for Refund of Home Depot, 198 P.3d 902, 904, ¶ 7 (Okla.Civ.App.2008). Likewise, the Alabama Court of Civil Appeals found that the Alabama regulation's reference to a retailer's collection of amounts due on sale “implies that the bad debt at issue is debt owned by the retailer itself because, in situations involving the third-party financing of purchases from a retailer, a retailer would not be in a position to ‘recover [ ] ... amounts previously claimed as bad debt credits or refunds.’ ” Magee v. Home Depot U.S.A., Inc., 95 So.3d 781, 793–94 (Ala.Civ.App.2011) (quoting Ala. Admin. Code r. 810–6–4–.01(6)).

¶ 16 We agree with the Department that Taxpayer had no bad debts for purposes of A.A.C....