The Louisiana Court of Appeals has denied Dillard’s department store their appeal for a refund of sales tax remitted for purchases customers paid for with store credit cards. The department store had an agreement to issue store-branded credit cards in affiliation with Wells Fargo Bank, NA, where the bank held responsibility for all losses, and Dillard’s took a share of revenues generated by the credit card program. When customers made a purchase using their store cards, the department store would take payment for any sales tax owed, which they then remitted to the Louisiana Department of Revenue. When customers failed to pay off their store credit cards, Wells Fargo would write off these bad debts on their federal return, and factor these write offs into their formula used to calculate the bank’s payouts to Dillard’s under their revenue sharing program.
Dillard’s submitted a refund claim for taxes remitted to the department that were ultimately written off as bad debt, which was originally granted. The Department determined later that the refund claim was invalid and attempted to recover refunds that had been granted. The Department’s claim was upheld by the Louisiana Board of Tax Appeals, and appealed by the taxpayer to the Louisiana Court of Appeals.
The Louisiana Court of Appeals agreed with the department’s determination that Dillard’s did not have the right to claim a refund of taxes paid on bad debt, because though they were the ones who actually remitted the tax, the bank was responsible for payment of the tax and the loss from the unpaid debt. The courts and the department pointed to Louisiana’s statute defining the terms of refunds for bad debts, which states that refunds are not authorized for bad debts on sales financed by lending institutions, “unless the lender has full recourse against the seller for any unpaid amounts.” The court determined that the reduction in profits caused by bad debt did not constitute “full recourse,” and that the contract between the bank and the department store specified that all credit losses would be borne by the bank.
Whenever there is a refund claim for sales tax, there is usually more than one party involved, whether that is the purchaser, the seller, or in this case, the lender. State by state, whether each of these parties may be entitled to a refund and the limitations on their ability to claim a refund may be different. Taxpayers should examine statutes, regulations, and department policy to ensure that they are allowed to claim tax overpaid. (Higbee v. Robinson, 2023 CA 0184, Louisiana Court of Appeal, First Circuit.)
UPDATE: On February 6th, 2024, the Louisiana Supreme Court decided in a 4-3 split decision to decline a review of the appeal court’s ruling, leaving the refund denial in place.