Home Depot Usa v. State, Dept. of Revenue

• Decision Date: 25 August 2009
• Docket Number: No. 37854-0-II.,37854-0-II.
• Citation: 151 Wn. App. 909,215 P.3d 222
• Parties: HOME DEPOT USA, INC., Appellant, v. STATE of Washington, DEPARTMENT OF REVENUE, Respondent.
• Court: Washington Court of Appeals

215 P.3d 222

151 Wn. App. 909

HOME DEPOT USA, INC., Appellant, v. STATE of Washington, DEPARTMENT OF REVENUE, Respondent.

No. 37854-0-II.

Court of Appeals of Washington, Division 2.

August 25, 2009.

Randall Paul Beighle, Ryan P. McBride, Timothy W. Jones, Lane Powell PC, Seattle, WA, Jennifer H. Rearden, Randy M. Mastro, Gibson, Dunn & Crutcher, New York, NY, for Appellant.

David M. Hankins, Atty. Generals Office/Revenue Division, Rosann Fitzpatrick, Washington Attorney General, Olympia, WA, for Respondent.

HOUGHTON, J.

¶ 1 Under former RCW 82.08.037 (2002), Home Depot USA, Inc., seeks a refund of sales tax it paid on defaulted transactions made on its private label credit card. Home Depot contracted with a financing company to establish the private label credit card. It sold its entire interest in the accounts to the financing company in return for payment of the full amount of the sale made on the card plus the sales tax, minus a service fee. The trial court found Home Depot ineligible to obtain a sales tax refund and granted the Department of Revenue's (DOR) motion for summary judgment. Because Home Depot cannot obtain a sales tax refund for bad debts its customers owe to a third party, we affirm.

FACTS

¶ 2 Between July 1, 1997, and July 31, 2003 (the refund period), Home Depot, a retailer, paid state sales tax for purchases made at Home Depot stores in Washington. Under former RCW 82.08.037¹ (sales tax refund statute), Home Depot seeks a refund of $1,098,641.61 in sales tax. This amount represents the amount of sales tax Home Depot paid on defaulted transactions made on its private label credit card (Home Depot card).

¶ 3 In Washington, Home Depot entered into agreements with General Electric Capital Corporation (GECC), through various operating entities (banks), to have GECC issue Home Depot cards to Home Depot customers. Cardholders may use the credit cards only in Home Depot stores.

¶ 4 GECC and Home Depot executed a separate contract for consumer accounts, commercial accounts, and business accounts. All contracts provided that (1) the named contracting bank is the exclusive owner of the credit card accounts, (2) the contracting bank bears the risk of all credit losses on the accounts, and (3) Home Depot has no interest in the accounts or indebtedness the credit card program created. Consistent with these provisions, GECC took a bad debt deduction, under 26 U.S.C. § 166,² for defaulted Home Depot card accounts on its federal income tax returns.

¶ 5 GECC, not Home Depot, set the finance charges, annual fees, late fees, and all other terms of the credit card accounts Home Depot customers opened. GECC made all decisions related to customer eligibility for a Home Depot card.

¶ 6 In consideration for the agreements, GECC paid Home Depot a $6.5 million signing bonus for the consumer portion of the program and $500,000 for the business portion. At the end of each day, Home Depot transmitted that day's Home Depot card sales to GECC. GECC then paid Home Depot the proceeds on the sales, including any retail sales taxes, minus charge-backs for circumstances such as returned merchandise, and, most importantly for the purpose of this appeal, service fees.

¶ 7 The deducted service fees ranged from 0 percent to 13.80 percent, depending on the account type. For example, Home Depot paid no service fees on at least some nonpromotional consumer purchases. In contrast, it paid the highest rate for promotional consumer sales marketed as interest free, if the customer paid the entire balance during the final month of the no-interest period. Home Depot does not dispute that it deducted the service fees it paid GECC as an ordinary business expense on its federal tax returns.

¶ 8 Home Depot and GECC used a complex economic analysis to set the service fees. GECC forecasted the amount of profit it expected to earn on various categories of credit sales in the form of interest, late fees, and other charges, and it balanced this against expected losses from uncollectible debts and other expenses. These other expenses included the costs of borrowing money, overhead, collections, and operating expenses. As a GECC employee explained, "[R]eally Home Depot paid us a service fee, a discount, if you will, for transactions to run their program." Clerk's Papers (CP) at 33.

¶ 9 DOR denied Home Depot's refund petition. Home Depot appealed to the superior court. DOR moved for summary judgment on the ground that Home Depot did not incur a deductible loss on the defaulted Home Depot card sales. The trial court granted DOR's motion, dismissing Home Depot's refund request and Home Depot appeals.

ANALYSIS

¶ 10 We must decide whether the trial court erred in granting DOR summary judgment. In doing so, we review the trial court's decision that Home Depot cannot obtain a sales tax refund under former RCW 82.08.037 because it could not deduct defaulted debt on its private label cards as bad debt under federal income tax laws. Former RCW 82.08.037, in effect during the refund period, states, "A seller is entitled to a credit or refund for sales taxes previously paid on debts which are deductible as worthless for federal income tax purposes."

