Lowe's Home Ctrs., LLC v. Dep't of Revenue ( 2020 )

A IN CLERK* OFFICE
This opinion was
fUFRBE COURT.SIXrE OF WKSHMOraM
filed for record
JAN t 6 2025- ai^tLM.on 3^ao
Susan L. Carlson
Supreme Court Clerk
IN THE SUPREME COURT OF THE STATE OF WASHINGTON
LOWE'S HOME CENTERS,LLC,
No. 96383-5
Petitioner,
V. En Banc
DEPARTMENT OF REVENUE,STATE OF
WASHINGTON,
Respondent. Filed JAN >'.6 202C
MADSEN,J.—This case concerns whether a retail seller, Lowe's Home Centers,
may seek reimbursement of state sales taxes and B&O (business and occupation) taxes
from the Department of Revenue(DOR)where Lowe's contracted with GE Capital
Financial Incorporated and Monogram Credit Bank of Georgia (banks)to offer private
label credit cards to its customers, and agreed to repay the banks for losses they sustained
on defaulting customer accounts. RCW 82.08.050 provides that a seller must collect and
remit sales taxes to the State. For sellers unable to recoup sales tax funds from buyers,
RCW 82.08.037(1) provides that sellers may claim a deduction "for sales taxes
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previously paid on bad debts, as that term is used in 26 U.S.C. Sec. 166." In a partially
split decision, the Court of Appeals affirmed the trial court's denial ofreimbursement.
We hold that although the banks were involved in the credit transaction, Lowe's is
still the seller burdened with the loss from its customers' defaults, including their
nonpayment ofthe sales taxes. Accordingly, we reverse the Court of Appeals.
FACTS
Lowe's contracted with two banks to offer private label credit cards to Washington
customers. The banks offered credit to cardholders who purchased Lowe's goods.
Within two days of a credit purchase, the banks would send full payment and related
sales taxes to Lowe's. Lowe's then remitted the taxes to DOR.
The banks undertook the majority of the risk of defaulting cardholders, and
Lowe's contracted to mitigate this risk by acting as guarantor. When credit card holders
failed to repay the purchase price and sales tax, Lowe's agreed to reimburse the banks.
The contract calculated Lowe's share of the banks' finance income by providing that
Lowe's "shall be responsible for Net Write-Offs during such year up to a maximum of
7.0% of Average Net Receivables." Clerk's Papers(CP)at 140. The contract termed
these repayments "bad debt guarantees" and stated that Lowe's alone could claim bad
debt relief. E.g., id. at 454.' Each month the banks subtracted amounts it had written off
as uncollectible(up to the 7.0 percent cap)from the amounts it could collect from
cardholders.
'The agreements specified that Lowe's and "not [the] Bank[s] shall have the right to claim any
available sales tax deductions related to Net Write-Offs home by" Lowe's. CP at 454, 523, 613.
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On its federal income tax returns, Lowe's claimed bad debt reductions based on its
bank repayments. For its 2001-2009 state tax assessment period, Lowe's asked for the
same deduction. Lowe's sought a refund of over $2.2 million. DOR denied the refund.
After paying its tax assessment under protest, Lowe's appealed and sought
reimbursement in superior court.
On cross motions for summary judgment, the trial court agreed with DOR that
Lowe's should not receive a sales tax deduction and dismissed the case. The Court of
Appeals affirmed in a published split opinion. Lowe's Home Ctrs., LLC v. Dep't of
Revenue, 5 Wash. App. 2d 211, 242-43, 425 P.3d 959 (2018); id. at 243(Maxa, J.,
dissenting).
Two amici submitted briefing. Kohl's Department Stores Inc. and the Council on
State Taxation(COST)filed briefs in support of Lowe's petition for review; COST also
filed a brief in support of Lowe's supplemental briefing.^
ANALYSIS
At issue is whether Lowe's is entitled to a refund of sales and B&O taxes because
the banks reduced Lowe's profit share from credit card transactions to meet Lowe's
obligation as guarantor of the banks' bad debt arising from the banks' contract with
Lowe's account holders.
^ Kohl's notes that its own litigation conceming bad debt relief in Thurston County has been
consolidated with a case from Macy's, and the matter has been stayed pending our resolution of
this case.
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DOR urges us to deny the reimbursement. The plain language of our state bad
debt provisions requires a taxpayer to satisfy four requirements: (1)be a seller(2)
making sales at retail and (3) entitled to a refund for sales taxes previously paid on bad
debts(4)that are federally deductible. ROW 82.08.037(1); see also WAC
458-20-196(3)(a). DOR argues that Lowe's fails to satisfy the plain language of.037(1)
because Lowe's fully recovered sales tax funds and incurred no bad debt.
