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Home Depot, U.S.A., Inc. v. Director, Division of Taxation

A-4064-07T3 (N.J. Super. App. Div. 2009) (Unpublished)

TAXATION; SALES TAX — New Jersey’s statutes deny any refund of sales tax where a vendor has collected from a customer an amount at least equal to the amount of sales tax paid and also, where a retailer bears no direct risk with respect to its customer’s credit card indebtedness, it cannot claim that service fee payments to finance companies constitute bad debt losses for which a sales tax refund is appropriate.

A national retailer was a conduit for credit card applications and for collecting and remitting New Jersey’s sales tax in connection with credit card sales. For a four year period, it made a business decision to outsource its private label credit card account receivables to three finance companies. The retailer paid service fees to the finance companies. These covered administrative costs, billing and collection costs, and anticipated bad debt. The components of the fee, as it related to any specific cost, bad debt or other loss incurred by the finance companies, was not allocated by any agreement. The retailer had no credit risk with respect to the purchases made with the credit cards as the finance companies agreed to bear all losses on such accounts. After credit was extended and a purchase made, the finance companies paid the retailer the full amount of the transaction, including sales taxes collected. The retailer then remitted the sales taxes to the New Jersey Tax Division. The retailer paid sales tax during the aforementioned four year period on uncollectible credit card purchases for which it sought a refund. The Director of Taxation denied the retailer’s request. The retailer challenged the Director’s determination.

The Tax Court upheld the Director’s ruling and denied the retailer’s refund claim. It rejected the retailer’s position that it was entitled to a refund of sales tax paid on uncollectible credit card debt because it funded the finance companies’ projected bad debt losses through the payment of service fees. As a result, it found that the retailer did not bear the risk of loss under its agreements with the finance companies. The retailer appealed.

The Appellate Division affirmed. First, it held that the claim was barred by a statutory provision which denied any refund of sales tax where a vendor has collected from a customer an amount at least equal to the amount of sales tax paid. Here, under the express terms of the credit card agreements, the retailer collected from the finance companies not less than 86.2% of the purchase amount of each transaction, including applicable sales tax, even in cases where the credit card holder defaulted. Second, the retailer failed to establish that it suffered any losses on credit card transactions due to bad debts since the services fees paid to the finance companies were unidentified and unallocated. Third, because the retailer bore no direct risk with respect to its customer’s credit card indebtedness, did not suffer any losses as a result of the defaults to the finance companies, and presented no competent evidence that its service fee payments constituted bad debt losses for which a sales tax refund was appropriate under the statute, the Court ruled that the Tax Court properly rejected the retailer’s position that it was entitled to a sales tax refund. Moreover, it noted that the “sales tax first regulation,” which requires a vender to remit all the sales tax on an item even when the vendor is only able to collect a portion of the principal, applied since New Jersey had no ability to participate in the credit card evaluations of particular customers. It believed New Jersey taxing authority should not bear the credit risk with respect to any particular customer and that the vendor alone should suffer the consequences of its failure to properly evaluate a customer’s creditworthiness.


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