Illinois Supreme Court Disallows Sales Tax Refund on Bad Debt to Lender

The Illinois Supreme Court has reversed a lower court’s decision and disallowed a lender’s refund claim of sales tax paid through affiliated retailers upon the sale of goods, transactions that were financed through the lender and that ultimately resulted in uncollectible debts. An Illinois appellate court had ruled that the lender could pursue a refund of the taxes attributed to uncollectible debts. The lender provided sales financing programs to Illinois retailers. When the retailers’ customers used the financing program, the lender would remit to the retailer the amount the customer financed, including the tax owed on the purchase. Under the agreements between the lender and the retailers, the lender acquired “any and all applicable contractual rights relating thereto, including the right to any and all payments from the customers and the right to claim Retailer’s Occupation Tax (ROT) refunds or credits.” After some of the customers defaulted on their accounts and the lender made reasonable attempts to collect the balances due, the lender wrote the balances off as bad debts. Subsequently, the lender filed a claim for a refund of sales tax paid. The lender’s claim did not contain some of the detailed information required to be reported within different parts of the form used by the Department.

In its decision, the Illinois Supreme Court found that the legislature has made clear that all refund or credit claims – whether on bad debt or otherwise – go through the retailer, the original remitter of the tax. The Court stated that allowing claims by the lender via assignment would circumvent the legislature’s statutory policy of requiring refund requests to be made by the remitter of the tax, so as to avoid reporting problems that might arise. The Court concluded that it is not the intent of the legislature to allow a direct action for a refund by a lender against the Department under these circumstances. The Court noted that lenders could remedy this situation by accounting for this circumstance in their agreements. The retailer should file the refund claim but then could transfer the credit memo to the lender as permitted in Illinois. (Docket No. 121634, In the Supreme Court of the State of Illinois, Citibank, N.A., Appellee, v. The Illinois Department of Revenue et al., Appellants, Nov 30, 2017)