Lowe's counters that state bad debt relief relies exclusively on federal bad debt
relief. Because Lowe's received a federal deduction, Lowe's contends that it qualifies for
a state deduction. Lowe's further contends that its contractual payments to the banks
covering the banks' losses qualify as "sales taxes previously paid" under .037(1).
Standard of Review
We review summary judgment orders de novo. Sheehan v. Cent. Puget Sound
Reg'l Transit Auth., 155 Wash. 2d 790, 796-97, 123 P.3d 88 (2005). Taxes are presumed to
be valid, and the burden is on the taxpayer to prove the tax is incorrect. Avnet, Inc. v.
Dep't ofRevenue, 187 Wash. 2d 44, 49-50, 384 P.3d 571 (2016)(plurality opinion)(citing
Lamtec Corp. v. Dep't ofRevenue, 170 Wash. 2d 838, 43, 246 P.3d 788 (2011)); Ford
Motor Co. V. City ofSeattle, 160 Wash. 2d 32, 41, 156 P.3d 185 (2007). The taxpayer
seeking a refund has the burden to prove that DOR incorrectly assessed the tax and that it
is entitled to a refund. ROW 82.32.180. We look to substance rather than form when
determining tax classifications. First Am. Title Ins. Co. v. Dep't ofRevenue, 144 Wash. 2d
300, 303, 27 P.3d 604(2001). To qualify for a tax exemption, a taxpayer must
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demonstrate that the exemption clearly falls within the scope of a tax deduction statute.
TracFone Wireless, Inc. v. Dep 't ofRevenue, 170 Wash. 2d 273, 196-97, 242 P.3d 810
(2010). If ambiguity exists in an exception or deduction provision, courts strictly
construe the provision against the taxpayer. Avnet, 187 Wash. 2d at 50 (citing Simpson Inv.
Co. V. Dep-t ofRevenue, 141 Wash. 2d 139, 149-50, 3 P.3d 741 (2000)).
Lowe's and DOR agreed before the Court of Appeals and reaffirmed here that
there are no issues of material fact. Lowe's, 5 Wash. App. 2d at 223. We must decide
whether, as a matter of law, Lowe's is entitled to a sales tax refund under ROW
82.08.037.
Sales Tax
Washington imposes sales tax on retail purchases. ROW 82.08.020. A buyer
must pay sales tax to the seller, and the seller must remit the tax to DOR,even if the
seller does not collect that tax at the point of sale. White v. State, 49 Wash. 2d 716, 724-25,
306 P.2d 230(1957)(sellers must remit the tax whether or not they collect it); AARO
Med. Supplies, Inc. v. Dep't ofRevenue, 132 Wash. App. 709, 716, 132 P.3d 1143 (2006).
"The amount of tax, until paid by the buyer to the seller or to the department, constitutes
a debt from the buyer to the seller." ROW 82.08.050(8).
Under Washington law, a seller who collects sales tax from a buyer over time
must hold those funds in trust and must remit them to DOR. ROW 82.08.050(2)-(3). A
seller cannot use sales tax funds for other purposes; if a seller fails to remit the funds for
any reason, the seller is personally liable. Id. A seller making a credit sale to a customer
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who later defaults in payment will have remitted sales tax to the State that it could not
collect from a customer. E.g., Puget Sound Nat'I Bank v. Dep't ofRevenue, 123 Wash. 2d
284, 287, 868 P.2d 127 (1994); James A. Amdur, Armotation, Recovery ofSales Taxes
Paid on Bad Debts, 38 A.L.R. 6th 255, § 2(2008).
The former sales tax and B&O tax administrative rule reiterated that under RCW
82.08.037 and RCW 82.04.4284, sellers are entitled to a credit, refund, or deduction for
sales or B&O taxes previously paid on "bad debts" under section 166 ofthe Internal
Revenue Code, and the former rule further provided that taxpayers "may claim the credit
or refund for the tax reporting period in which the bad debt is written off as uncollectible
in the taxpayer's books and records and would be eligible for a bad debt deduction for
federal income tax purposes." Former WAC 458-20-196(2)(a),(3)(a)(2005).^ The
policy behind this statute is to "provide relief to vendors" left holding uncollectible sales
tax. Home Depot USA, Inc. v. Dep't ofRevenue, 151 Wash. App. 909, 917, 215 P.3d 222
(2009)(citing Amdur,supra).
