Rulings of the Tax Commissioner

December 7, 2016

Re:      § 58.1-1821 Application:  Retail Sales and Use Tax

Dear *****:

This determination is in response to your letter in which you appeal the Department's denial of sales tax refund claims submitted by ***** (the “Taxpayer”) for the periods September 2010 through March 2014.  I apologize for the delay in responding to your request.

FACTS

On June 19, 2014, the Department issued a letter to the Taxpayer's representative denying the Taxpayer's request for refund.  Two main reasons were given for the denial.  First, the Taxpayer failed to provide proof that its claimed bad debt sales tax deductions were similar to the transactions in Public Document (P.D.) 99-37 (3/30/99).  Second, the Taxpayer submitted Assignment of Rights documents from several retailers who agreed to assign all of their rights to sales tax refunds or credits attributable to charged off accounts to the Taxpayer but failed to prove that these retailers incurred bad debt losses or that the retailers charged to losses any amounts relative to the retail sales.  In other words, the Taxpayer failed to establish that it was entitled to the claimed refund.

In its appeal of such refund denial, the Taxpayer indicates that it is a credit card company that has entered into various agreements with retailers (hereinafter, “Retailer” or “Retailers”) to finance credit sales made by the Retailers.  During the period in question, the Taxpayer indicates that it financed all of the retail purchases that are the subject of the refund claim, including the sales tax thereon.

According to the Taxpayer, it entered into program agreements (the “Agreement” or “Agreements”) with each Retailer to acquire or originate consumer charge accounts for financing the credit card sales.  Based on these Agreements, the Taxpayer indicates that it paid the Retailers the full outstanding purchase price of the merchandise and all sales tax relating to the sales.  The Taxpayer claims that each Retailer reported and remitted the sales tax to the Department on all sales to customers.

The Taxpayer presents a number of documents entitled Assignment of Rights (hereinafter, “Assignment” or “Assignments”).  In each Assignment provided, a Retailer assigns to the Taxpayer any and all rights and interests (including the right to claim sales or use tax credits and refunds) for sales or use tax remitted to the Department by the Retailer and subsequently charged off by the Taxpayer on or after January 2010.  Based on these Assignments, the Taxpayer maintains that it retained or acquired any and all rights with respect to the accounts, including the right to any and all payments from the customers.

The Taxpayer contends that any losses attributable to customers’ defaults on the accounts were borne by it.  The Taxpayer maintains that it reasonably determined that the accounts were worthless and uncollectible and that legal action to enforce payment would not likely result in the satisfaction of execution on a judgment.  The Taxpayer has charged off the worthless accounts on its books and records and claimed a bad debt deduction for federal income tax purposes that includes the unpaid portions of the worthless accounts, including unpaid sales tax.

Based on the foregoing, the Taxpayer disagrees with the Department's denial of its entitlement to bad debt sales tax refunds under Va. Code § 58.1-621 and P.D. 99-37.

DETERMINATION

Statute of Limitations

Refunds are subject to a three year statute of limitations.  Virginia Code § 58.1-1823 A provides that “[a]ny person filing a tax return or paying an assessment required for any tax administered by the Department of Taxation may file an amended return with the Department within the later of . . . three years from the last day prescribed by law for the timely filing of the return.”

The initial periods were September 2010 through September 2013.  Based on the Taxpayer's refund request of January 17, 2014, the amended returns for the periods September 2010 through November 2010 were filed outside the three year statute of limitations.  Because these three amended returns were not timely filed, they cannot be a part of the Taxpayer's refund request or its appeal of the refund denial.  Furthermore, the inclusion of such returns in the Department's response of June 19, 2014 is erroneous.

The Taxpayer also submitted a refund request dated February 11, 2014 for the period October 2013 through December 2013 and a refund request dated May 13, 2014 for the period January 2014 through March 2014.  Those requests are timely filed in accordance with Va. Code § 58.1-1823 (A) and the related appeals are also timely filed.  When consolidated, the available periods for the three refund requests are from December 2010 through March 2014.

Burden of Proof

Virginia Code § 58.1-205 (1) sets out the rule that “[a]ny assessment of a tax by the Department shall be deemed prima facie correct.”  For applications to court, Va. Code § 58.1-­1825 (D) specifically requires that “[i]t shall be the burden of the applicant in any such proceeding to show that the assessment or collection or action on a transferred credit or other tax attribute complained of is erroneous or otherwise improper.”  With respect to bad debt issues, the Court of Appeals of Tennessee has noted that a person seeking a tax refund or credit “has the burden of demonstrating that it is entitled to the relief it seeks.”  The court went on to say that “[p]ersons seeking relief generally carry their burden by demonstrating that they fit within the language of the statute authorizing the credit or the refund.”  [Emphasis added.]  See Sun Trust Bank, Nashville v. Johnson, 46 S.W.3d 216, 224 (Tenn. Ct. App. 2000), appeal denied (2001).  The same burden is appropriate for establishing qualification for a bad debt credit under Va. Code § 58.1-621.

