Opinion
CV095014432S
09-17-2018
HOME DEPOT U.S.A., INC. v. COMMISSIONER OF REVENUE SERVICES of the State of Connecticut
UNPUBLISHED OPINION
OPINION
Henry S. Cohn, JTR
These tax appeals, pursuant to General Statutes § 12-422, are brought by the plaintiff, Home Depot U.S.A., Inc. (Home Depot) against the commissioner of revenue services (DRS). These appeals seek to reverse denials of credits for sales taxes that Home Depot had sought pursuant to § 12-408(2)(B). This section provides in relevant part as follows: "Whenever such [sales] tax, payable by the consumer ... is remitted by the retailer to the commissioner and such sale as an account receivable is determined to be worthless and is actually written off as uncollectable for federal tax purposes ... the amount of such tax remitted may be credited against the tax due on the sales tax return filed by the retailer for the monthly or quarterly period ... next following the period in which such amount is actually so written off ... If any account with respect to which such credit is allowed is thereafter collected by the retailer in whole or in part, the amount so collected shall be included in the sales tax return covering the period in which such collection occurs."
The DRS regulation, § 12-408-1, adopted pursuant to § 12-408(2)(B) provides in part: "(a) ... Public Act 84-362 amended section 12-408(2) to allow a credit against the sales tax to a retailer with respect to an account receivable from a charge account or credit sale, when such account receivable is determined to be worthless and is actually written off as uncollectible for federal tax purposes ...
(c) No deductions shall be allowed for expenses incurred in attempting to collect any account receivable or for that portion of a recovered debt which is retained or paid to a third party as compensation for services and rendered in collecting the account ...
(d) In support of claims for credit, the retailer must maintain adequate and complete records showing the date of the original sale, the name and address of the purchaser, the amount which the purchases contracted to pay, the amount on which the retailer paid the sales tax to this state, all payments or other credits applied to the account of the purchaser, and evidence that the uncollectible portion on which the sales tax has been paid to this state has been actually written off as uncollectible for federal income tax purposes.
(e) If the account written off is made up in part of nontaxable receipts, such as separately stated installation charges, and in part of taxable receipts upon which the sales tax has been paid to this state, the credit may be claimed only with respect to the taxable portion. In determining the taxable portion, all payments and credits to the account shall be applied ratably against both taxable and nontaxable portions of the account."
The record shows that Home Depot made two refund claims, one for the period August 1, 1998 to July 31, 2003, and another from August 1, 2003 to January 31, 2007. The first claim was in the amount of $873,771.46. The second claim was in the amount of $1,026,971.68.
After proceedings before the DRS, the DRS commissioner denied both claims on September 15, 2009. These appeals were timely filed on October 14, 2009.
Commencing in 2015, and concluding in August 2018, the court conducted a de novo trial and argument on Home Depot’s appeal. The court makes the following factual findings:
1. A customer at a Home Depot store pays for purchases at a register with computer capacity.
2. This register calculates the amount due for purchases and also calculates the sales tax due under Connecticut law. Certain items, such as weatherization, are not taxable and the register is capable of exempting these items from sales tax.
3. The customer’s total bill as shown on a receipt includes both the cost of items purchased and the sales tax due.
4. The sales tax figure is transmitted to a "vault system" in each store for a tally. The total tally for each day is forwarded to a Home Depot headquarters in Texas.
5. The Texas headquarters completes the Connecticut sales tax form on a monthly basis and forwards the tax due for all Connecticut stores to the DRS.
6. The customer pays for the purchases and the sales tax at the time of checkout.
7. The acceptable methods of payment include cash, check, and traditional credit cards such as Master Card and Visa.
8. Another acceptable method of payment is the "Private Label Credit Card" (PLCC), also called a "Home Depot Credit Card."
9. Home Depot offers a named credit card to remind shoppers to visit its stores. It is an advertising tool. Discounts are often available to Home Depot Credit Card holders.
10. The finance companies or banks that administer the PLCC favor them because they receive access to Home Depot customer lists. Also, the accounts receivable of Home Depot, through the PLCC, are held as an asset of the financing credit card company.