As noted, RCW 82.08.037(1) has four requirements: a taxpayer must(1) be a
seller(2) making sales at retail and (3) entitled to a refund for sales taxes previously paid
on bad debt(4)that is federally deductible.'^ Lowe's and DOR do not dispute that
^ DOR amended WAC 458-20-196 in 2010 with no change to the relevant language. But,
effective July 29, 2018, DOR again amended the rule, deleting the reference in former WAC
458-20-196(2)(a) to claiming a refund "for the tax reporting period in which the bad debt is
written off as uncollectible in the taxpayer's books and records." See WAC 458-20-196(2)
(effective July 2018). The parties do not address this amendment made after the assessment
period.
In 2003, the legislature altered the text of.037(1) as follows: "A seller is entitled to a credit or
refund for sales taxes previously paid on debts which are ((deductible as worthless for federal
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Lowe's has satisfied requirements one, two, and four. The parties' dispute involves the
meaning ofrequirement four, as well as whether it satisfies requirement three. Lowe s
asserts,"Washington Iook[s] exclusively to federal law and standards relating to bad debt
losses" to determine state deductions. Pet. for Review at 12. Therefore, they assert a
federal deduction automatically meets state requirements.
Federal Bad Debt Deduction
26 U.S.C. § 166(a)(1) allows as a deduction "any debt which becomes worthless
within the taxable year." It permits a deduction for "bad debts owed to the taxpayer" and
states that for this purpose, bad debt shall be taken into account as a deduction for debts
that become worthless. 26 C.F.R. § 1.166-l(a). Only a bona fide debt arising from a
debtor-creditor relationship based on a valid and enforceable obligation to pay a fixed
sum of money qualifies. 26 C.F.R. § L166-l(c).
If a taxpayer agrees in the course of business to act as a guarantor of a debt
obligation and makes a payment of principal or interest in discharge ofthat obligation as
a guarantor, that payment is "treated as a business debt becoming worthless in the taxable
year in which the payment is made." 26 C.F.R. § I.I66-9(a). A taxpayer's payment
discharging its agreement to act as a guarantor of an obligation will be treated as
worthless debt if the agreement was entered into in the course ofthe taxpayer's trade or
income tax purposes)) bad debts under 26 U.S.C. Sec. 166. as amended or renumbered as of
January 1. 2003." Laws of 2003, ch. 168, § 212(underlined text was added to the session law
and language in double parentheses was deleted). The 2003 language was in effect during
Lowe's sales tax assessment period for which it seeks reimbursement(2001-2009). The 2003
language change did not materially affect the federal deductibility requirement under .037(1).
The parties do not disagree.
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business or transaction for profit, the taxpayer was subject to an enforceable legal duty to
make the payment, and the agreement was entered into before the obligation became
worthless. 26 C.F.R. § 1.166-9(d).
Relevant Cases
To resolve this case, the parties refer us primarily to two tax refund cases: Puget
Sound National Bank, 123 Wn.2d284, md Home Depot USA, 151 Wash. App. 909. In
Puget Sound National Bank, car dealers entered into installment contracts with buyers.
When the dealers and buyers entered into the contracts, the dealers had to pay DOR the
sales tax due on the purchase price of the car. Puget Sound Nat'I Bank, 123 Wash. 2d at
285., When Puget Sound National Bank(PSNB)purchased the installment contracts from
the dealers, it paid the dealers the balance due on the installment contracts, including the
uncollected portion of sales tax, and the dealers assigned to the bank all their rights in the
installment contracts. In that case, after assignment, buyers defaulted on their payments,
and PSNB repossessed the cars, selling them at a loss and writing off the loss as
worthless debt for federal tax purposes. Id. at 286. PSNB unsuccessfully petitioned
DOR for a tax refund on the income tax loss as the assignee ofthe installment sales
contracts under ROW 82.08.037. The sales tax refund statute, ROW 82.08.037, permitted
a refund if the seller was(1) a person (2) making sales at retail and (3) was entitled to a
refund for sales taxes previously paid on debts that are deductible as worthless for federal
income tax purposes. Id. at 286-87. This court affirmed that a "seller" is every person
making sales at retail or retail sales to a buyer or consumer and that a "person" includes
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an assignee. Id. at 287. It determined that PSNB,as assignee, was a person and took a
worthless debt deduction for federal income tax purposes relating to the installment
contract. Id. Further, although the dealer and not PSNB made the retail sales, the court
observed that no statute or public policy prohibited the assignment of a sales tax refund.
Id. at 288-91. The court held that an assignment carries with it the rights and liabilities of
the assigned contract and applicable statutory rights and liabilities, so when the dealers
assigned the installment contracts to PSNB,the bank assumed all the dealers rights and
liabilities related to the contracts. Id. at 293. Consequently, under RCW 82.08.037, the
status ofPSNB included the dealers' tax attribute of"making sales at retail," and PSNB,
as assignee, was entitled to a sales tax refund. Id.