In the four Agreements presented, the Taxpayer has blacked out or removed several clauses from each of these Agreements.  Some of the omitted clauses appear to relate to certain fees, charges and discounts agreed upon in conducting the Agreements.  However, the Department cannot determine the content of the other omitted clauses.  In DaimlerChrysler Services North America, LLC v. Arizona Department of Revenue, 210 Ariz. 297, 307, 110 P.3d 1031, 1041 (2005), review denied (2006), the reverse side of the assignment was not furnished to the court.  The reverse side set out the terms, conditions and warranties of the seller's assignment.  In Footnote 2 of such court case, the court stated that “[w]e have no ability to  evaluate what impact these terms may or may not have on this matter.”  [Emphasis added.]  The same concern applies in the instant case.

Bad Debt Statute

Strict Construction Rule Applies to Bad Debt Credit Statute

Most courts that have ruled on a request for a bad debt credit or refund require the application of strict construction to bad debt statutes because such statutes are analogous to an exemption or refund statute in which the statutory language must be strictly construed against the person seeking a credit or refund.  For instance, in Department of Taxation v. DaimlerChrysler Services North America, LLC, 121 Nev. 541, 544, 545, 119 P.3d 135 (2005), the Supreme Court of Nevada stated:

Most states confronted with a finance company's claim that it is entitled to a bad-debt tax credit have denied the finance company relief for a variety of reasons.  Like Washington, Ohio's bad-debt statutes are similar to Nevada's in that they include an “assignee” in the definition of a “person”.  The Ohio court, in Chrysler Financial Co., L.L. C. v. Wilkins, strictly interpreted its statute in denying a finance company relief because the statute was granting something similar to a

tax exemption, which it concluded should be strictly interpreted.[1]  Other states that have considered a finance company's claim to a bad-debt credit have also used strict construction of the statute to deny the requested relief.  [Several footnotes of the court are omitted.]

Like most other states, the courts in Virginia require the application of strict construction to exemption statutes.  For example, see Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973).  The Supreme Court of Virginia in Nielsen Co. (US), LLC v. County Bd. of Arlington County, 767 S.E.2d 1 (2015) cited from the U.S. Supreme Court's case in INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84, 112 S.Ct. 1039 (1992) that “an income tax deduction is a matter of legislative grace and that the burden of clearly showing the right to the claimed deduction is on the taxpayer.”  [Emphasis added.] Similarly, deductions from sales tax are generally considered in many states as matters of legislative grace in which strict construction applies.[2]  The Supreme Court of Virginia has not specifically addressed the strict construction rule with respect to “credits.”  In this regard, however, is Howell's Motor Freight, Inc. v. Virginia Department of Taxation, 1 Va. Cir. 382, Law No. 82-0846 (1983).  In that case, the Circuit Court of Virginia for the City of Roanoke relied on 71 Am. Jur. 2d, State and Local Taxation, ‘549 at page 823, to cite the following:

Because statutes allowing credits against income tax due reflect privileges  accorded as a matter of legislative grace rather than taxpayer right, and because credits have a far greater impact on the ultimate liability of the taxpayer than deductions, such statutes must be strictly construed against the taxpayer and in favor of the taxing authority . . . ." [Emphasis added.]

The circuit court went on to state that, “[n]ot only must such statutes be strictly construed, but the burden of persuasion is upon the applicant to prove the error of the assessment.”  Based on these authorities, and the fact that the Virginia bad debt credit for sales tax serves to reduce the tax liability of a taxpayer, it is my opinion that Va. Code § 58.1­621 is a statute of legislative grace and, thus, is subject to the rule of strict construction.

Plain Language of the Bad Debt Statute

For Virginia retail sales and use tax purposes, subsection A of Va. Code § 58.1-621 specifically provides the following:

In any return filed under the provisions of this chapter, the dealer may credit, against the tax shown to be due on the return, the amount of sales or use tax previously returned and paid on accounts which are owed to the dealer and which have been found to be worthless within the period covered by the return. The credit, however, shall not exceed the amount of the uncollected sales price determined by treating prior payments on each debt as consisting of the same proportion of sales price, sales tax and other nontaxable charges as in the total  debt originally owed to the dealer.  The amount of accounts for which a credit has been taken that are thereafter in whole or in part paid to the dealer shall be included in the first return filed after such collection.  [Emphasis added.]

A requirement of Va. Code § 58.1-621 is that the credit for bad debts must be applied against the tax shown to be due on the return filed by the dealer.  Thus, this requirement implies that the dealer claiming the credit must be registered to collect and remit the sales tax and must have reported the taxable amount of each sale on its returns and remitted the sales tax before it can subsequently claim a credit for bad debts related to the taxable portion of such sales.  Because the Taxpayer did not report any of the retail sales of tangible personal property that are the subject of the Taxpayer's bad debt claim and did not remit the sales tax imposed on such sales to the Commonwealth, it has not satisfied this requirement for any of the sales claimed to be worthless.

