by Teresa Farnsworth March 23, 2022

Written By Guest Blogger S.M. Oliva 

By Law, Retailers Must Collect Sales Tax Where Applicable

Retailers must charge the applicable sales tax on a customer purchase, regardless of whether that customer pays in cash or with a credit card. In the latter case, the credit card company essentially loans the customer the funds to pay the retailer. But the retailer is still responsible for remitting the sales tax portion of the credit card sale to the appropriate authorities.

Some larger retailers also offer what are known as “private label” credit cards. Typically, the retailer signs a contract with an outside financing company to issue cards to the retailer’s customers for use in financing purchases. Again, the retailer–not the financing company–is legally responsible for ensuring the proper collection and payment of any sales taxes.

Capital One Attempts to Collect Sales Tax “Refunds” on Uncollected Debts

A Colorado appellate court recently addressed a novel legal question: Could a financing company apply for a sales tax credit on credit card purchases that were later charged off as bad debts? Two major credit card issuers, Capital One, N.A., and Citigroup, Inc., argued they were entitled to such credits under Colorado law. A three-judge panel of the Colorado Court of Appeals disagreed, however, and separately affirmed a lower court’s ruling in favor of the state’s Department of Revenue on this point.

The appellate court only issued a published opinion in the Capital One case. In that case, Capital One, NA v. Colorado Department of Revenue, Capital One and one of its subsidiaries, HSBC Bank, N.A., issued private label credit cards to a number of customers. As is common in the credit card industry, some of those customers failed to later pay for their retail purchases, forcing Capital One to charge off the debts as uncollectible.

Sales Tax “Credits” Allowed for Sales That Are Later Charged Off

Colorado law states that a “taxpayer” may be “credited upon a subsequent payment” of sales tax if they previously paid taxes on gross sales that were “represented by accounts found to be worthless and actually charged off for income tax purposes.” On this basis, Capital One filed a number of claims with the Department seeking a “refund” of approximately $1.5 million in sales tax paid on purchases made by private label cardholders who defaulted between 2011 and 2013.

Are Retailers and Credit Card Issuer a "Unit"?

From a legal standpoint, the key question was whether or not Capital One actually qualified as the “taxpayer.” As previously described, the retailer is the party that is legally responsible for collecting and remitting the sales tax, not the credit card company. Nevertheless, Capital One said that when it came to these types of private label card sales, the financing company and the retailer were “acting as a unit” and thus it did qualify as the taxpayer for this limited purpose.

The Department of Revenue rejected this position. That Department’s director concluded that Capital One and the various retailers it issued cards for were all “independent contractors” and not a joint venture or any sort of “unit” for tax collection purposes. Dissatisfied with that decision, Capital One appealed, first to a district court judge and then to the Court of Appeals.

Both courts sided with the Department. Judge Elizabeth Harris, writing for the Fifth Division of the Court of Appeals, noted that the Colorado law does not provide for a sales tax “refund” for bad debts. Rather, it only authorizes a credit against future sales tax payments remitted to the Department. It therefore made no sense to treat Capital One as a “taxpayer,” as it never collected any sales tax to begin with.

More to the point, Harris said, Capital One and the retailers were not “acting as a unit” when making credit card sales. This was different from, say, a situation where a retailer financed its own credit card sales through a wholly owned subsidiary. As the Department concluded, Capital One and the retailers were legally independent entities and not part of some joint venture.

S.M. Oliva is a writer living in Virginia. He authors the blog Computer Chronicles Revisited.
Teresa Farnsworth
Teresa Farnsworth

Teresa Farnsworth is the VP / Account Manager at Zip2Tax. She works closely with her clients to make sure they have just what they need to collect the right amount of sales or use tax in the U.S. and Canada. Questions? Chat with Teresa on the Web site, the Subscriber User Portal, or call her direct line; 866-492-8494.

Leave a comment

Comments will be approved before showing up.