In Home Depot,the retailer and financier. General Electric Capital Corporation,
agreed it would issue Home Depot credit cards to Home Depot customers. The
agreement between the financier and Home Depot provided that the financier was the
exclusive owner of the credit card accounts and bore the risk of credit losses on the
accounts, and that Home Depot had no interest in the accounts or indebtedness ofthe
credit card program the financier had created. The financier made all decisions regarding
customer eligibility for the credit cards, and it set the finance charges, fees, and all other
terms of the credit card accounts. The financier paid Home Depot bonuses in
consideration for the agreements. Home Depot daily transmitted the credit card sales to
the financier, which then paid Home Depot the proceeds on the sales, including retail
sales taxes, minus charges for service fees. Home Depot deducted the service fees it paid
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the financier as a business expense on its federal tax return. The financier took the bad
debt deduction under section 166 for defaulted Home Depot accounts on its federal
income tax return. Under RCW 82.08.037, Home Depot sought a refund of sales tax that
it paid on defaulted transactions made on the credit card that it had contracted with the
financier to establish. It argued that a seller is entitled to a sales tax refund for sales taxes
previously paid on debts that are deductible by any company as worthless for federal
income tax purposes so long as the seller/sales tax refund claimant shows that it actually
bore the risk of loss from the defaulted debt. Home Depot, 151 Wash. App. at 915. DOR
denied the refund.
In affirming DOR,the Court of Appeals noted that RCW 82.08.037 required a
"seller" to be a person making sales at retail who was entitled to a refund for sales taxes
previously paid on debts that are deductible as worthless for federal income tax purposes.
M at 919. It also recognized that a seller could include an original seller's assignee and
that an original seller could assign the tax attribute of"making sales at retail" to a
financing entity, making it eligible for a sales tax refund. Id. It observed that Home
Depot sold goods and made sales at retail, but it held that it was not "entitled to a refund
for sales taxes previously paid on debts that are deductible as worthless for federal
income tax purposes" because that requirement applied only to seller-claimants that incur
the deductible debt. Id. at 918-19. The court reasoned that Home Depot sold all of its
interest in the credit card accounts to the financier, thereby surrendering both its right to
deduct losses on the credit card accounts as bad debt and its ability to claim a refund for
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the defaulted debt. Id. at 920. Thus, Home Depot no longer had authority to deduct
customer defaults on the cards as bad debt or to seek the sales tax refund. Id.
The Home Depot court found this holding consistent with other state laws and
with federal bad debt statute 26 U.S.C. § 166, which ties the sales tax refund to a valid,
existing debt between a seller and a buyer that the seller can no longer collect from the
buyer and that is an enforceable obligation arising from a debtor-creditor relationship. Id.
at 920-21. The court observed that when a buyer purchased an item on a Home Depot
card. Home Depot paid the sales tax due to DOR,creating a statutory debt due from the
buyer to the seller. Home Depot. But, immediately after the sale, when Home Depot
submitted the charge to the financier and the financier reimbursed Home Depot for the
purchase price and sales tax payment,the statutory debt between Home Depot and the
buyer ceased to exist, and the buyer no longer owed Home Depot anything because the
buyer's statutory debt, as well as the underlying debt for the purchase price, was
discharged. At that point. Home Depot no longer held any debt that was "directly
attributable to its sales tax payment to" DOR. Id. at 922.
Importantly, the court noted that Home Depot no longer had any right to collect
unpaid sums from the buyer and could not legally seek repayment from the buyer for any
loss due to the buyer's later default because Home Depot sold all its rights to the Home
Depot card account to the financier, further demonstrating that the statutory sales tax debt
was no longer connected to Home Depot. Id. The court held that although RCW
82.08.037 did not explicitly require bad debts to be deductible by the refund claimant.
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No. 96383-5
state and federal tax laws demonstrated that "the party seeking the deduction must be the
one holding the bad debt as well as the one to whom repayment on such a debt would be
made." Id.(citing Alabama,Indiana, and Oklahoma cases). Home Depot was promptly
paid in full, including sales tax, and was not the party who wrote offthe receivable as
uncollectible to get a sales tax refund, so its argument failed. Id. The court rejected
Home Depot's argument that in setting agreed service fees that the financier paid to
Home Depot,the parties incorporated the anticipated bad debt expenses into their pricing
calculations, and so Home Depot suffered actual loss, because it would allow Home
Depot a sales tax refund for an ordinary business expense. Id. at 923-24. Simply
"because someone can deduct the unpaid sales tax as a bad debt does not transform an
ordinary business expense or loss into a refundable sales tax debt" under RCW
82.08.037. Id. at 924.
Relying on Home Depot,DOR,here, argues that Lowe's profit share reductions
qualified as bad debt from a guarantor loss under section 1.166-9, but they did not qualify
as retail sales or B&O tax bad debt under state law because they did not constitute bad
debt directly attributable to the retail sale for "sales taxes previously paid" and "written
off as uncollectible." Instead, DOR argues, the guaranteed profit share reduction covered
the banks' credit account losses. And once Lowe's collected the taxes from buyers, it
held them in trust until paid to DOR,RCW 82.08.050(2), and no authority states that
Lowe's could later "negate" the buyer's satisfaction ofthe sales and B&O tax obligation
through an agreement with the banks.