11. From August 1, 1998, to July 31, 2003, Home Depot had a financing relationship for PLCC with General Electric Capital Financial, Inc. (G.E.)
12. From August 1, 2003, to January 31, 2007, Home Depot had a financing relationship for PLCC with Citibank USA, N.H. (Citi).
13. The G.E. and Citi relationships with Home Depot form the basis of the Home Depot claim for refund of Connecticut sales tax.
14. G.E. and Citi each entered into a contract with Home Depot. These contracts govern payments made to Home Depot for its PLCC sales. The contracts also provide that collections are the sole province of the financing entities.
15. The agreements with Home Depot are without recourse.
16. The financing entities determine when the customer account receivable is worthless and is to be written off as a bad debt for federal tax purposes.
17. A customer, by swiping the PLCC card at Home Depot, makes a payment of the invoice for both the merchandise and the sales tax.
18. G.E. or Citi, for the relevant years, reimbursed Home Depot for the gross amount of the goods purchased and the sales tax less a service fee. A similar service fee applies to any other credit card used at Home Depot.
19. This service fee is derived by negotiation between the finance companies and Home Depot.
20. The service fee was approximately 3% for the time period at issue.
21. Periodically for G.E., and monthly for Citi, Home Depot was informed that certain account receivables have been "determined to be worthless" by G.E. or Citi and actually written off for federal income tax purposes by G.E. or Citi. The court held a hearing on December 14, 2017 and viewed entries sent to Home Depot’s accountant, Ernst & Young, demonstrating this point.
22. Home Depot introduced documentation that each credit card company had determined certain accounts to be worthless. The proof that these accounts had been written off for federal tax purposes was made by introduction into evidence of the IRS form 1120, showing yearly aggregate losses.
The hearing held on 12/14/17 proved that a member of the G.E. staff had transmitted information on the issue of worthlessness to Home Depot in 2003 and in 2005 for the period of 1999-2003. The Citibank information on worthlessness was sent to Ernst & Young in 2006-2007 and continues to be sent monthly.
23. For trial purposes, an exemplar was chosen as a claim made by Home Depot. Claim # 1 was one submitted to G.E. by Home Depot. The five transactions totaled $369.94 and the sales tax was $21.60.
24. Home Depot, on page 199 of its claims for refunds, Ex. J, established its request for a sales tax refund as $21.15.
25. Claim # 4 was one submitted to Citi by Home Depot. There were sales and payments on this account.
26. Home Depot, on page 98 of its claims for refunds, Ex. K, established its request for a sales tax refund as $6.56.
27. With slight adjustments, the amount of refund sought for claim # 1 and claim # 4 (and hence all refunds) were identical to the amounts initially remitted by DRS at the initial sale.
28. Pursuant to the operating agreement first between G.E. and Home Depot, and then Citi Bank and Home Depot, a committee was formed that meets monthly. This committee negotiated a figure known as a service fee or merchant discount fee. This fee is applied to the reimbursement that the credit card companies remit to Home Depot. A typical service fee is 3%. This means that the gross amount of the sale, and the sales tax advanced by Home Depot, is reimbursed less 3%. There is no breakdown of the 3% figure between the value of the goods and the sales tax. This fee applies to all Home Depot transactions, regardless of whether the transaction was subsequently worthless.
The service fee evidence was provided at a day of trial on December 20, 2017. The fee is "to compensate the portfolio or the bank for all the costs associated with running the program ... [including] all bad debt losses." (Trans., p. 147.) The service fee is developed by looking at the record of every transaction between the financing companies and Home Depot. "[T]he three main expense categories would be first and foremost, the cost of funds, so the bank has to borrow money in order to make a payment to us on day one, then there’s operating expense which is all the salary, wages and benefits for all the people that work and all the facets of the program and rent expense, printing credit cards, statements, things of all that nature, all operating expenses and the third category being the vernacular is net credit losses or NCLs, that is the bad debt, that’s all the write-off of the people, the uncollectible accounts." Id., 149
THE COURT: So would you agree with me that your claim for reimbursement of the sales tax that you advanced or that the credit company advanced, is based upon not so much that you lost a sales tax because you didn’t lose a sales tax, it’s based on a pattern or math that’s done based upon how well Citi did in collecting the sales tax and also their full debt ...
