Lowe's Home Ctrs., LLC v. Dep't of Revenue

• Decision Date: 05 September 2018
• Docket Number: No. 50080-9-II,50080-9-II
• Citation: 425 P.3d 959
• Parties: LOWE’S HOME CENTERS, LLC, Appellant, v. DEPARTMENT OF REVENUE, State of Washington, Respondent.
• Court: Washington Court of Appeals

425 P.3d 959

LOWE’S HOME CENTERS, LLC, Appellant,

v.DEPARTMENT OF REVENUE, State of Washington, Respondent.

No. 50080-9-II

Court of Appeals of Washington, Division 2.

Filed September 5, 2018

A. Troy Hunter, Justin Patrick Walsh, Issaquah Law Group, PLLC, 410 Newport Way NW Ste. C, Issaquah, WA, 98027-3116, John Allan, E. Kendrick Smith, 1420 Peachtree St. Ste. 800, Atlanta, GA, 30309 for Appellant.

Rosann Fitzpatrick, Washington Attorney General, Po Box 40123, Olympia, WA, 98504-0123 for Respondent.

PUBLISHED OPINION

Johanson, J.

¶ 1 In this state tax refund claim case, Lowe’s Home Centers LLC appeals the superior court’s order denying Lowe’s a tax refund on cross motions for summary judgment filed by the Department of Revenue (DOR) and Lowe’s. Lowe’s customers made retail purchases using Lowe’s credit cards issued by GE Capital Financial Inc. and Monogram Credit Bank of Georgia (collectively the Bank). The Bank paid Lowe’s in full for the cardholders’ purchases within one to two days of each transaction. Some cardholders defaulted on their credit card payments to the Bank, and Lowe’s profit-share amount under agreements with the Bank was reduced by the amount in which cardholders had defaulted, up to a specified cap. Lowe’s argues that as a matter of law under the undisputed facts, it is entitled to a state retail sales tax and corresponding retailing business and occupation (B&O) tax refund on the reductions to its profit-sharing income based on its guaranty of defaulted accounts under the profit-sharing agreements. And it argues that the superior court violated its due process and equal protection rights. We affirm.

FACTS

¶ 2 Between April 1, 2001 and December 31, 2009, the relevant tax assessment period, Lowe’s sold merchandise at its retail stores. Many customers paid for products using "private label credit cards" (PLCC) that could be used only at Lowe’s stores. Clerk’s Papers (CP) at 68. A PLCC is a customized credit card that may be used only at a particular retailer’s outlets.

¶ 3 The PLCCs were issued under agreements between Lowe’s and the Bank. The agreements provided (1) the terms under which the Bank extended credit to Lowe’s customers and furnished cash payment to Lowe’s for items purchased under the PLCC accounts, (2) the terms governing ownership and management of PLCC accounts, and (3) the terms by which Lowe’s and the Bank jointly marketed the PLCCs to Lowe’s customers and shared profits and losses resulting from the PLCC accounts.

I. PAYMENT FOR PLCC PURCHASES

¶ 4 Under the PLCC agreements, the Bank would extend credit to qualified Lowe’s customers for purchases at Lowe’s stores. The cardholder could then purchase goods from Lowe’s stores using the line of credit provided by the Bank.

¶ 5 When a cardholder made a purchase using a PLCC, the Bank forwarded full payment for the purchase and all corresponding taxes to Lowe’s within one to two days. Lowe’s promptly remitted to the DOR all Washington sales and B&O taxes on the PLCC transactions. Lowe’s accounted for PLCC transactions as "cash and cash equivalents," the same term used for customers’ payments with cash, check, or other credit cards. CP at 60.

II. OWNERSHIP AND MANAGEMENT OF PLCC ACCOUNTS

¶ 6 Under the PLCC agreements, the Bank was the "sole and exclusive owner" and manager of all PLCC accounts and outstanding receivables. CP at 136. As such, credit sales generated through Lowe’s PLCCs were not reflected in Lowe’s accounts receivable.

¶ 7 In addition, the Bank had the "sole right to establish the finance charge rates" and "all other terms and conditions" related to the credit accounts. CP at 136. Lowe’s had "no right, title or interest" in the credit accounts and transaction-related documentation. CP at 136. The Bank had the exclusive right to receive cardholder payments. And the Bank was "entitled to receive all payments made by or on behalf of Cardholders on Accounts. ... Retailers acknowledge and agree that they have no right, title or interest in or to ... any payments made by or on behalf of Cardholders on Accounts or any proceeds with respect to the accounts." CP at 136. All marketing and promotional materials given to customers had to "clearly disclose that Bank is the owner and creditor on all Accounts." CP at 134. All PLCC services were to be "performed and controlled directly" by the Bank. CP at 49.

III. JOINT MARKETING AND PROFIT AND LOSS SHARING

¶ 8 Lowe’s and the Bank jointly marketed and promoted PLCCs. As an incentive to Lowe’s to promote the use of the PLCCs, the Bank and Lowe’s agreed to share profits and losses associated with the accounts.

¶ 9 Under the agreements’ terms, Lowe’s was entitled to additional profits generated by the PLCC portfolio once the Bank reached its target rate of return. Lowe’s and the Bank settled the profit-sharing obligations on a monthly basis after balancing the revenues generated by finance charges, fees, debt insurance premiums, and other services against program expenses, including net write-offs.

