Editor’s note: This piece from the SCOV Law Blog is by Elizabeth Kruska.
Citibank, N.A. v. Department of Taxes, 2016 VT 69
[S]ears, as you may know, is (well, was) a big retailer where people could buy all sorts of stuff ranging from socks to tools to, in some instances, charming houses. This was back in the days of yore, which, in this instance, means “pre-internet.” I do not believe you can buy a bungalow house on Amazon. You can buy mayonnaise on Amazon, which falls under the category of “things you can do, but probably shouldn’t for lots of reasons.” I don’t know if you could buy mayonnaise by mail from Sears. The catalog was something like 600 pages, so probably.
Sears also has a credit card. Without going through the history of the American credit card, it’s fair to say Sears (and some other major retailers) now have their cards serviced through a major bank or lender rather than running the credit show themselves. Here, Citibank teamed up with Sears to operate Sears’ credit cards.
If all works according to plan, a consumer who makes a purchase with a credit card pays his or her bill. The purchase price includes sales tax, which is due to the state, and which the company has to pay, regardless of whether or not the consumer pays his or her bill. This leads to a situation where there could be bad debts owed by consumers, but an outstanding tax bill from the company to the state.
This can feel unfair to businesses, though. Think about it this way. A consumer buys a $10 item, and there is a 60 cents sales tax added to the price. The customer digs in his pocket and plunks down a Hamilton and some coins, and walks away with the item. The sawbuck goes to the retailer, and the change collected goes to the governor. Everybody wins. But if the customer swipes his trusty credit card to leverage his $10 doo-dad, the tab gets picked up by the lender and the customer pays the lender. If the customer beats feet and doesn’t pay, the lender still has to pay the partner-merchant the money and the tax still needs to be paid to the state.
Sears and Citibank were in a partnership. Well, not really. They were in a “business arrangement.” If a customer used a Sears card serviced by Citibank, Citibank paid Sears the purchase price plus sales tax. Sears would then report sales to the Vermont Department of Taxes and pay applicable taxes. Between June 2004 and June 2007, Citibank wasn’t registered with the Vermont tax department, so it, on its own, could not collect and remit tax payments to the State of Vermont. Lots of people bought things at Sears in Vermont during those times, but then defaulted on their payments. Citibank still had to pay Sears, per their agreement, and Sears still had to remit taxes.
Citibank, which probably employs scores of accountants (you know, since it’s a bank), did its own taxes and determined it should take some deductions for the bad debts generated by the consumers who didn’t pay. Citibank also sought refunds from the Vermont tax department of close to a million dollars, associated with the bad debts. Vermont’s tax department said, “Sorry, not sorry” and denied the request.
Sears also took some tax deductions for the bad debts. The Vermont Tax Department did an audit and disallowed their tax deductions and assessed about $350,000, not including penalties and interest.
Both Sears and Citibank appealed and had a hearing before the tax commissioner. The commissioner determined that based on the statute that she could grant relief if: (a) the retailer was required to collect the tax; and (b) was the one who was unable to collect. Sears fits category A but not B, and Citibank fits category B but not A.
SCOV says the commissioner is allowed to forgive a bad debt but isn’t required to do so. Long story short, this is part of the risk of operating on credit. Other courts have made a similar finding.
The two companies said, “Wait a second. We’re a team in this, you should treat us as one unit.” The commish said no, since the parties’ own contract said, “This doesn’t make us a partnership.” Both Sears and Citibank appealed to the Superior Court, who agreed with the tax commissioner and made essentially the A and B argument above. Both Sears and Citibank appeal to SCOV.
The two companies raise three arguments. First, whether they could be treated as a combination for tax purposes. Second, whether prohibiting the refund of sales taxes collected violated Vermont’s minimum sales tax rate law. And finally, whether they could raise a good faith defense.
SCOV looks only at the commissioner’s findings in a case like this, effectively rendering the Superior Court the neglected middle child. Hey, Superior Court, it’s OK. We’ve all felt this way sometimes.
As to the partnership argument, SCOV says the commissioner made the right finding. Sure, the two businesses worked together, and both would benefit from the increased business from consumers, and potentially from the tax benefit. They themselves indicated in their own contract that it wasn’t a partnership or business unit. They don’t get to say they were partners in order to get a tax benefit. Unsaid here, is that I’m pretty sure if Sears went paws-up, Citibank wouldn’t be lining up to take on their debts as if they’re partners, and vice versa. It’s sort of like how in marriage vows there’s that whole “in sickness and in health” part. Although, people can write whatever vows they want, and I suppose it could say, “in health, but if you get sick you’re on your own.” To those people I say, “Hey, I handle divorces; keep me in mind for the future because this isn’t going to work out.”
SCOV also examines the definition of the word “person” in the statute. The two companies argue that someone other than the vendor should be able to collect taxes. The commissioner is allowed some latitude in figuring out who might be the “person’s” agent for tax collection. The commissioner draws the line, though, at extending this as far as a lender who has never had liability for the tax. Lots of other states agree with this analysis that a third-party lender doesn’t get to claim a benefit or refund for taxes in this kind of situation. SCOV even points out that Citibank and Sears have tried this argument in other states and haven’t won in those states, either. Vermont is different from other states for a whole lot of reasons, but isn’t going to be different on this score.
The companies also try to argue that by not paying a refund, the state violated the minimum sales tax statute. That statute says the tax is fixed to the price someone actually pays for the item. By collecting tax on things a purchaser didn’t actually pay for violates the statute. SCOV, unsurprisingly, disagrees.
SCOV says the commissioner is allowed to forgive a bad debt but isn’t required to do so. Long story short, this is part of the risk of operating on credit. Other courts have made a similar finding.
Last, Citibank and Sears argue that they should be able to raise a good faith defense and avoid penalties for failing to pay all sales and use tax on time. SCOV says no to this, also. Again, the commissioner has discretion to impose penalties (or not). But they didn’t show any reason that the commissioner shouldn’t impose penalties. For starters, they tried the “we didn’t know” defense, which is actually not ever a defense. (This is not to be confused with “I Didn’t Know,” which is always welcome at Phish shows and following the statement above that “Vermont is different” features a solo on an Electrolux vacuum, which, I believe can be purchased — on credit! — at Sears). Second, they could have gone to the tax department ages ago to get a ruling about the bad-debt statute. These companies aren’t some little upstarts trying to make their way in the world; they are two very-well-established businesses, who not only have been around for a long time, but who have faced this very same issue in different states throughout our great union.
So, SCOV upholds the tax commissioner.