A second requirement of Va. Code § 58.1-621 is the statutory phrase owed to the dealer.  This phrase allows a credit for only amounts of worthless debt payable to the dealer. A debt payable to the dealer occurs when the dealer makes a taxable retail sale, reports it, and remits the sales tax to the Commonwealth.  See Va. Code § 58.1-625.  In this case, the Taxpayer did not make the sales at issue and did not report or remit the sales tax on such sales.  Thus, there was no sales tax or debt owed by the Retailers’ customers to the Taxpayer.  A third requirement is that prior payments must be applied in the same proportion of sales price, sales tax and nontaxable charges as in the total debt originally owed to the dealer.  Again, none of the debts at issue were owed to the Taxpayer because it was not the dealer who made the original sales.  A fourth requirement is that payments to the dealer on worthless accounts must be included in the first return filed after such collection.  The record presented does not indicate that the Taxpayer reported any payments made on worthless accounts.  These requirements taken together provide compelling evidence that the legislature intended that the bad debt statute apply only to those dealers that have reported the sale and remitted the sales tax on accounts that become worthless.

Other States — Dealer Claiming Bad Debt Must be Retailer of Uncollectible Sales Tax

When a dealer does not satisfy the above cited requirements of the bad debt statute, it is not eligible to claim a bad debt credit under Va. Code § 58.1-621.  In similar fashion, other states have declined to allow a bad debt statute to apply to a third party assignee engaged only as a lender, finance company or credit card company or incidentally engaged in retailer activities.  To illustrate my point, consider the following:

·       In the Matter of General Electric Capital Corp. v. N.Y. State Div. of Tax Appeals, 301 A.D.2d 819, 820, 754 N.Y.S.2d 84 (2003).  The Supreme Court of New York held that “[i]t cannot be doubted that the statute, as written, refers to credits or refunds only to vendors inasmuch as only vendors are possessed of 'taxable receipts' . . . there was nothing irrational in promulgating 20 NYCRR 534.7 [a regulation for refunds and credits attributable to bad debts] which limited such credits or refunds to vendors and excluded third-party assignees." [Insert added.]

·       DaimlerChrysler Services North America, LLC v. State Tax Assessor, 817 A.2d 862, 2003 ME 27 (2003).  The Supreme Judicial Court of Maine held that “only retailer who paid sales tax could obtain benefit of sales tax statute providing credit for worthless accounts.”  The court at 817 A.2d 865 further stated that “the fact that the statute provides only for a credit, and does not permit the Assessor to refund the amount paid, demonstrates that it is limited to retailers because only retailers are in position to take a credit against a tax owing on a subsequent report.  Retailers are persons making sales . . . and they are required to collect taxes from sales and to report monthly on all sales made during the preceding month . . . . Thus, retailers are persons who have tax liabilities against which a credit can be taken.”

·           Chrysler Financial Company, L.L. C. v. Wilkins, supra, 102 Ohio St. 3d at 448, 812 N.E.2d at 952.  “The plain language of R.C. 5739.121 [Ohio's bad debt deduction statute] permits only the vendor that made the sale and remitted the tax to the Department of Taxation to claim a bad-debt deduction.”  [Insert added]

·           Chrysler Fin. Co., L.L.C. v. Wilkins, supra, 102 Ohio St. 3d at 447, 812 N.E.2d at 951.  The Supreme Court of Ohio further held that “While the definition of ‘person’ includes ‘assignee,’ merely being an assignee does not make the assignee a vendor for the purposes of R.C. 5739.121 [Ohio's bad debt deduction statute].  R.C. 5739.01(C) [Ohio's sales tax definition statute] defines ‘vendor’ as the person ‘by whom the transfer effected . . . by a sale is or is to be made.’  Thus, an assignee, trustee, or any of the other entities included in the definition of ‘person’ set forth in R.C. 5739.01(A) can be a vendor, but only if the entity makes the transfer effected by a sale.”  [Inserts added.]

·           DaimlerChrysler Services North America, LLC v. Commissioner of Revenue Services, 274 Conn. 196, 207, 875 A.2d 28, 35 (2005).  The Supreme Court of Connecticut held that the logical construction is that “the credit is available only to the retailer who made the sale and remitted the tax to the defendant rather than a financing company in the plaintiffs position because the former is in a position to claim the credit, whereas the latter is not.”