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No. 96383-5
DOR reasons that here, as in Home Depot, the banks contracted with Lowe s to
provide the credit card accounts; determined the eligibility of cardholders; set the terms,
fees, and penalties ofthe accounts; and exclusively owned and managed the credit card
accounts, including account indebtedness and outstanding receivables. And Lowe's sold
any right, interest, or title in any payment made by or on behalf ofthe account holder to
the banks, which controlled all account collection. Within days of a credit card purchase,
the banks paid Lowe's the full amount ofthe purchase, including sales and B&O taxes,
so that the buyer then ceased to owe Lowe's anything, and Lowe's no longer held any
debt "directly attributable" to its B&O or sales tax payments to DOR. Although Lowe's
took a bad debt deduction pursuant to section 166 for the amount ofthe banks' bad debt
that it guaranteed relating to the banks' account losses, that debt arose after the banks had
paid Lowe's in full for an account purchase, including sales and B&O tax. Thus, the
court held that the bad debt Lowe's paid was not "directly attributable" to Lowe's retail
sale.
We disagree. First, we note that the language "directly attributable" is nowhere in
the statutes or regulations. Even if it that language did appear, there is no doubt that
Lowe's was the retail seller, that it remitted sales tax to DOR,and that it was also the
guarantor ofthe unpaid sales tax. DOR argues that Lowe's did recover the sales tax; it
was fully paid by the banks, and then remitted to the State by Lowe's. But Lowe's did
not receive payment from its buyers who had defaulted, and it was guarantor to the banks
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No. 96383-5
for the unpaid sales tax.^ A seller making a credit sale to a customer who later defaults in
payment will have remitted sales tax to the State that it could not collect from a customer.
Puget SoundNat'l Bank, 123 Wash. 2d at 287.
Similar to PSNB, which acted as assignee in Puget Sound National Bank, Lowe's
contracted to act as guarantor for its customers who defaulted on credit payments and
thus failed to pay sales tax that was due. As this court observed in Puget Sound National
Bank, no statute or public policy prohibited the assignment of a sales tax refund. Id. at
288-91. The court held that an assignment carries with it the rights and liabilities ofthe
assigned contract and applicable statutory rights and liabilities, so that when the dealers
assigned the installment contracts to PSNB,the bank assumed all the dealers' rights and
liabilities related to the contracts. Id. at 293. Here, no one questions that Lowe's was the
seller and that Lowe's assumed the legal liability for losses attributable to its customers
who defaulted, including unpaid sales tax. That the bad debt was created in two steps
rather than one is of no moment—^the policy underpinning the bad debt deduction is to
"provide relief to vendors" left holding uncollectible sales tax. Home Depot, 151 Wn.
App. at 917.
^ The dissent invokes legislative history in the form of introduced but unpassed legislation as
undermining the conclusion that Lowe's is not entitled to a deduction. See dissent at 18. As the
dissent correctly notes, legislation that has not been enacted (let alone passed out of legislative
committee)reveals little about the intent of the legislature and should not generally be relied
upon. See, e.g.. In re Marriage ofSchneider, 173 Wash. 2d 353, 363, 268 P.3d 215(2011)("Our
fundamental purpose in construing statutes is to ascertain and carry out the intent of the
legislature. We determine the intent ofthe legislature primarily from the statutory language."
(emphasis added)(citation omitted)).
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As noted, section 166 allows as a deduction "any debt which becomes worthless
within the taxable year." And if a taxpayer agrees in the course of its business to
guarantee a debt obligation and it makes a "payment of principal or interest... in
discharge of... the taxpayer's obligation as a guarantor," that payment is "treated as a
business debt becoming worthless in the taxable year in which the payment is made." 26
C.F.R. § 1.166-9(a). A taxpayer's payment in discharge of its agreement to act as a
guarantor of an obligation will be treated as worthless debt only if the agreement was
entered into in the course ofthe taxpayer's trade or business or a transaction for profit,
the taxpayer was subject to an enforceable legal duty to make the payment, and the
agreement was entered into before the obligation became worthless. 26 C.F.R. § 1.166-
9(d). These provisions entitled Lowe's to the sales and B&O tax credits because its
payments, in the form ofthe banks' deductions from its profit share and made pursuant to
an agreement executed before the debt became worthless, discharged its legal obligation
as a guarantor ofthe sales and B&O tax bad debt.