THE WITNESS: That’s right.
Id., 152
The primary issue in these appeals is whether the DRS erred in failing to award a sales tax credit to Home Depot pursuant to § 12-408(2)(B). The parties have agreed on the following statement as taken from the DRS brief at pages 11-12, relative to the burden of proof: "[A] sales and use tax appeal taken pursuant to § 12-422 is a trial de novo." Rainforest Café, Inc. v. Dep’t of Revenue Services, 293 Conn. 363, 371 (2009). Moreover, a heavy burden of proof falls on a plaintiff in tax appeals: plaintiffs must prove the validity of their claims by clear and convincing evidence.
"To that end, the Connecticut Supreme Court has long recognized that the burden of proof in tax cases lies with the plaintiff. Specifically, the Connecticut Supreme Court has stated that ‘It is well established ‘that the burden of proving an error in a deficiency assessment is on the plaintiff ...’ (Citations omitted.) New England Yacht Sales, Inc. v. Commissioner of, Revenue Services. 198 Conn. 624, 634, 504 A.2d 506 (1986); see H.B. Sanson, Inc. v. Tax Commissioner, 187 Conn. 581, 586, 447 A.2d 12 (1982); Fusco-Amatruda Co. v. Tax Commissioner, 168 Conn. 597, 599, 362 A.2d 847 (1975)." Leonard v. Commissioner of Revenue Services, 264 Conn. 286, 302, 822 A.2d 1184 (2003). The Connecticut Supreme Court has further stated that "[t]he plaintiff must present clear and convincing evidence that the assessment is incorrect or that the method of audit or amount of tax assessed was erroneous or unreasonable." (Internal quotations and citations omitted.) Id.
The court agrees with Home Depot that the "clear and convincing" standard may be met by Home Depot presenting credible testimony of multiple witnesses. Leonard, supra at 302-06.
The first claim made by Home Depot is that under the PLCC arrangement, both Home Depot and the credit card companies act as a "group or combination ... as a unit." Thus, it is argued, both Home Depot and the credit card companies taken together are a "retailer," as defined in § 12-407(a)(12).
The court rejects this contention. First, as the DRS argues at page 32 of its brief, Home Depot and the credit card companies specifically acknowledge in the contracts between them that Home Depot is an independent contractor. Further, Home Depot has never filed a joint tax return with the credit card companies.
In a similar situation, our Supreme Court in Daimler Chrysler Services North America, LLC v. Commissioner of Revenue Services, 274 Conn. 196, 209 (2005) notes that the bad debt statute was intended to "benefit the retailer that made the original sale ..." The statute shows no intent to allow an association under the PLCC to qualify. See also Home Depot U.S.A. v. North Carolina Dep’t of Revenue, Superior Court, North Carolina, Docket No. 11-CVS-2261 (2015): "The Court believes that construing the statute to allow such arm’s-length business arrangements to qualify Home Depot and the third-party banks as a single taxpaying "unit" would push the statutory language beyond its reasonable construction. While this Court is not bound by the decisions of appellate courts outside of this state, the Court is aware that other courts have reached a similar conclusion. For example, the Arizona Court of Appeals held that the contractual relationship between Home Depot and financing companies, although requiring communication and coordination on credit standards, did not suffice to establish the existence of a single tax-paying entity. Home Depot USA., Inc. v. Ariz. Dep’t of Revenue, 230 Ariz. 498, 287 P.3d 97, 103 (Ariz.Ct.App. 2012); see also Home Depot U.S.A., Inc. v. Wash. Dep’t of Revenue, 151 Wash.App. 909, 215 P.3d 222, 230 (Wash.Ct.App. 2009) (concluding that Home Depot and a third-party financing company were ‘two separate companies bound only by a negotiated contract’)."
