The taxpayer operates a large home-improvement store. As part of their services, the taxpayer provided financing to their customers for their purchases. When a customer bought something (and paid sales tax as part of the purchase), the details of their purchase were sent to a finance company. The finance company paid the taxpayer for the amount of the purchase (which included the sales tax) less a service fee. The taxpayer remitted the collected sales tax to the appropriate Alabama governmental entity or entities. The taxpayer deducted the finance company’s service fee on its federal income-tax returns as a credit-card expense.
In 2003, the taxpayer filed a petition with the Alabama Department of Revenue for a $610,449 refund of the sales tax it had remitted from September 2000 to July 2003 for customers who participated in the financing program, but who had failed to pay the finance company for their purchases. The taxpayer relied on the bad-debt regulation. Alabama Administrative Code § r. 810-6-4-.01. The taxpayer maintained that since part of the service fee included a calculation for expected non-payment of debts, the taxpayer was entitled to a refund of sales taxes paid.
In 2006, the department denied the refund. The taxpayer appealed to an administrative law judge for the department and requested a formal hearing. In 2007, the administrative law judge held a hearing on the taxpayer’s request for a refund. At this point, the taxpayer reduced its request for a refund to $383,341. The administrative law judge found that the bad-debt regulation did not apply to the taxpayer. He found that the regulation applied to retailers who extended credit to their customers, but not when a retailer sold the customer debts to a finance company.
In 2009, the taxpayer filed an appeal with the Montgomery County Circuit Court, but reduced its request for a refund to $266,672. In 2011, the circuit court awarded summary judgement to the taxpayer. The Alabama Department of Revenue appealed to the Alabama Court of Civil Appeals, which reversed the circuit court. The court of appeals noted that the taxpayer bore no risk of its customers’ defaults and had been fully paid by the finance companies for the purchases, less the service charges; therefore, the taxpayer was not entitled to a refund of the sales tax it had collected and remitted.
See McGee v. Home Depot, decided on November 4, 2011.
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