We agree with Lowe's that Home Depot does not control because there the
financier was completely responsible for all its bad debt relating to nonpayment of retail
sales tax and never agreed to act as Home Depot's guarantor, while here Lowe's agreed
to guarantee a portion ofthe banks' credit card related bad debt for sales taxes previously
paid that were "written off as uncollectible."
WAG 458-20-196 entitles sellers to a refund for sales taxes or B&O taxes
previously paid on bad debt under section 166 ofthe Internal Revenue Code, and ensures
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No. 96383-5
that taxpayers may claim the refund "for the tax reporting period in which the bad debt is
written off as uncollectible in the taxpayer's books and records and would be eligible for
a bad debt deduction for federal income tax purposes." Former WAC 458-20-196(2)(a),
(3)(a). Consistent with federal standard section 166,former WAC 458-20-196 merely
stated when a taxpayer may claim a credit or refund; it did not require a taxpayer seeking
a tax refund to have claimed the bad debt as an uncollectible debt on its books, and it did
not address a guarantor's payment of a financier's debt obligation. And even ifthere was
a write-off requirement, in recording the amount ofthe banks' reductions to its profit
share, Lowe's met that bad debt write-off requirement.
R&O tax refund
Lowe's also seeks relief for its B&O taxes pursuant to RCW 82.04.4284(1).
Taxpayers pay for the "privilege of engaging in business" in Washington State through
B&O taxes. RCW 82.04.220(1). The state B&O tax system "impose[s] the business and
occupation tax upon virtually all business activities carried on within the state," Time Oil
Co. V. State, 19 Wash. 2d 143, 146,483 P.2d 628 (1971), and "leave[s] practically no
business and commerce free of... tax." Budget Rent-A-Car ofWash.-Or., Inc. v. Dep t
ofRevenue, 81 Wash. 2d 171, 175, 500 P.2d 764(1972). Businesses cannot impose B&O
taxes on their customers. Nelson v. Appleway Chevrolet, Inc., 160 Wash. 2d 173, 180-83,
157 P.3d 847(2007). Instead, the tax is levied directly on businesses and against the
value of products, gross proceeds of sales, or gross income of a business. RCW
82.04.220(1). RCW 82.04.4284(1) states,"In computing tax there may be deducted from
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the measure ofthe tax bad debts, as that term is used in 26 U.S.C. Sec. 166,... on which
tax was previously paid." For B&O taxes on retail sales, the tax applies at the rate of
0.471 percent of"the gross proceeds of sales of the business." RCW 82.04.250(1). A
party may deduct "from the measure oftax bad debts, as that term is used in 26 U.S.C.
Sec. 166,. .. on which tax was previously paid." RCW 82.04.4284(1).
Lowe's is entitled to a bad debt deduction for B&O tax because, similar to its
"sales tax" payments, Lowe's incurred bad debt. Lowe's satisfies RCW 82.04.4284.
CONCLUSION
Under the circumstances of this ease, Lowe's is entitled to a refund for the taxes it
paid concerning its customers' bad debt. Lowe's timely paid sales taxes to the State
following Lowe's sale of goods to its customers, but some customers defaulted on those
credit sales. Via its guarantor arrangement with the banks, which facilitated the credit
transactions, Lowe's reimbursed the banks for the losses the banks incurred from the
defaulting customers (i.e., the bad debt). While third-party banks were involved as to the
credit transactions (i.e., as facilitators ofthe credit sales), Lowe's is still the seller
burdened with the loss for its customers' defaults, including their nonpayment of the sales
taxes. Accordingly, we hold that under RCW 82.08.037(1), Lowe's may properly claim a
deduction for "sales taxes previously paid on bad debts." Similarly, under RCW
82.04.4284, Lowe's may properly claim a deduction concerning its B&O taxes based on
the same bad debt. We reverse the Court of Appeals and remand the case for further
proceedings in accord with this opinion.
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WE CONCUR;
v5z
18
Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
No. 96383-5
WIGGINS, J. (dissenting)—The central issue before us is whether petitioner
Lowe's Home Centers LLC is entitled to a refund of sales taxes and business and
occupation(B&O)taxes from credit extended by banks to Lowe's customers, who then
defaulted. RCW 82.08.037(1); RCW 82.04.4284. Lowe's contracted with two banks to
provide private label credit cards (PLCCs). Within two days of a credit purchase, the
banks would send full payment and related sales taxes to Lowe's. Lowe's then remitted
the sales tax to the Department of Revenue (DOR). To help mitigate the banks' risks
of defaulting customers, the banks and Lowe's entered into a profit and loss sharing
agreement under which Lowe's profits were reduced to cover a certain percentage of
the banks' losses from defaulting customers.