·           In re Appeal of Ford Motor Credit Co. from Denial of Refund of Kansas Retailers' Sales Tax, Dated March 31, 2000, 275 Kan. 857, 869, 69 P.3d 612, 620 (2003).  The Supreme Court of Kansas held that a finance company may “incidentally be a retailer of repossessed vehicles, but it is not a retailer with regard to the sale preceding default and repossession.  Strictly construing . . . would permit only the retailer who sells a vehicle and . . . remits the sales tax to the State to reduce its tax liability for a bad debt.”

·       Daimler Chrysler Services North America, LLC v. Wisconsin Dept of Revenue, 298 Wis. 2d 119, 138, 131, 726 N.W.2d 312, 321, 318 (Ct. App. 2006), review denied, 300 Wis. 2d 195, 732 N.W.2d 860 (2007).  The court held that, “Tax exemptions, deductions, and privileges are matters of legislative grace and will be strictly construed against the taxpayer.”  “The retailer entitled to a bad debt deduction is the retailer who has liability for sales tax.”  “The most reasonable interpretation . . . is that liability refers to liability to the state, not liability to a third party pursuant to contract law.”

Statutory Construction Principles Prevail Over General Assignment Principles

The plain language of Va. Code § 58.1-621 (A) does not expressly extend a bad debt credit to an assignee that has not reported or remitted the sales tax on sales or leases made by the original dealer and subsequently determined by the assignee as uncollectible.  In this regard, other states have relied upon statutory construction principles to prevail over general assignment principles.  To illustrate, consider the following:

·       DaimlerChrysler Services North America, LLC v. Commissioner of Revenue Services, supra, 274 Conn. at 217, 875 A.2d at 40.  The Supreme Court of Connecticut ruled that ‘the right to a tax credit . . . is not assignable to a third party absent explicit statutory language authorizing such an assignment.”

·       Citibank (S.D.) N.A. v. Commissioner of Revenue, 2015 Minn. Tax LEXIS 34, Docket No. 8488-R, June 4, 2015, the Minnesota Tax Court declined “to allow common-law  principles of assignment to prevail over principles of statutory construction, in the absence of a clear indication from the legislature to the contrary.”  [Emphasis added.]

Other courts have similarly declined to accept common-law principles over statutory construction principles.  To illustrate, consider the following:

·       SunTrust Bank, Nashville v. Johnson, supra, 46 S.W.3d at 226.  The court held that the Tennessee statute for claiming a bad debt credit [Tenn. Code Ann. § 67-6-507(e)(1)] was available only to the “dealer who has paid the tax imposed by this chapter.”  The court reasoned that this “language is unambiguous and cannot reasonably be construed to include the assignees of dealers who have paid the sales tax.”  The court further held that “in this context, the traditional principles of statutory construction applicable to statutes granting tax credits, deductions, or exemptions, should prevail over general assignment principles.”

·       Daimler Chrysler Services North America, LLC v. Arizona Dept. of Revenue, supra, 210 Ariz. at 297, 110 P.3d at 1031.  The court held that the finance company was not a vendor entitled to a bad debt deduction.  It was not required to pay the transaction privilege tax.  Nor was it entitled to a bad debt deduction as assignee.  Strict construction of exemption prevented use of bad debt deduction under general principles of assignment law.

·       General Motors Acceptance Corp. v. Jackson, 247 Ga. App. 141, 144, 542 S.E.2d 538, 541 (2000), reconsideration denied (2000).  The court held that a finance company, although an assignee, was not entitled to a bad debt deduction because the Georgia bad debt statute in effect at the time of sale did not clearly and distinctly show that the legislature intended that such deduction was available to an assignee.

Credit Mechanism

            While the Taxpayer contends that it is entitled to a credit or refund in this matter, I would note that subsection A of Va. Code § 58.1-621 allows only a “credit” not a refund. This statutory “credit” mechanism limits who is entitled to the credit.  In DaimlerChrysler Services North America, LLC v. Commissioner of Revenue Services, supra, 274 Conn. at 206 and 207, 875 A.2d at 34, the Supreme Court of Connecticut addressed a similar tax credit issue:

We also note that the statute provides for a tax “credit,” not a “refund” as claimed by the plaintiff (i.e., the finance company).  This fact is significant because the credit is to be applied against sales tax owed on future sales tax returns.  See General Statutes § 12-408(2)(B) (“the amount of such tax remitted may be credited against the tax due on the sales tax return filed by the retailer for the monthly or quarterly period . . . next following the period in which such amount is actually so written off [as uncollectible]” [emphasis added]).  Financing companies do not sell goods at retail, they finance goods sold by others, and hence do not file sales tax returns.[3] Thus, such companies are not eligible to claim the credit.  We further note that the credit is available against the retailer's sales tax returns for up to a three year period.  If the retailer obtains a tax credit from the state and thereafter is able to collect on the bad debt, the amount “collected by the retailer . . . shall be included in the sales tax return covering the period in which such collection occurs.”  General Statutes § 12-­408(2)(B).  Thus, the “credit” mechanism strongly suggests that the credit  remains with the retailer involved in the initial sales transaction.  [Insert, footnote and additional emphasis added.]

