Menard, Inc. v. Comm'r of Revenue, A20-0241

CourtSupreme Court of Minnesota (US)
Writing for the CourtGILDEA, Chief Justice.
Citation955 N.W.2d 284
Parties MENARD, INC., Relator, v. COMMISSIONER OF REVENUE, Respondent.
Docket NumberA20-0241
Decision Date24 February 2021

955 N.W.2d 284

MENARD, INC., Relator,


Supreme Court of Minnesota.

Filed: February 24, 2021

Lynn S. Linné, Masha M. Yevzelman, Fredrickson & Byron, P.A., Minneapolis, Minnesota; and Brian R. Harris, Akerman LLP, Tampa, Florida, for relator.

Keith Ellison, Attorney General, Kristine K. Nogosek, Mawerdi Hamid, Assistant Attorneys General, Saint Paul, Minnesota, for respondent.


GILDEA, Chief Justice.

The question presented in this appeal is whether Menard, Inc., is entitled to an offset on its sales tax liability under Minn. Stat. § 297A.81 (2020). This statute allows a taxpayer to reduce current tax liabilities by the amount of sales taxes attributable to uncollectible debts owed to the taxpayer. Menard claimed a sales tax offset based on uncollectible debts that resulted from customer purchases made on Menard's private label credit card offered by Capital One, N.A. The Commissioner of Revenue audited Menard's sales tax returns and determined that Menard was not entitled to claim an offset. Accordingly, the Commissioner assessed additional sales tax. Menard appealed the assessment, and the tax court concluded that Menard is not eligible for a sales tax offset because unpaid debts from customer transactions made on Menard's private label credit card were owed to Capital One, not Menard. Menard, Inc. v. Comm'r of Revenue , Nos. 8922-R & 8960-R, 2019 WL 7426213, at *4 (Minn. T.C. Dec. 20, 2019). Because we conclude that these unpaid customer transactions are not debts owed to Menard and that Menard is not a guarantor of the cardholders’ debts, we affirm.


The facts are undisputed. Menard operates home improvement retail stores at locations in several midwestern states, including Minnesota. In 2013, Menard entered into an agreement with Capital One, under which Capital One agreed to issue a private label credit card branded with Menard's name to Menard's retail customers. Under this agreement, Menard offered the private label credit cards to its customers, while Capital One established the criteria and procedures to process applications for credit. Capital One retained the sole authority to reject or accept customer credit applications and had the exclusive right to determine the amount of credit to extend to approved customers. Capital One also owned the cardholders’ accounts (including each cardholder's individual indebtedness), was responsible for collecting all amounts due on cardholder accounts, and was entitled to receive all payments made by cardholders. Menard and Capital One acknowledged in their agreement that they were "independent contractors."

Consistent with the Menard and Capital One agreement, when a customer made purchases from Menard using the private

955 N.W.2d 286

label credit card, the customer became indebted to Capital One for the entire amount charged on the account, including Minnesota sales tax imposed on the purchase price. On a daily basis, Menard provided Capital One with data on sales made using that card, including the purchase amount and associated sales tax. Then, Capital One reimbursed Menard for the purchase price and applicable sales tax for each transaction, less an agreed-upon discount fee.1 Menard then reported and paid the sales tax to the Minnesota Department of Revenue.

In addition to the provisions governing daily settlement of individual customer transactions made using the Capital One credit cards, Capital One agreed to pay compensation to Menard. Specifically, Capital One agreed to share financing income with Menard, composed of interest charges on account balances and late fee charges. Menard agreed to accept a share of the net losses incurred in the program, i.e., a portion representing charged-off account balances and bankruptcy write-offs, net of certain recoveries that Capital One made. Capital One calculated the compensation it owed to Menard by reducing Menard's share of the financing income by Menard's share of the net program losses.

Capital One deducted delinquent account receivable balances on its federal income tax returns as bad debts under I.R.C. § 166(a)(1). Menard did not. Rather than claiming a bad debt deduction under section 166, Menard claimed a deduction on its federal tax returns for its share of the net program losses on the "other deductions" line.