The majority holds that Lowe's may claim a tax deduction under RCW
82.08.037(1)for "sales taxes previously paid on bad debts." It further holds that under
RCW 82.04.4284, Lowe's may claim a deduction concerning its B&O taxes for the same
alleged bad debts.
The majority would allow Lowe's to contract its way out of paying Washington
state taxes—taxes not, in fact, paid by Lowe's but paid by the banks and Lowe's
customers. I respectfully dissent because the majority's interpretation allows Lowe's to
collect the unpaid sales tax even though Lowe's never loaned Lowe's customers the
funds to pay the sales tax, never owned the funds used to pay the sales tax, and never
tracked the customer debtors or pursued any collection action against the credit card
debtor. It permits Lowe's to reap the benefits of operating in Washington, enjoying the
Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
Wiggins, J., dissenting
privileges of a business and the direct commerce with the state's residents, while
depriving the State—and therefore those very Washington residents—of the benefit of
more tax dollars. The loser here is not just the State but also the people of Washington.
Nothing in the statutory scheme nor the case law permits this result. Just the
opposite is what is mandated by our statutes. Lowe's reductions in profit sharing are
"not sales taxes previously paid" within the meaning of the statutory scheme, and
Lowe's did not incur any bad debt directly attributable to retail sales. I would therefore
hold that Lowe's is not entitled to the deductions. Given that, I would also reach the
issue of whether the denial of the tax deduction violates equal protection and hold that
it does not. I respectfully dissent.
STATEMENT OF FACTS
The material facts in this case are undisputed. Lowe's and the banks entered
into contracts to provide PLCCs to customers. Clerk's Papers(CP) at 452."' Only the
banks extended the credit and owned and managed the cardholders' accounts. Id. at
134,136, 453. Lowe's had "no right, title or interest in or to any of the foregoing and no
right to any payments made by or on behalf of Cardholders on Accounts or any
proceeds with respect to the Accounts." Id. at 136 (agreement between Lowe's and
Monogram Credit Card Bank of Georgia). Further, the banks held the exclusive right to
receive payments from cardholders. Id.^ As a result, the cardholders never owed
Lowe's any debt.
^ Customers could apply for a Lowe's PLCC,and if the bank granted the application, customers
could use the PLCC to purchase merchandise from Lowe's. CP at 133, 136, 453.
2 Although cardholders could make payments on the accounts at Lowe's retailers. In those
situations, Lowe's was acting solely as an agent of the banks. Id. at 136.
Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
Wiggins, J., dissenting
When a customer used a PLCC to purchase merchandise from Lowe's, Lowe's
would notify the banks of the total purchase price. Id. at 138, 145. The banks would,
within two days, pay Lowe's for the merchandise price and any applicable sales taxes.
Id. at 145, 453. Lowe's would then remit the sales taxes and B&O taxes to DOR. Id. at
453.
Things became more complicated when a cardholder defaulted. The PLCC
agreements established a process of monthly allocations of revenue and expenses to
distribute to the banks and to Lowe's. This fund consisted of program revenues net of
program expenses, reduced by net write-offs. The net write-offs consisted of
delinquencies from prior credit card sales. Under the PLCC agreements, Lowe's agreed
to guarantee payment of delinquent customers' debt. Id. at 453-55. All delinquencies
were totaled monthly and became net write-offs. Lowe's was then charged a fixed
percentage of the net write-offs pursuant to its contractual guaranty to cover a
percentage of customer defaults. Id. at 442. Lowe's payment was actually charged
against Lowe's share of the monthly distribution under the PLCC agreements. In short,
under the contracts, Lowe's and the banks agreed to share profits and losses. See id.
at 140-41, 453-55. Lowe's was entitled to profits above the banks' target rate of return
from interest payments, late fees, and other fees associated with cardholder accounts.
Id. at 141, 454. Further, Lowe's was responsible for the banks' net write-offs across the
portfolio up to a cap of approximately 7.0 percent to 7.5 percent of average net
receivables depending on the contract. Id. at 453. In other words, when cardholders
defaulted, Lowe's was responsible for a certain percentage of their default up to the
cap. Id.