Virginia Code § 58.1-621 similarly provides that the bad debt credit may be applied against the sales tax owed on future sales tax returns.  If a Virginia dealer collects on a bad debt that was claimed on a previous return, the amount collected by the dealer must be included in the first return filed after such collection.  Thus, I would also conclude that Virginia's credit mechanism strongly suggests that the credit remains with the retailer involved in the initial sales transaction.

Assignments and Agreements

Assignment of Rights Documents

In this case, each Assignment uses the following standard language:

________ (“Assignor”), as the dealer that paid the sales or use tax liability to the Virginia Department of Taxation, by and through the undersigned duly authorized corporate officer or other authorized agent or representative, hereby assigns to [the Taxpayer] and all of its subsidiaries, affiliates and assignees (collectively, "Assignee") any and all rights and interests which Assignor has or  will have in any accounts, whether currently in existence or created in the future, including the right to claim sales or use tax credits and refunds, for all accounts originated with Assignor that were charged off by Assignee or its predecessors on or after January 1, 2010.  Assignor has not received a credit or refund and will no longer seek a credit or refund in regard to the taxes that are the subject of this Assignment.   [Emphasis and insert added.]

The Assignment provides the Taxpayer with any and all rights and interests which a Retailer has or will have in any accounts, whether currently in existence or created in the future, including the right to claim sales or use tax credits and refunds, for all accounts originated with the Retailer for which the Taxpayer subsequently charges off.  Despite this transfer of rights, none of the Assignments explicitly assign to the Taxpayer the right to obtain a “bad debt” credit.  As such, a right to the bad debt credit was not assigned to the Taxpayer.  A similar conclusion was reached by the Supreme Court of Kansas In the Matter of the Appeal of Ford Motor Credit Company From  Denial of Refund of Kansas Retailers’ Sales Tax, Dated March 31, 2000, supra, 275 Kan. at 871.[4] 

Furthermore, the Retailers do not have and will not have any accounts (that are subsequently transferred to the Taxpayer) in which they have or will incur a bad debt.  None of the Retailers incur a bad debt at the time the accounts are transferred to the Taxpayer.  Moreover, the Retailers do not incur a bad debt at any time subsequent to the transfers to the Taxpayer.  As such, no bad debts are transferred from the Retailers to the Taxpayer.  When an account defaults, the Retailers no longer have a security interest in the accounts.  Rather, the Taxpayer has the only rights to those accounts.

In this regard, the Supreme Court of Connecticut noted in DaimlerChrysler Services North America, LLC v. Commissioner of Revenue Services, supra, 274 Conn. at 212 and 213, 875 A.2d at 37 and 38:

As an initial matter, we note that, at the time of the assignment, the automobile dealers themselves did not yet possess a right to a sales tax credit because the purchase contracts were not then in default and had not yet been written off by the dealers as worthless and uncollectible debts.  Therefore, it is highly questionable whether the dealers could in fact assign the plaintiff a right that they did not yet possess. Indeed, several courts have rejected the claim presented here on such a basis.

The Supreme Court of Connecticut further noted two court cases as support for its position: Dept. of Revenue v. Bank of America, 752 So.2d 637 (2000), and Chrysler Financial Co., LLC v. Wilkins, supra, 102 Ohio St.3d at 448, 812 N.E.2d at 948.

In Dept. of Revenue v. Bank of America, supra, 752 So.2d at 642, the District Court of Appeal of Florida, First District, held:

We are cognizant of the policy favoring assignability of contract and statutory rights.  Nevertheless, we agree with the Department that the dealer cannot  assign a right to receive a sales tax refund which the dealer does not possess at  the time of the assignment.  In the event the buyer defaults after the dealer has assigned all rights under the installment sales contract, the dealer cannot comply with the statutory qualifying conditions for entitlement to a partial sales tax refund, i.e., the dealer does not retain a security interest in the property.  [Emphasis added.]

In Chrysler Financial Co., LLC v. Wilkins, supra, 102 Ohio St.3d at 448, 812 N.E.2d at 948, the Supreme Court of Ohio held that “express assignment from original retailer to plaintiff of bad-debt reduction would be invalid because retailer would not have suffered bad debt at time of assignment.”  The Supreme Court of Ohio further held:

Prior to the sale and assignment of the retail installment contract to Chrysler, the dealer had no claim to a bad-debt deduction, because the dealer had no bad debt. After the retail installment contract was assigned to Chrysler, and the dealer had been paid in full, the dealer could not claim a bad-debt deduction.  After the dealer assigned the retail installment contract to Chrysler, the customer's debt to the dealer was paid in full, including any amount owed to the dealer for sales tax.  As far as the dealer is concerned, the sale of the retail installment contract to Chrysler produces the same result as if the customer had paid off the contract.  Thus, the dealer never suffered any bad debt that it could  assert or that Chrysler could assert as the dealer's assignee. [Emphasis added.]