The next contention by Home Depot is that it meets the requirements of the "whenever" clause of § 12-408(2)(B), that is (1) it is a "retailer," (2) it remitted the sales tax paid by the consumer, (3) the sales on such accounts were determined to be worthless and (4) such sales were actually written off as uncollectible for federal income tax purposes.
Determining whether Home Depot met the terms of the statute, the court follows the usual principle of statutory interpretation.
"When construing a statute, [o]ur fundamental objective is to ascertain and give effect to the apparent intent of the legislature ... In other words, we seek to determine, in a reasoned manner, the meaning of the statutory language as applied to the facts of the case ... In seeking to determine that meaning, General Statutes § 1-2z directs us first to consider the text of the statute itself and its relationship to other statutes. If, after examining such text and considering such relationship, the meaning of such text is plain and unambiguous and does not yield absurd or unworkable results, extratextual evidence of the meaning of the statute shall not be considered ... The test to determine ambiguity is whether the statute, when read in context, is susceptible to more than one reasonable interpretation ... When a statute is not plain and unambiguous, we also look for interpretive guidance to the legislative history and circumstances surrounding its enactment, to the legislative policy it was designed to implement and to its relationship to existing legislation and common-law principles governing the same general subject matter." (Internal quotation marks omitted.) Commissioner of Public Safety v. Freedom of Information Commission, 301 Conn. 323, 338.
A statute is not ambiguous merely because it fails to define a term. See Mayfield v. Goshen Volunteer Fire Co., Inc., 301 Conn. 739, 745 (2011). Nor is a statute ambiguous merely because parties disagree as to its meaning. Commissioner, Department of Public Safety v. Freedom of Information Commission, 204 Conn. 609, 620 (1987). "Where statutory language is clearly expressed ... courts must apply the legislative enactment according to the plain terms and cannot read into the terms of the statute something which manifestly is not there in order to reach what the court thinks would be a just result." (Internal quotation marks omitted.) Id.
See also Germain v. Manchester, 135 Conn.App. 202, 209 (2012):
" ‘In construing a statute, common sense must be used and courts must assume that a reasonable and rational result was intended ...’ Wasko v. Farley, 108 Conn.App. 156, 163, cert. denied, 289 Conn. 922 (2008) ... It is well established that ‘[a] statute must be interpreted to give effect to all its provisions ... No word within a statute is to be rendered mere surplusage.’ (Citation omitted.) Westport Taxi Service, Inc. v. Westport Transit District, 235 Conn. 1, 40 (1995)."
The initial requirements are not in dispute and the court finds that Home Depot has proved them, that is (1) Home Depot is a retailer under § 12-407(a)(12), and (2) Home Depot remitted the sales tax to DRS that was paid by the consumer.
The two remaining requirements are more troubling. The first is that "the sale ... is determined to be worthless." Here Home Depot argues that "determined to be worthless," without whom makes that determination, is a clear indication that the statute must be read to indicate that a third party may make the worthlessness determination. The DRS argues that the legislative intent was to have this determination made only by the retailer.
The court holds that this portion of the statute is not ambiguous and is clear as written. There is no need to consult legislative history on this point. Siband v. Wilson-Coker, 276 Conn. 618, 628 (2006). Here the evidence shows that the determination was made by the credit card companies and, by data transfer, communicated to Home Depot.
However, Home Depot has not satisfied the requirement that the "sale" is "actually written off as uncollectible for federal tax purposes." Home Depot was merely informed that all the claimed sales were contained on federal form 1120. No specifics were given. Thus, even if the statute is satisfied by credit card companies writing the worthless account on federal form 1120, factually here Home Depot has failed to prove that claims # 1 and # 4 were actually written off.
See Transcript, March 4, 2015, p. 64.
THE COURT: In other words, your answer is: Do you know for a fact that, that by looking at the tax returns, that they took a bad-debt deduction for these ones that are listed in the schedule? But you don’t know the amount?
THE WITNESS: Well, we- what we could show is a, a rather large bad-debt deduction, as you can imagine on the line 15
THE COURT: Oh, I see. So it isn’t broken down?
