Lowe's Home Ctrs., LLC v. Dep't of Revenue
| Decision Date | 16 January 2020 |
| Docket Number | No. 96383-5,96383-5 |
| Citation | 455 P.3d 659,195 Wash.2d 27 |
| Court | Washington Supreme Court |
| Parties | LOWE’S HOME CENTERS, LLC, Petitioner, v. DEPARTMENT OF REVENUE, State of Washington, Respondent. |
A. Troy Hunter, Issaquah Law Group, PLLC, 410 Newport Way NW, Suite C, Issaquah, WA 98027-3116, Edward Kendriek Smith, John M. Allan, 1420 Peachtree Street, Suite 800, Atlanta, GA 30309, for Petitioner.
Rosann Fitzpatrick, Cameron Gordon Comfort, Washington Attorney General, P.O. Box 40123, Olympia, WA 98504-0123, for Respondent.
¶1 This case concerns whether a retail seller, Lowe’s Home Centers, may seek reimbursement of state sales taxes and B&O (business and occupation) taxes from the Department of Revenue (DOR) where Lowe’s contracted with GE Capital Financial Incorporated and Monogram Credit Bank of Georgia (banks) to offer private label credit cards to its customers, and agreed to repay the banks for losses they sustained on defaulting customer accounts. RCW 82.08.050 provides that a seller must collect and remit sales taxes to the State. For sellers unable to recoup sales tax funds from buyers, RCW 82.08.037(1) provides that sellers may claim a deduction "for sales taxes previously paid on bad debts, as that term is used in 26 U.S.C. Sec. 166." In a partially split decision, the Court of Appeals affirmed the trial court’s denial of reimbursement.
¶2 We hold that although the banks were involved in the credit transaction, Lowe’s is still the seller burdened with the loss from its customers’ defaults, including their nonpayment of the sales taxes. Accordingly, we reverse the Court of Appeals.
¶3 Lowe’s contracted with two banks to offer private label credit cards to Washington customers. The banks offered credit to cardholders who purchased Lowe’s goods. Within two days of a credit purchase, the banks would send full payment and related sales taxes to Lowe’s. Lowe’s then remitted the taxes to DOR.
¶4 The banks undertook the majority of the risk of defaulting cardholders, and Lowe’s contracted to mitigate this risk by acting as guarantor. When credit card holders failed to repay the purchase price and sales tax, Lowe’s agreed to reimburse the banks. The contract calculated Lowe’s share of the banks’ finance income by providing that Lowe’s "shall be responsible for Net Write-Offs during such year up to a maximum of 7.0% of Average Net Receivables." Clerk’s Papers (CP) at 140. The contract termed these repayments "bad debt guarantees" and stated that Lowe’s alone could claim bad debt relief. E.g., id. at 454.1 Each month the banks subtracted amounts it had written off as uncollectible (up to the 7.0 percent cap) from the amounts it could collect from cardholders.
¶5 On its federal income tax returns, Lowe’s claimed bad debt reductions based on its bank repayments. For its 2001-2009 state tax assessment period, Lowe’s asked for the same deduction. Lowe’s sought a refund of over $2.2 million. DOR denied the refund. After paying its tax assessment under protest, Lowe’s appealed and sought reimbursement in superior court.
¶6 On cross motions for summary judgment, the trial court agreed with DOR that Lowe’s should not receive a sales tax deduction and dismissed the case. The Court of Appeals affirmed in a published split opinion.
Lowe’s Home Ctrs., LLC v. Dep’t of Revenue , 5 Wash. App. 2d 211, 242-43, 425 P.3d 959 (2018) ; id. at 243, 425 P.3d 959 (Maxa, J., dissenting).
¶7 Two amici submitted briefing. Kohl’s Department Stores Inc. and the Council on State Taxation (COST) filed briefs in support of Lowe’s petition for review; COST also filed a brief in support of Lowe’s supplemental briefing.2
¶8 At issue is whether Lowe’s is entitled to a refund of sales and B&O taxes because the banks reduced Lowe’s profit share from credit card transactions to meet Lowe’s obligation as guarantor of the banks’ bad debt arising from the banks’ contract with Lowe’s account holders.
¶9 DOR urges us to deny the reimbursement. The plain language of our state bad debt provisions requires a taxpayer to satisfy four requirements: (1) be a seller (2) making sales at retail and (3) entitled to a refund for sales taxes previously paid on bad debts (4) that are federally deductible. RCW 82.08.037(1) ; see also WAC 458-20-196(3)(a).
DOR argues that Lowe’s fails to satisfy the plain language of .037(1) because Lowe’s fully recovered sales tax funds and incurred no bad debt.
¶10 Lowe’s counters that state bad debt relief relies exclusively on federal bad debt relief. Because Lowe’s received a federal deduction, Lowe’s contends that it qualifies for a state deduction. Lowe’s further contends that its contractual payments to the banks covering the banks’ losses qualify as "sales taxes previously paid" under .037(1).