Based on these authorities, expressed assignment from the Retailers to the Taxpayer of a bad debt credit or refund is invalid because the Retailers do not suffer any bad debt at the time of or subsequent to assignment.

Public Document 99-37 (3/30/99)

In P.D. 99-37, a taxpayer requested a ruling as to the availability of the bad debt credit to an assignee in the event of default on an installment sales contract.  The only fact provided is that “[t]he assignment of installment sales contracts by a creditor is a common business practice.”  This ruling goes on to cite only one of the eight definitions of the term “dealer.”  This is important as the term “dealer” was solely defined as “every person who . . . leases or rents tangible personal property for a consideration, permitting the use or possession of such property without transfer of title.”  First, a lease or rental transaction does not constitute a type of installment sale.  Second, the tax application for a lease or rental transaction differs considerably from that of an installment sale transaction; i.e., a dealer collects the sales tax on the gross proceeds received from the lease or rental of tangible personal property on a daily, weekly or monthly basis but collects the entire amount of sales tax upfront on an installment sale at the time of sale.  Because of these differences and the fact that the ruling focuses solely on lease or rental businesses, I find that P.D. 99-37 does not address the application of the bad debt credit to the assignment of installment sales contracts.  Rather, it is intended to apply only to assignees of dealers engaged in the lease or rental of tangible personal property and has no application to other types of assignees or dealers.

I would further note that an assignee that is obligated to collect lease or rental payments and sales tax on the gross proceeds is acting as a dealer.  In these situations, the assignee may claim a bad debt credit in connection with a worthless account because it has reported and paid the sales tax.  The Taxpayer is not in a similar situation as it does not engage in selling tangible personal property for which it is obligated to report and remit the sales tax.

As previously mentioned, Va. Code § 58.1-621 does not expressly allow an assignment of the right to a tax credit.  In DaimlerChrysler Services North America, LLC v. Commissioner of Revenue Services, supra, 274 Conn. at 214, the Supreme Court of Connecticut held:

Because the right to assign the credit would expand the class to whom the credit is available, we do not construe the legislature's silence to permit assignment of that right.  As we noted previously, “[e]xemptions, no matter how meritorious, are of grace, and must be strictly construed.  They embrace only what is strictly within their terms.”  [Emphasis added; internal quotation marks omitted.]  Interlude, Inc. v. Skurat, supra, 266 Conn. at 140, 831 A.2d 235.

While P.D. 99-37 deals with an assignment of rights to the lease or rental of tangible personal property, it does not expand the class of dealers to whom the bad debt credit is available. Rather, the assignee of such leases or rentals must be a registered dealer that collects the sales tax from the assigned leases or rentals and remits it to the Department, just like any other lessor of tangible personal property.

Agreements Made Without Recourse

In reviewing the four Agreements presented, it appears that they are contracts without recourse because the Taxpayer obtained all rights to the credit sales from the Retailers and fully compensated them but did not expect any refund, credit or payment from the Retailers when a customer defaulted on a credit card obligation that was determined to be worthless.  While most of these Agreements have provisions for chargebacks and other overpayments in which the Retailer may be required to reimburse the Taxpayer, such chargebacks and overpayments do not appear to be relevant to worthless accounts.  Some of these Agreements also require the Retailers to pay certain incidental fees and charges.  All of the information related to such fees and charges, however, was omitted by the Taxpayer from the Agreements.  Based on the available facts, it appears that the Taxpayer lacks full recourse against the Retailers for the unpaid worthless accounts.  Accordingly, I am treating these

Agreements as though each one was made without recourse with respect to worthless accounts.

The majority of the courts in other states have applied the rule of strict construction to bad debt deduction/credit statutes.  Such courts have also denied a bad debt credit or refund on the basis that the finance or credit card company is not the retailer or dealer that reported and paid the sales tax.  In many instances, the assignments of installment sales by dealerships to the finance companies, as assignees, are made without recourse.  Some examples of these court cases are set out below.

In other states, there are many instances in which the courts have denied a bad debt credit or refund with respect to purchase contracts made without recourse.  Some examples of these court cases are set out below.