¶ 11 Home Depot advocates that the statute means a "seller is entitled to a credit or refund for sales taxes previously paid on debts which are deductible" by any company "as worthless for federal income tax purposes," so long as the seller/sales tax refund claimant, if it is not the company able to deduct the bad debt under federal tax law, can show that it actually bore the risk of loss from the defaulted debts. Former RCW 82.08.037; Appellant's Br. at 3. DOR counters that it means "[a] seller is entitled to a credit or refund for sales taxes previously paid on debts which are deductible" by the seller "as worthless for federal income tax purposes." Former RCW 82.08.037; Resp't's Br. at 9-10.

A. Standard of Review

1. Summary Judgment

¶ 12 We review summary judgment orders de novo, engaging in the same inquiry as the trial court. Berrocal v. Fernandez, 155 Wash.2d 585, 590, 121 P.3d 82 (2005); see also Atherton Condo. Apartment-Owners Ass'n Bd. of Dirs. v. Blume Dev. Co., 115 Wash.2d 506, 515-16, 799 P.2d 250 (1990). We may affirm the trial court's order on any basis that the record supports. LaMon v. Butler, 112 Wash.2d 193, 200-01, 770 P.2d 1027 (1989).

¶ 13 We consider summary judgment proper where "the pleadings, depositions, 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." CR 56(c). We draw all reasonable inferences from the facts in the light most favorable to the nonmoving party. Hisle v. Todd Pac. Shipyards Corp., 151 Wash.2d 853, 860, 93 P.3d 108 (2004).

2. Review of Tax Matters

¶ 14 In a tax case, we review a trial court's legal conclusions, including statutory construction, de novo. Nelson Alaska Seafoods, Inc. v. Dep't of Revenue, 143 Wash. App. 455, 461, 177 P.3d 1161, review denied, 164 Wash.2d 1018, 195 P.3d 89 (2008). "`When interpreting statutory language, our goal is to carry out' the legislature's intent." Nelson Alaska, 143 Wash.App. at 461, 177 P.3d 1161 (quoting Simpson Inv. Co. v. Dep't of Revenue, 141 Wash.2d 139, 148, 3 P.3d 741 (2000)). "`In ascertaining this intent, the language at issue must be evaluated in the context of the entire statute.'" Nelson Alaska, 143 Wash.App. at 461, 177 P.3d 1161 (quoting Simpson, 141 Wash.2d at 149, 3 P.3d 741). "We derive the legislative intent from the statute's plain language and ordinary meaning; however, we must avoid unlikely, absurd, or strained results." Nelson Alaska, 143 Wash.App. at 461, 177 P.3d 1161.³

B. The Sales Tax Scheme

¶ 15 Washington imposes a sales tax on "each retail sale." Former RCW 82.08.020(1) (2002). The tax is calculated based on the "selling price," meaning "the consideration" without deduction for the seller's overhead expenses. Former RCW 82.08.010(1) (2002). "[T]he measure of the tax is to be the cost to the buyer or consumer, and not the cost to the seller." Klickitat County v. Jenner, 15 Wash.2d 373, 382, 130 P.2d 880 (1942).

¶ 16 A buyer "has the primary burden to pay" sales tax to the seller. AARO Med. Supplies, Inc. v. Dep't of Revenue, 132 Wash.App. 709, 716, 132 P.3d 1143 (2006). The seller has a duty to remit the sales tax to DOR, however, even if it does not collect the tax from the buyer at the time of sale. AARO Med. Supplies, 132 Wash.App. at 716, 132 P.3d 1143. A sales tax paid by the seller to DOR but not paid from a buyer to the seller constitutes a statutory "debt" owed by the buyer to the seller. Former RCW 82.08.050 (2002).⁴

¶ 7 As previously stated, former RCW 82.08.037 provided relief to sellers owed an unpaid and uncollectible sales tax debt by granting them a "credit or refund." DOR maintains that the policy behind this statute is to "provide relief to vendors" left holding uncollectible sales tax debt. See James A. Amdur, Recovery of Sales Taxes Paid on Bad Debts, 38 A.L.R.6th 255 (2008). Generally, Home Depot takes the position that the statute intended to prevent unjust enrichment to DOR by requiring refund of sales taxes on defaulted transactions.

C. Puget Sound National Bank National Bank v. Department of Revenue

¶ 18 Both parties rely on the only case addressing former RCW 82.08.037, Puget Sound National Bank v. Department of Revenue, 123 Wash.2d 284, 868 P.2d 127 (1994).⁵ Home Depot contends that our Supreme Court set out three requirements to qualify for a refund under the statute and that it meets these requirements. DOR counters, "Puget Sound supports the proposition that a refund claimant must incur a deductible bad debt loss on a sale to qualify for a sales tax refund." Resp't's Br. at 15.

¶ 19 In Puget Sound, the bank purchased installment contracts from automobile dealers. 123 Wash.2d at...