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Menard, Inc. v. Dep’t of Treasury: Who gets a Michigan sales tax refund on bad debt?

In a published opinion released by the Michigan Court of Appeals on September 12, 2013, retailers Menard’s, Sears and Art Van were denied a refund of the sales tax they paid on customer purchases that were charged off as bad debts by the retailers’ private label credit card financing companies.

Many large retailers have their own branded “private label credit cards,” which you experience at a cash register when the clerk asks if you want to save 15% on your purchase today by signing up for a credit card. If you do put your purchase on the retailer’s private label credit card, the retailer submits the sales tax portion of the purchase to the Michigan Department of Treasurer and the financing company that issues the credit card reimburses the retailer for both the purchase price and the sales tax paid.

But what happens when the customer does not pay their credit card bill and the financing company writes it off as a bad debt?

The State of Michigan has a statute that provides if a retailer does not ultimately receive payment for a purchase where sales tax has already been paid by the retailer to the State, the retailer can receive a refund for the sales tax paid. Which is what Menard’s, Sears and Art Van were claiming, arguing that because they were the entity that submitted the sales tax and the customer did not pay for the purchase in the end, they should receive a refund of the sales tax.

The problem with this argument according to the Court of Appeals is that the retailers were already reimbursed for the sales tax payments by the private label credit card’s financing company. Absent an agreement between the financing company and the retailer regarding which entity can claim the bad debt sales tax refund, the plain language of the Michigan says bad debt does not include any accounts receivable that have been sold to and remain in the possession of a third party for collection.

From a tax policy perspective, this case is another example of the judicial branch’s policy to construe any tax exemptions or deductions against the taxpayer if there is no ambiguity in the statute, because “the judicial tribunals of the State have no concern with the policy of State taxation determined by the legislature.

The full text of the opinion can be found at: Menard, Inc. v. Dep’t of Treasury.