Sun Trust Bank, Nashville v. Johnson, supra, 46 S.W.3d at 226; Daimler Chrysler Services North America, LLC v. Arizona Dept. of Revenue, supra, 210 Ariz. at 297, 110 P.3d at 1031;  In re Appeal of Ford Motor Credit Co. from Denial of Refund of Kansas Retailers' Sales Tax, Dated March 31, 2000, supra, 275 Kan. at 869, 69 P.3d at 620; Chrysler Fin. Co., L.L.C. v. Wilkins, supra, 102 Ohio St. 3d at 447, 812 N.E.2d at 951; General Motors Acceptance Corporation v. Jackson, supra, 247 Ga.App. at 141, 542 S.E.2d at 539 (“. . . the dealer would sign the installment contract's assignment provision, without recourse, so that GMAC would have no right to recover from the dealer if the consumer defaulted.”); and DaimlerChrysler Services North America, L.L.C. v. Secretary, Dept. of Revenue, 970 So. 2d 616, 620 (La. Ct. app. 1^st Cir. 2007), writ denied, 976 So. 2d 725 (La. 2008) (The court held that the lender did not acquire the right to a bad debt refund by assignment from the motor vehicle dealers because it lacked full recourse against such dealers for any unpaid amounts.).

There are also other decisions that did not specify whether the purchase contract was made with or without recourse.  Such cases have similar facts and results as the preceding cited cases.  Despite no mention about recourse or non-recourse rights, these cases involve finance companies paying dealerships for the total amount financed by customers, including sales tax.  Examples of these cases are: DaimlerChrysler Services North America, LLC v. Commissioner of Revenue Services, supra, 274 Conn. at 217, 875 A.2d at 40; and Daimler Chrysler Services North America, LLC v. Wisconsin Dept of Revenue, supra, 298 Wis. 2d 119, 726 N.W.2d 312.

Based on the foregoing, it seems very plausible that most courts would apply strict construction to Virginia's bad-debt sales-tax statute and, thus, not allow the bad debt credit to transfer to the Taxpayer under any of the Agreements.

Taxpayer's Business Model

Incidental Leases

To be subject to Virginia's registration requirements under Va. Code § 58.1-612, a dealer must be engaged in a sufficient retail activity that requires the collection of the sales tax.  For example, the Taxpayer must be engaged in the sale of goods at retail, in the distribution of tangible personal property in Virginia, or in the rental or lease of tangible personal property in Virginia. Based on the facts presented, I find that the Taxpayer was never engaged in selling tangible personal property during the periods in question.  Rather, it is my understanding from the Taxpayer that it engaged in some incidental leasing of tangible personal property for the periods from September 2010 through June 2012 and transferred such leasing business to an affiliate beginning in July 2012.  Thus, for the periods July 2012 through September 2013, the Taxpayer did not engage in any sales or leases of tangible personal property.  For the sales tax returns filed by the Taxpayer for the periods October 2013 through March 2014 in which no gross sales were reported, I find that the Taxpayer engaged in no sales or leases of tangible personal property.  Clearly, the Taxpayer's leasing business had nothing to do with the worthless accounts at issue.

Furthermore, in DaimlerChrysler Services North America, LLC v. Commissioner of Revenue Services, supra, 274 Conn. at 210, 875 Am2d at 36, the court stated:

That the plaintiff may in other circumstances act as a “retailer” is immaterial.  See In the matter of the Appeal of Ford Motor Credit Co., 275 Kan. 857, 869, 69 P.3d 612 (2003) (“The key question is whether, where the installment sales contact was purchased by a third party, a retailer permitted to reduce its tax liability for a bad debt must be the retailer that remitted sales tax on the defaulted installment sale . . . . [Ford Motor Credit Company] is regularly engaged in the business of financing and, as necessary, it repossesses and resells the vehicles it finances.  Thus, it may incidentally be a retailer of repossessed vehicles, but it is not a retailer with regard to the sale preceding default and repossession.  Strictly construing [Kansas Administrative Regulations § ] 92-19-3(b) would permit only the retailer who sells a vehicle and, in this case, remits the sales tax to the State to reduce its tax liability for a bad debt.”).  [Emphasis added.]

Like Ford Motor Company in the above cited case, the Taxpayer is regularly engaged in the business of financing.  While the Taxpayer is also engaged in some incidental leasing of tangible personal property, it is not the retailer with respect to the sales preceding the defaults.

Sales Tax Returns filed by the Taxpayer

The reported gross proceeds and the remitted sales tax are far less than the amount requested for refund.  For instance, the Taxpayer reported gross proceeds of $3,651.68 per month for each month starting with September 2010 through June 2012 of the refund claim period.[5]  In comparison, the Taxpayer's amended returns indicate the same amount of gross proceeds as on the original filings but amend the return's exempt state sales and other deductions line from a zero amount, as originally reported, to some other amount, such as $1,155,238.67 for December 2010, $981,595.20 for February 2011, $819,765.55 for October 2011, $903,523.62 for March 2012, etc.  Clearly, the Taxpayer did not report as gross sales the sales claimed for the bad debt sales tax refund at issue.

