United States

Illinois: Purchaser of Consumer Accounts Entitled to Sales Tax Refund

Nov 14, 2016
From KPMG TaxWatch

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Recently, an Illinois appellate court considered whether a bank was entitled to a refund of Retailer’s Occupation Tax (sales tax) remitted on purchases made by account holders that later defaulted. The entity bringing the suit, a national bank, originated and/or acquired consumer charge accounts from Illinois retailers. When the bank acquired the accounts, it acquired all rights related to the accounts, including the right to later claim sales tax refunds. Each time a consumer financed a purchase, the bank would remit to the retailer the financed amount, including any applicable sales tax. The retailer would then remit the sales tax to the state. Some of the consumers later defaulted, leaving unpaid balances that included amounts attributable to financed sales taxes. The bank sought a refund of the portion of the sales taxes attributable to amounts written off as bad debts for federal tax purposes. After a circuit court ruled in favor of the bank, the Department of Revenue appealed.

Before the appellate court, the Department contended that the bank lacked standing to seek a refund because it was not a “retailer” that remitted tax to the state. The court, however, disagreed, as the retailers at issue assigned their rights to pursue a refund to the bank. Both common law and statutory rights are assignable, unless a statute or public policy clearly states otherwise. The Department asserted that the assignment of the right to a sales tax refund was prohibited by Illinois law and violated public policy. With respect to the statutory issue, the Department argued that because the refund statute limited refunds to the person that remitted the sales tax, it also prohibited assignment to anyone other than the remitter. The court disagreed, noting that the statute did not discuss assignment of the right to sales tax refund, much less prohibit it. The Department also argued that the assignment of a right to a sales tax refund violated public policy for various reasons, including that the bank was already compensated for the “bad debt risks” inherent in its business through vendor discounts, cardholder charges, and interest payments. The court determined that the compensation the bank received for its services had no bearing on whether the right to a tax refund could be assigned. Further, it was not within the court’s province to police what was considered to be fair compensation for the bank’s services. After finding that the right to a refund could be assigned, the court then rejected the Department’s remaining arguments, including that the retailers would not have been able to obtain a refund because none of the sales taxes were refunded to consumers. The court pointed out that the retailers would not have been required to refund sales taxes that had never been paid by the consumers. Finally, the Department’s contention that the bank failed to provide certain information to support its refund claim was rejected. The parties had already stipulated that the claimed refund was the portion of the amounts written off as bad debts that were attributed to sales taxes. For more information on Citibank v. Illinois Department of Revenue, please contact Drew Olson at 312-665-2897 or Jill Nielsen at 312-665-2794.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.