Retailer that Contracted With Finance Companies Entitled to Bad-Debt Deduction in Michigan

A retailer that entered into private label credit card (PLCC) agreements with finance companies is entitled to a bad-debt deduction for Michigan sales taxes collected and remitted on purchases made by PLCC holders who subsequently failed to pay their credit card bills because the retailer met the requirements set forth in the applicable Michigan tax statute. The retailer sought a refund of taxes paid between 1999 and 2007 despite having received compensation for the purchases and the tax pursuant to its contracts with the finance companies. In a previous court case, the Michigan Court of Appeals held that parties acting in concert could be viewed as a unit for purposes of the bad-debt statute. When the statute was amended in 2007, the Legislature did not expressly override this conclusion but stated that only the retailer was entitled to the bad-debt deduction for periods on or before September 30, 2009. The retailer in this case did have the legal liability to remit sales tax on the retail sales for which the bad-debt deduction is recognized for federal income tax purposes. While the finance companies wrote off the bad debt, this fact does not diminish the taxpayer’s qualification under the bad-debt statute. The finance companies’ actions in writing off the debts satisfy the requirements of the pertinent Michigan tax statute.

On October 22, 2012, the Michigan Supreme Court denied a request to review the Court of Appeals decision in this case. Therefore, Home Depot was entitled to the refund of taxes paid on items written off as bad debts. (Home Depot USA, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 301341, May 24, 2012; Home Depot USA, Inc. v. State of Michigan, et al., Michigan Court of Appeals, No. 301341, May 24, 2012; leave to appeal denied, Michigan Supreme Court, Dkt. No. 145412, October 22, 2012)

Posted on November 26, 2012