¶11 We review summary judgment orders de novo. Sheehan v. Cent. Puget Sound Reg’l Transit Auth., 155 Wash.2d 790, 796-97, 123 P.3d 88 (2005). Taxes are presumed to be valid, and the burden is on the taxpayer to prove the tax is incorrect. Avnet, Inc. v. Dep’t of Revenue, 187 Wash.2d 44, 49-50, 384 P.3d 571 (2016) (plurality opinion) (citing Lamtec Corp. v. Dep’t of Revenue, 170 Wash.2d 838, 843, 246 P.3d 788 (2011) ); Ford Motor Co. v. City of Seattle, 160 Wash.2d 32, 41, 156 P.3d 185 (2007). The taxpayer seeking a refund has the burden to prove that DOR incorrectly assessed the tax and that it is entitled to a refund. RCW 82.32.180. We look to substance rather than form when determining tax classifications. First Am. Title Ins. Co. v. Dep’t of Revenue, 144 Wash.2d 300, 303, 27 P.3d 604 (2001). To qualify for a tax exemption, a taxpayer must demonstrate that the exemption clearly falls within the scope of a tax deduction statute. TracFone Wireless, Inc. v. Dep’t of Revenue , 170 Wash.2d 273, 296-97, 242 P.3d 810 (2010). If ambiguity exists in an exception or deduction provision, courts strictly construe the provision against the taxpayer. Avnet , 187 Wash.2d at 50, 384 P.3d 571 (citing Simpson Inv. Co. v. Dep’t of Revenue, 141 Wash.2d 139, 149-50, 3 P.3d 741 (2000) ).
¶12 Lowe’s and DOR agreed before the Court of Appeals and reaffirmed here that there are no issues of material fact. Lowe’s , 5 Wash. App. 2d at 223, 425 P.3d 959. We must decide whether, as a matter of law, Lowe’s is entitled to a sales tax refund under RCW 82.08.037.
¶13 Washington imposes sales tax on retail purchases. RCW 82.08.020. A buyer must pay sales tax to the seller, and the seller must remit the tax to DOR, even if the seller does not collect that tax at the point of sale. White v. State , 49 Wash.2d 716, 724-25, 306 P.2d 230 (1957) (); AARO Med. Supplies, Inc. v. Dep’t of Revenue , 132 Wash. App. 709, 716, 132 P.3d 1143 (2006). "The amount of tax, until paid by the buyer to the seller or to the department, constitutes a debt from the buyer to the seller." RCW 82.08.050(8).
¶14 Under Washington law, a seller who collects sales tax from a buyer over time must hold those funds in trust and must remit them to DOR. RCW 82.08.050(2) - (3). A seller cannot use sales tax funds for other purposes; if a seller fails to remit the funds for any reason, the seller is personally liable. Id. A seller making a credit sale to a customer who later defaults in payment will have remitted sales tax to the State that it could not collect from a customer. E.g., Puget Sound Nat’l Bank v. Dep’t of Revenue , 123 Wash.2d 284, 287, 868 P.2d 127 (1994) ; James A. Amdur, Annotation, Recovery of Sales Taxes Paid on Bad Debts, 38 A.L.R.6th 255, § 2 (2008).
¶15 The former sales tax and B&O tax administrative rule reiterated that under RCW 82.08.037 and RCW 82.04.4284, sellers are entitled to a credit, refund, or deduction for sales or B&O taxes previously paid on "bad debts" under section 166 of the Internal Revenue Code, and the former rule further provided that taxpayers "may claim the credit or refund for the tax reporting period in which the bad debt is written off as uncollectible in the taxpayer’s books and records and would be eligible for a bad debt deduction for federal income tax purposes." Former WAC 458-20-196(2)(a), (3)(a) (2005).3 The policy behind this statute is to "provide relief to vendors" left holding uncollectible sales tax. Home Depot USA, Inc. v. Dep’t of Revenue , 151 Wash. App. 909, 917, 215 P.3d 222 (2009) (citing Amdur, supra ).
¶16 As noted, RCW 82.08.037(1) has four requirements: a taxpayer must (1) be a seller (2) making sales at retail and (3) entitled to a refund for sales taxes previously paid on bad debt (4) that is federally deductible.4 Lowe’s and DOR do not dispute that Lowe’s has satisfied requirements one, two, and four. The parties’ dispute involves the meaning of requirement four, as well as whether it satisfies requirement three. Lowe’s asserts, "Washington look[s] exclusively to federal law and standards relating to bad debt losses" to determine state deductions. Pet. for Review at 12. Therefore, they assert a federal deduction automatically meets state requirements.
¶17 26 U.S.C. § 166(a)(1) allows as a deduction "any debt which becomes worthless within the taxable year." It permits a deduction for "bad debts owed to the taxpayer" and states that for this purpose, bad debt shall be taken into account as a deduction for debts that become worthless. 26 C.F.R. § 1.166-1(a). Only a bona fide debt arising from a debtor-creditor relationship based on a valid and enforceable obligation to pay a fixed sum of money qualifies. 26 C.F.R. § 1.166-1(c).
¶18 If a taxpayer agrees in the course of business to act as a guarantor of a debt obligation and makes a payment of principal or interest in discharge of that obligation as a guarantor, that payment is "treated as a business debt becoming worthless in the taxable year in which the payment is made." 26 C.F.R. § 1.166-9(a). A taxpayer’s payment discharging its agreement...
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...of the net program losses.Finally, in arguing that we should reverse the tax court, Menard relies on Lowe's Home Centers, LLC v. Department of Revenue , 195 Wash.2d 27, 455 P.3d 659 (2020). The Lowe's court considered an argument similar to that presented here: whether Lowe's was entitled t......