THE WITNESS: No. At least not for the pieces of information that, that we had looked at.
An Indiana court has held that only the retailer may write off the bad debt. Home Depot USA, Inc. v. Indiana Dep’t of Revenue, 891 N.E.2d 187, 191 (Tax Court 2008).
There is a more serious problem here with Home Depot’s tax appeal. Even assuming Home Depot satisfies the "whenever" requirements, it must also prove that the credit that it is seeking is appropriate. The provisions of the statute taken as a whole indicated what is the nature of this credit. The final sentence of § 12-408(2)(B) provides that if the retailer thereafter recovers an amount subsequent to taking the credit, the retailer must adjust this by including the amount recovered in the next filing with DRS.
The regulation in subsection (c) disallows any amount the retailer expended in attempting to collect on the bad debt. In subsection (d), the retailer is specifically allowed to recover for the "taxable portion."
Since there is some ambiguity in determining what "credit" means in § 12-408(2)(B), the court looks to the legislative history. The repeated statements of Representative Smoko in the House of Representatives on April 30, 1984, for Bill Number 5380, at 3681 are that "what this bill will allow the retailer to do is to claim the sales tax loss that he has paid to the state against future sales tax deductions that he makes so that at least he won’t be out the sales tax. He’ll only be out the merchandise."
These quoted provisions, above, mean that the retailer is entitled to a credit for the actual sales tax loss. Thus, it is irrelevant to the amount of the credit that Home Depot initially paid the sales tax here.
Home Depot contends that it has proven its actual loss- and that loss is equal to its initial payment of sales tax to the DRS- because its payment of the "MRD" or service fee. See the summary of Home Depot at 3-4, reply brief.
Home Depot compensated Citibank through "interest and late fees ... merchant fee[s] ... paid by Home Depot on each transaction ... [and] the right to market or cross-sell products ..." Thus, the PLCC programs generated three income streams for the finance companies, including the merchant fees Home Depot paid to the finance companies.
Citibank closely monitored and tracked all expenses of the PLCC program in monthly profit and loss statements, which were shared with Mr. Donoghue during monthly committee meetings. GE also acted to ensure that all expenses, including bad debts, were tracked for recovery from Home Depot. (D. Smith) ) ("[T]he financial institutions accumulate a lot of history over a long period of time" on "administrative costs and things of that sort ... [including] bad debt ...").
The administrative costs associated with running the PLCC program were one category of program expenses; credit losses (i.e., bad debts), were another. Citibank and the PLCC program’s going operating committees tracked these two categories of expenses separately on the monthly profit and loss statements. See id.
The PLCC agreements guaranteed the finance companies a profit. The contracts gave the Finance Companies the power to adjust merchant fees to make up for increased expenses, including higher bad debt losses.
The finance companies "always ma[de] money" from Home Depot’s PLCC programs.
None of these arguments, however, answer the specific interpretation that the court has placed in 12-408(2)(B). What was the exact or actual loss of sales tax attributable to the Home Depot initial payout? The Home Depot arguments only show that the amount in sale tax initially paid may not have actually been received back by Home Depot when reimbursed by GE or Citi. The mere imposition of the service fee, even if some of the fee is attributable to sales tax, does not provide the answer. Thus, Home Depot has failed in its proof.
While clearly the statutes are not identical, the court regards as significant the statements of courts in other states in reaching a similar conclusion. "Plaintiff has failed to establish, even on a prima facie basis, the relationship, if any, between the unmeasured, and apparently unmeasurable, component of the service fees representing the Finance Companies’ projected bad debt losses and the actual bad debt losses incurred by the Finance Companies with respect to the private label credit cards issued to plaintiff’s customers. As a result, plaintiff has failed to demonstrate that it suffered any losses attributable to bad debts. It received payment in full from the Finance Companies for each transaction in which a customer used plaintiff’s private label credit card, subject to deductions from some payments in the amount of the service fees (the service fees under the Monogram Agreement could be zero) and, perhaps, other items not relevant to this appeal. Whether or not the customer eventually defaulted on the credit card obligation, plaintiff received the same payment with respect to the transaction, and paid the same service fee.