When reporting its sales tax liability to the Minnesota Department of Revenue, Menard claimed an offset against its current sales tax liability based on its share of the net program losses that Capital One calculated under the agreement's compensation formula.2 The Commissioner audited Menard and disallowed the sales tax offsets, concluding that the net program losses did not represent bad debts owed to Menard, but instead were based on bad debts owed to Capital One. This determination resulted in the Commissioner assessing additional sales tax and interest for the period of January 1, 2014 to March 31, 2016.

Menard appealed the Commissioner's assessment to the tax court, and Menard and the Commissioner each moved for summary judgment. The tax court granted the Commissioner's motion for summary judgment and denied Menard's motion for summary judgment. Menard, Inc. v. Comm'r of Revenue , Nos. 8922-R & 8960-R, 2019 WL 7426213, at *1 (Minn. T.C. Dec. 20, 2019). The tax court concluded that no uncollectible debt was owed to the taxpayer, Menard, and therefore Menard was not entitled to offset its sales tax liability under Minn. Stat. § 297A.81, subd. 1. 2019 WL 7426213, at *4–5.3 Menard appeals from this decision.

955 N.W.2d 287


This appeal comes to us from a final order of the tax court. We review a final decision of the tax court to determine whether the court lacked jurisdiction, whether the court's order is not justified by the evidence or does not conform to the law, or whether any other error of law was committed. Minn. Stat. § 271.10, subd. 1 (2020). We review conclusions of law, including statutory interpretation, de novo and review factual findings for clear error. Antonello v. Comm'r of Revenue , 884 N.W.2d 640, 643–44 (Minn. 2016). The Commissioner's tax assessments are presumed to be valid and correct, and the taxpayer bears the burden of demonstrating otherwise. YAM Special Holdings, Inc. v. Comm'r of Revenue , 947 N.W.2d 438, 441 (Minn. 2020).

Menard argues that it is entitled to offset its Minnesota sales tax liability by the amount of the net program losses Capital One used to calculate the program compensation owed to Menard. Menard contends that by agreeing to reduce its share of the income generated from the credit card program by a portion of the net program losses, Menard acted as a guarantor of the bad debts of Capital One on cardholders’ accounts. Then, Menard asserts that a "guarantor" can claim a bad debt deduction under federal law, see Treas. Reg. § 1.166-9(a). Finally, Menard contends that because it is eligible to claim a bad debt deduction under I.R.C. § 166 as a guarantor, it is entitled to claim an offset of its Minnesota sales tax liability for that same debt.

The Commissioner disagrees, asserting that Capital One was the sole owner of the cardholder accounts and the indebtedness associated with those accounts. Accordingly, no debts on those accounts are owed to Menard. The Commissioner also contends that the formula used to calculate Menard's compensation under its agreement with Capital One did not transfer to Menard any of Capital One's ownership rights in and responsibility for cardholder debts, or impose a guaranty obligation on Menard. Those terms simply established payment obligations between the contracting parties that operated to reduce Menard's share of the profits from the card program. Thus, the Commissioner asserts, Menard's offset claim was properly denied.


Before turning to Menard's specific arguments, we review the tax laws that are relevant to this appeal.

Minnesota imposes a tax "on the gross receipts from retail sales." Minn. Stat. § 297A.62, subd. 1 (2020). Retailers collect the sales tax from the purchaser at the time of the sale, and remit the taxes to the Minnesota Department of Revenue. Minn. Stat. § 297A.66, subd. 2 (2020) ; Minn. Stat. § 297A.77, subds. 1, 3 (2020) ; see Minn. Stat. § 289A.11 (2020) (stating the filing requirements for sales tax returns). A refund may be claimed for an "overpayment" of a tax. Minn. Stat. § 289A.50, subd. 1 (2020). In the case of sales tax paid to the

955 N.W.2d 288

State for a purchase made on credit that is later not paid and becomes uncollectible, the retailer may offset the uncollectible debt against a current tax liability. Specifically, a taxpayer is allowed to:

offset against the [sales and use] taxes payable ... the amount of taxes imposed by this chapter previously paid as a result of any transaction the consideration for which became a debt owed to the taxpayer that became uncollectible during the reporting period, but only in proportion to the portion of the debt that became uncollectible. Section 289A.40, subdivision 2, applies to an offset under this section.

Minn. Stat. § 297A.81, subd...

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