¶ 10 In exchange for the benefits Lowe’s received from the PLCC agreements, including sharing profits and "giving its customers increased access and incentives to purchase additional merchandise," Lowe’s agreed to "pay to the Bank[ ] any amounts that the Cardholders failed to pay on their PLCC accounts, up to" a specified cap.¹ CP at 453-54. The defaulted accounts Lowe’s guaranteed under the profit-sharing agreements included the purchase prices and retail sales taxes for Lowe’s products that cardholders had failed to repay the Bank. To satisfy Lowe’s obligation under the profit-sharing agreements’ guarantee provision, the Bank reduced Lowe’s monthly share of profit distributions up to a specified percentage of anticipated average net receivables on the PLCC accounts. The Bank was responsible for losses on defaulted accounts exceeding the cap.

¶ 11 The agreements stated that Lowe’s "and not Bank shall have the right to claim any available sales tax deductions related to Net Write-Offs borne by" Lowe’s. CP at 454, 523, 613, 696, 782.

¶ 12 When a customer defaulted on its PLCC account, the Bank, not Lowe’s, possessed the accounts receivable and had authority to write off the uncollectible debt on its books and records. CP at 113 ("[The Bank] has the receivables and liabilities, along with anything else on their books, and Lowe’s does not have a receivable or liability on its books and records at all."); CP at 945 ("[The Bank] owns the receivable and [Lowe’s] do[es] not make an entry when an account is uncollectible."). Although Lowe’s books and records reflected Lowe’s profit-sharing reductions, Lowe’s books and records did not reflect any accounts receivable on the PLCC accounts nor unpaid debt obligations owed to Lowe’s by cardholders.

IV. PROCEDURAL HISTORY

¶ 13 Throughout the relevant assessment period, Lowe’s filed federal corporate income tax returns. Under 26 U.S.C. § 166, Lowe’s deducted its profit-sharing reductions as "Bad Debts" on line 15 of the tax returns. CP at 846. The Internal Revenue Service (IRS) audited these returns and proposed no adjustments to Lowe’s bad debt deductions.²

¶ 14 Lowe’s also claimed a Washington retail sales tax credit under RCW 82.08.037³ and retailing B&O tax deduction under RCW 82.04.4284⁴ for Lowe’s profit-sharing reductions. The DOR audited Lowe’s and determined that Lowe’s had improperly claimed bad debt sales tax credits and B&O tax deductions on the defaulted PLCC accounts.

¶ 15 After these audits, the DOR assessed retail sales taxes and retailing B&O taxes against Lowe’s. Lowe’s paid in full both assessments. Lowe’s filed an appeal under RCW 82.32.180 seeking a retail sales tax and retailing B&O tax refund.

¶ 16 The parties filed cross motions for summary judgment. The superior court ruled that under Home Depot USA, Inc. v. Department of Revenue ,⁵ the DOR properly denied Lowe’s tax refund. Consequently, the superior court granted the DOR’s summary judgment motion and denied Lowe’s summary judgment motion. Lowe’s appeals.

ANALYSIS

I. PRINCIPLES OF LAW

A. STANDARD OF REVIEW

¶ 17 We review a summary judgment order de novo, and we perform the same inquiry as the superior court. Sheehan v. Cent. Puget Sound Reg’l Transit Auth. , 155 Wash.2d 790, 796-97, 123 P.3d 88 (2005). We consider all the facts submitted to the superior court and all reasonable inferences from the facts in the light most favorable to the nonmoving party. Keck v. Collins , 184 Wash.2d 358, 370, 357 P.3d 1080 (2015). The moving party is entitled to summary judgment if it shows that the pleadings, affidavits, depositions, and admissions on file demonstrate the absence of any genuine issues of material fact and that the moving party is entitled to judgment as a matter of law. Sheehan , 155 Wash.2d at 797, 123 P.3d 88 ; CR 56(c).

B. RETAIL SALES TAX BACKGROUND

¶ 18 Washington imposes a 6.5 percent tax on each retail sale of tangible personal property. RCW 82.08.020(1)(a). The tax is based on the " ‘selling price,’ " which means "the total amount of consideration" for which a good is sold, without deduction for the seller’s overhead expenses or any other expenses whatsoever and without deduction on account of losses. RCW 82.08.010(1). The buyer has the primary obligation to pay the sales tax, but the seller has the duty to remit sales tax even if no tax is collected at the time of sale. RCW 82.08.050(1) ; AARO Med. Supplies, Inc. v. Dep’t of Revenue , 132 Wash. App. 709, 716, 132 P.3d 1143 (2006). Sales taxes paid by the seller on the buyer’s behalf but not paid from the buyer to the seller are a debt owed by the buyer to the seller. Home Depot , 151 Wash. App. at 917, 215 P.3d 222.

¶ 19 "A seller is entitled to a credit or refund for sales taxes previously paid on bad debts, as that term is used in 26 U.S.C. Sec. 166." RCW 82.08.037(1). In Puget Sound National Bank v. Department of Revenue , our Supreme Court stated that " RCW 82.08.037 has three requirements: (1) the seller must be a person, (2) making...