The Business Court turned out its one hundredth published (numbered) opinion of 2015 at the end of last week. It came in the form of a tax case, in Home Depot U.S.A., Inc. v. North Carolina Dept. of Revenue, 2015 NCBC 100.
How much of a milestone ruling is this? It marks the first time that the Business Court has delivered one hundred opinions in a year. That’s way more than the opinions issued by the Court in its early years (like in 1996, the Court’s second year: 2 opinions, 1997: 5 opinions, 1998: 4 opinions). Its most productive year before this year was 2014: 73 opinions.
You might be wondering how those 100 opinions compare to the production of the Delaware Court of Chancery. That Court has already rendered more than twice the number of opinions of the Business Court, 237. Well, there are five Judges (Chancellors) on that Court and only three active Judges on the Business Court.
The Case Was About A Sales Tax Refund Based On The "Bad Debt Deduction"
Home Depot was seeking a refund of some of the sales tax which it had paid to the Department of Revenue (DOR). It said that it was entitled to a bad debt deduction against its gross sales, the amount on which sales tax is calculated. The requested bad debt deduction for 2004-07 was nearly $2 million. Op. ¶7.
The applicable statute says that a retailer can deduct from its gross sales "[a]ccounts of purchasers, representing taxable sales, on which the tax imposed by this Article has been paid, that are found to be worthless and actually charged off for income tax purposes." N.C. Gen. Stat. §105-164.13(15).
Private Label Credit Cards
The bad debts which Home Depot was seeking to deduct were unpaid amounts on Home Depot’s Private Label Credit Cards (PLLCs)(credit cards branded with Home Depot’s colors and logo, usable only at Home Depot).
If a Home Depot customer does not pay his or her PLLC bill, doesn’t Home Depot suffer a bad debt which it should be allowed to deduct from its gross sales?
You would think the answer should be "yes," but first you need to get into the business of PLLCs. Home Depot doesn’t actually extend the credit which its customers enjoy on their cards. Home Depot, like many other companies that issue PLLCs, farms out the administration of its PLLC program to third party lenders. In Home Depot’s case, the lenders were General Electric Capital Financial, Inc., and Monogram Credit Card Bank of Georgia, Op. ¶20(5).
The third party banks owned the PLLC accounts. The banks settled up with Home Depot at the end of each day, paying Home Depot the amount charged by the customer less a service fee. Op. ¶20(16-17). The bank, not Home Depot, bore the risk of non-payment.
This case represents one of a number of cases where Home Depot has sought a state sales tax refund based on a bad debt deduction. Home Depot has apparently not won a single one of these cases. The states where Home Depot has made the same arguments as in North Carolina and lost include: Alabama (Magee v.. Home Depot U.S.A., Inc., 230 So.3d 781 (Ala. App. 2011); Arizona (Home Depot U.S.A., Inc. v. Arizona Dept. of Revenue); Indiana (Home Depot U.S.A., Inc. v. Indiana Dept. of State Revenue, 891 N.E.2d 187 (Ind. Tax 2008); New Jersey (Home Depot, U.S.A., Inc. v. Director, Division of Taxation); New York (In re Home Depot USA, Inc. v. Tax Appeals Tribunal);Ohio (Home Depot U.S.A., Inc. v. Levin, 905 N.E.2d 630 (Ohio 2009); Oklahoma (In re Sales Tax Claim for Refund of Home Depot, 198 P.3d 902 (Okla. App. 2008); and Washington (Home Depot, U.S.A., Inc. v. State Dept. of Revenue);
Home Depot can now add North Carolina to its list of losses. This was an appeal to the Business Court, from a final Agency Decision of the DOR, which had affirmed a grant of summary judgment against Home Depot by an Administrative Law Judge. Home Depot didn’t get traction in the Business Court with any of its arguments.
Accounts Of Purchasers?
The DOR’s position was that the requirement that the bad debt originate from the "accounts of purchasers" applied only to "accounts between the retailer and customer. . . and not. . . to accounts held by a third party." Op. ¶31
Judge Gale said that even though the statutory language was not "abundantly clear", that "the Department’s interpretation is reasonable and harmonious with other language in the Act." Op. ¶31.
Ambiguities In Tax Statutes Go Against The Taxpayer
Home Depot’s argument that the statute lacked sufficient clarity on who needed to own the accounts was destined for failure.
Judge Gale said that it is a canon of statutory construction that:
‘deductions . . . are in the nature of exemptions: they are privileges, not rights, and are allowed as a matter of legislative grace.’ As a result, ‘ambiguities. . . are resolved in favor of taxation.
Op. ¶31 (emphasis added).
Charging Off On Tax Returns?
The "bad debt statute" requires that the delinquent accounts are "actually charged off for income tax purposes." Op. ¶26.
Did Home Depot charge off the unpaid accounts on its tax return? No, because the PLLC issuer owned the accounts and it was the entity which charged them off on its own tax return.
The "Unit" Argument
Home Depot had another run to make at getting its bad debt deduction. It said that it and the third-party banks should be considered a single taxpaying "unit." That argument flows from G.S. §105-164.3 (47), which defines a "taxpayer" as "[a]n individual, a fiduciary, a firm, an association, a partnership, a limited liability company, a corporation, a unit of government, or another group acting as a unit."
But this argument was at odds with the agreement between Home Depot and the third party banks. Each said that the bank was the "sole and exclusive owner of all" of the accounts. Each also said that "nothing contained in this Agreement shall be construed to constitute Bank and [Home Depot] as partners [or] joint venturers." Op. ¶39.
So the "unit" argument failed.
Equal Protection Argument
Home Depot’s last and most desperate argument was that the DOR was violating the Equal Protection and Due Process Clauses of the United States and North Carolina Constitutions.
Home Depot said that it was being treated differently from retailers who financed their own sales as opposed to farming them out to third party lenders.
Judge Gale rejected both of those arguments. On the equal protection argument, all the DOR needed to show was that there was a rational basis for the distinction. Op. ¶43. There is at least a rational basis for the distinction since the retailers who finance their own accounts never receive the sales tax owed by their delinquent customers. Home Depot is paid the sales tax by the issuers of its PLLC cards, so it never has a loss.
Due Process? "The denial of a tax refund does not deprive a taxpayer of due process unless the denial is "arbitrary and irrational.’" Op. ¶47 Home Depot struck out on that argument as well..
100 Opinions From The Business Court
There is probably some glory for Judge Gale in delivering the Business Court”s 100th Opinion of the year. I doubt that there’s any kind of bonus from the Legislature. And there’s no benefit to the litigants.
But, even so, Judge McGuire very nearly beat Judge Gale to the coveted one hundredth spot. He delivered another Opinion to the Court files before Home Depot was assigned the honor of being 2015 NCBC 100. That case, which is Wedderburn Corp. v. Jetcraft Corp., became 2015 NCBC 101 on Monday afternoon.
I’ll try to write about that case before the end of the week.
I probably wouldn’t have written about the Home Depot case at all if it didn’t get the esteemed status of being the Business Court’s one hundredth opinion. I hate writing about tax cases, and if you are a careful observer of this blog, you will note that I have skipped over all of the Court’s opinions this year involving the Department of Revenue.