The plain language of Va. Code § 58.1-621 authorizes a bad debt credit specifically against the tax shown to be due on the dealer's return for accounts owed to the dealer that become worthless within the period covered by the return.  As such, the Virginia bad debt credit statute limits the credit to the amount of tax shown to be due on the return.  Applying this limitation in the Taxpayer's case, the maximum bad debt credit is the tax shown to be due on the gross proceeds of $3,651.68 as reported monthly for 22 months.[6]  Because none of the Taxpayer's reported tax represents the tax reported by the Retailers, i.e., the tax at issue, then none of the Retailer's reported tax may be claimed as a bad debt credit by the Taxpayer since it never reported such tax on its returns as gross sales.

As for the remainder of the refund claim period, i.e., July 2012 through September 2013, there is no tax shown to be due on these latter returns.  For the same reasons provided above, none of the Retailer's reported tax may be claimed as a bad debt credit by the Taxpayer since it did not originally report such tax on its returns as gross sales.

Remaining Issues

Because the Taxpayer is not entitled to a bad debt credit, deduction or refund in this matter, I need not address other issues with respect to the refund requests, such as the Taxpayer's proposed computation of the bad debts (i.e., whether its allocation methodology conforms to the statutory allocation set out in Va. Code § 58.1-621), the marked out portions of the Agreements presented by the Taxpayer (that redact the various costs to the Retailers of these Agreements), the lack of invoices relating to the charges claimed for the worthless accounts (invoice verification of the amount claimed for credit), the lack of proof that the sales tax at issue was paid,[7] and any other issues worthy of comment if the Taxpayer was entitled to the refund requested. 

CONCLUSION

Consistent with DaimlerChrysler Services North America, LLC v. Arizona Dept. of Revenue, supra, 210 Ariz. at 303 through 305, as well as, other cases decided in other jurisdictions, I find that the following holds true in the instant case:

·           Virginia Code § 58.1-621 is subject to the rules of strict construction in which doubts as to the application of the bad debt credit are resolved against a taxpayer.  Such construction limits who is entitled to the bad debt credit.

·           Virginia Code § 58.1-621 only allows a credit. When an assignee does not report, and has no legal right to report, the credit sales made by its assignors on its original returns, a credit may not be applied against the tax shown, if any, on the assignee's return.

·           The Retailers had no bad debt credit or deduction to assign to the Taxpayer.  The Retailers sold their interest in the accounts to the Taxpayer prior to any of the accounts becoming worthless. Furthermore, neither the Assignments nor the Agreements explicitly assigned rights to the Taxpayer for reporting taxable sales made by the Retailers and remitting the sales tax or for specifically claiming a "bad debt" credit with respect to any such sales.

·       The Taxpayer did not sell tangible personal property as an assignee.  Rather, it is an assignee of rights to property that was previously sold by the Retailers.

·           Because of the narrow construction of credits, I decline to apply general principles of assignment law to expand those rights in this case.  The Retailers' tax liabilities were not transferred to the Taxpayer.  The Retailers remained obligated for remitting the sales tax regardless of the Assignments.

·           Allowing the Assignments of bad debt credits in this case would conflict with Virginia's statutory scheme regarding bad debt credits.  Virginia Code § 58.1-621 only allows the dealer making the original sale to take a bad debt credit. As such, the Retailers are the only persons that made the credit sales and remitted the sales tax.

·           The Agreements were made without recourse.  That is, the Taxpayer cannot recover from the Retailers any overpayments resulting from the worthless accounts at issue.

·       The majority rule in other states would likely deny the bad debt credit to the Taxpayer.  I agree with the majority rule.

·           P.D. 99-37 and Va. Code § 58.1-1823 are not applicable to this matter.

Based on all of the foregoing, I find it reasonable to conclude that a bad debt credit under Va. Code § 58.1-621 is available only to dealers who sell or lease at retail and report and remit the sales tax to the Commonwealth.  Like several other states, Virginia's definition of “person” includes an “assignee.”  See Va. Code § 58.1-602. A dealer is defined as every person who does any of the enumerated things set out in Va. Code § 58.1-612.  Notwithstanding, the plain language of Va. Code § 58.1-621 implies that the bad debt credit applies only to those dealers registered to collect the Virginia retail sales tax and who have previously reported taxable sales and remitted the appropriate amount of sales tax on those sales, which are subsequently determined as uncollectible.  Applying the rule of strict construction, a reasonable interpretation of the bad debt statute is that the legislature intended to exclude third party assignees, such as the Taxpayer, from claiming bad debt credits on sales made by retail dealers, such as the Retailers, who are legally obligated to report and remit the sales tax on such sales.  While the Taxpayer is registered with the Department as a dealer, it was not the dealer who made the retail sales in question.[8]  Thus, it had no legal obligation to report the taxable sales in question.  Nor was it the dealer who remitted the sales tax in question.  Under these specific circumstances, I must conclude that Va. Code § 58.1­621 has no application to the Taxpayer as assignee of the uncollectible sales tax in question.  Based on this determination, the Taxpayer is denied its refund requests.

The Code of Virginia sections and the public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.  If you have any questions about this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5773578487.R
AR/1-5810123221.R