"Plaintiff has not identified or quantified, by percentage or aggregate dollar amount, the service fees it paid on the $32,947,949.17 in sales transactions that generated (at a tax rate of 6%) the $1,976,875.95 in sales tax which plaintiff seeks to have refunded. In any event, plaintiff does not contend that service fees paid with respect to these sales constituted the only service fees forming the basis for its refund claim. Plaintiff asserts that all service fees contained a bad debt component. As a result, plaintiff seeks a refund apparently based primarily on service fees paid where no bad debt loss occurred and the customer paid in full the credit card debt, including the merchandise charge and applicable sales tax. Neither N.J.S.A. 54:32B12(c) nor N.J.A.C. 18:24-23.2(a) contemplates a refund of sales tax where no bad debt loss has occurred. Thus, even if I were to assume (contrary to the actual situation described in plaintiff’s certifications) that the service fees, in their entirety, were intended to cover anticipated bad debt losses, plaintiff could not prevail because: (1) no refund would be appropriate based on service fees allocable to private label credit card sales where no customer payment default occurred, and (2) plaintiff has not segregated the service fees paid with respect to private label credit card sales where no default occurred from the service fees paid with respect to private label credit card sales where a customer payment default did occur." Home Depot USA, Inc. v. Director, Division of Taxation, 24 N.J.Tax. 23, 36-37 (2008).
See also Home Depot USA, Inc. v. State of Washington, 151 Wash.App. 909, supra at 229: "The mere existence of any economic loss to the refund claimant is simply not sufficient to allow it to invoke [the bad debt statute] to cover these losses." Home Depot has failed to demonstrate why its credit should consist of the full amount it initially remanded to DRS.
Home Depot makes two additional claims. The first is that in denying its claim, the doctrine for unjust enrichment would be violated. The court rejects this argument. Under the scheme as developed by Home Depot and the credit card companies, the state retains funds that might belong to Home Depot. That Home Depot has failed to prove this amount and it has not prevailed may be inequitable. But "it is the legislature’s province to grant such relief, not the court’s. The legislature is in a far better position than the courts to balance the myriad of factors necessary to formulate policy on matters that so intimately concern the state budget. We must respect the legislative prerogative of choosing the special circumstances under which such [tax credits] may be made." (Internal quotation marks omitted.) Doe v. State, 216 Conn. 85, 111, 579 A.2d 37 (1990)." Daimler Chrysler, supra at 210-11.
See also Magee v. Home Depot, USA, Inc., 95 So.3d 781, 798 (2011): "Finally, Home Depot argues that to deny a refund in this case would result in unjust enrichment to the State of Alabama because, according to Home Depot, it paid sales taxes on goods for which, ultimately, its customers failed to pay. We disagree. The transactions giving rise to the refund petition in this case constituted completed sales with regard to Home Depot. Home Depot’s customers received the object of the purchase, and Home Depot was paid for the purchase. The customers’ failure to pay the financing companies for their purchases did not in any way change the fact that Home Depot was paid for the purchases, and there is no evidence in the record indicating that Home Depot refunded the purchase price to the financing companies and recovered the items for which the purchaser failed to pay. Thus, if anything, awarding Home Depot the refund that it seeks in this case would result in unjust enrichment to Home Depot."
The second argument of Home Depot is that due process and equal protection were denied to Home Depot in the DRS’ denial of their credit.
Several courts have noted that Home Depot is not similarly situated to retailers that advance credit directly to consumers. Therefore, due process and equal protection rights do not apply. See, e.g., Home Depot USA, Inc. v. North Carolina Dep’t of Revenue, supra .
Other courts have held that the state has set forth a rational basis for distinguishing between the traditional seller and the Home Depot credit card seller. See, e.g., Magee v. Home Depot USA, Inc., supra, 797. The court agrees with these holdings.
For the foregoing reasons, the appeal in each case is dismissed.
So ordered.