Many retailers issue their own credit cards. These cards are actually backed by outside financing companies who collect a fee from the retailer on each purchase. When a customer uses a store credit card, the finance company pays the retailer the full purchase price, including any applicable sales tax. The retailer is then responsible for remitting any sales tax to the state or local government.
But what happens when a customer uses a store credit card and fails to pay the bill? The Missouri Supreme Court recently considered this issue in connection with the question of whether the retailer is entitled to a refund of any sales tax paid on such uncollected debts.
In this case, the retailers were Circuit City and Dillard’s. Both issue private credit cards, Circuit City through JPMorgan Chase and Dillard’s through GE Capital. In 2010, both retailers asked the Missouri Department of Revenue to refund sales taxes previously remitted for sales that were later written off as bad debts by the credit card issuers. They argued Missouri law requires such a refund whenever sales tax is “erroneously or illegally collected.”
But neither the Department of Revenue nor the Missouri Supreme Court saw it that way. Judge Laura Denvir Stith, writing for a unanimous Supreme Court in an opinion issued July 29 of this year, said the retailers suffered no loss as a result of the bad credit write-offs. They were already paid in full. It was the card issuers—JPMorgan and GE—who took a federal tax deduction for the unpaid bills.
Nonetheless, the retailers argued they should be treated as part of a single “unit” together with their credit card partners. That would allow them to claim a sales tax refund for the card issuers’ losses. Again, Judge Stith said that was not the proper interpretation of Missouri law. The retailers and their credit card partners are clearly separate entities, not two parts of a single business entity. Stith said the retailers could not create a loophole whereby they could be considered a single unit for the sole purpose of obtaining a sales tax refund.
Ultimately, Stith said, neither the retailers nor their credit card partners were entitled to a sales tax refund under Missouri law. The banks didn’t pay any sales tax to begin with, and the retailers never suffered any actual losses that would make them eligible for a refund.
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.
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