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The bank retained ownership of all rights, debts, and accounts whether the
cardholder defaulted or not. See id. at 145 (Lowe's has "no right, title or interest in the
Accounts (including the Indebtedness)"). The banks would write off the debt from the
defaults as uncollectible. Id. at 85, 128. To settle these debts according to the PLCC
agreement, the banks would reduce Lowe's profits by the amount of money Lowe's
owed for the defaulting customers. Id. at 454-55. The defaulting customers were
separated by stores, but Lowe's did not determine the individual debtors or whether
those debtors paid any of the sales taxes. Id. at 433. Lowe's declared these losses on
its corporate income tax return. Id. at 455.
The contracts also provided that Lowe's retained the right to claim any available
sales tax deductions. Id. at 144, 454. Accordingly, Lowe's deducted the sales tax bad
debts on line 15 of its federal income tax returns. Id. at 455. Lowe's also claimed
Washington sales tax credits and B&O tax credits. Id. at 459.
DOR audited Lowe's bad debt and B&O tax claims, determined Lowe's had
improperly claimed the credits, and assessed the PLCC bad debt and B&O taxes. Id.
at 419, 427, 460. The Appeals Division of DOR affirmed the assessment of the taxes.
See Id. at 432-48.
Lowe's paid its tax assessments and filed a refund claim in superior court for a
refund of the tax payments. Id. at 5, 450-51. The parties filed cross motions for
summary judgment. Id. at 1156, 2616. The superior court granted DOR's motion for
summary judgment and denied Lowe's motion for summary judgment. Id. at 2800-02.
Lowe's appealed, and Division Two of the Court of Appeals affirmed. See Lowe's Home
Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
Wiggins, J., dissenting
Ctrs., LLC V. Dep't of Revenue,5 Wash. App. 2d 211, 215, 425 P.Sd 959(2018). Lowe's
then appealed to this court and we granted review.
ANALYSIS
We presume taxes are valid, and the burden is on the taxpayer to prove an
assessed tax is incorrect. RCW 82.32.180] Ford Motor Co. v. City ofSeattle, 160Wn.2d
32,41,156 P.Sd 185(2007)."If there is ambiguity in a provision providing an exemption
or deduction, the court must strictly construe the provision against the taxpayer." Avnet,
Inc. V. Dep't of Revenue, 187 Wash. 2d 44, 50, 384 P.Sd 571 (2016)(plurality opinion).
Lowe's cannot meet this burden.
RCW 82.08.037(1) provides that a "seller is entitled to a credit or refund on sales
taxes previously paid on bad debts, as that term is used in 26 U.S.C. Sec. 166." A bad
debt is "based on federal income tax standards for worthlessness under 26 U.S.C. Sec.
166." WAC 458-20-196(2)(a): see also WAC 458-20-196(3)(a) ("The bad debts
reported must meet the federal revenue code standards for worthlessness.").^
Our state bad debt statute requires that a taxpayer (1) be a seller (2) making
sales at retail and (3) entitled to a refund for sales taxes previously paid on bad debts
(4)that are federally deductible. RCW 82.08.037(1); see also WAC 458-20-196(3)(a).
At issue in this case is whether Lowe's meets requirement three and whether meeting
requirement four automatically meets requirement three.
3 A deductible bad debt under 26 U.S.C. section 166 must "arise[ ]from a debtor-creditor
relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum
of money." 26 C.F.R. § 1.166-1(c). Bad debts under 26 U.S.C. section 166 can result from
multiple transactions, including guaranty payments. 26 C.F.R. § 1.166-9(a).
Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
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1. Lowe's contractual payments to the banks do not guaiifv as "sales taxes
previously paid" under RCW 82.08.037(1)
To determine if Lowe's meets the third requirement, I examine the meaning of
"sales taxes previously paid." RCW 82.08.037(1).
Statutory interpretation is a question of law, which we review de novo. State v.
Budik, 173 Wash. 2d 727, 733, 272 P.3d 816 (2012). The purpose of statutory
interpretation is to ascertain and carry out the intent of the legislature. Id. We determine
the intent of the legislature primarily from the statutory language. In re Marriage of
Schneider, 173 Wash. 2d 353, 363, 268 P.3d 215(2011).
We start with '"the statute's plain language and ordinary meaning.'" State v. J.P.,
149 Wash. 2d 444, 450, 69 P.3d 318 (2003)(quoting Nat'l Elec. Contractors Ass'n v.
Riveland, 138Wn.2d9,19,978 P.2d 481 (1999)). To determine the piain meaning, we
look to all the legislature has said in the statute and related statutes. Dep't of Ecology
V. Campbell & Gwinn, LLC, 146 Wash. 2d 1, 11, 43 P.3d 4(2002). We assume that the
legislature does not intend to create an inconsistency between statutes. State v. Bash,
130 Wash. 2d 594, 602, 925 P.2d 978 (1996). Statutes are to be read together in order
"to achieve a 'harmonious total statutory scheme . . . which maintains the integrity of
the respective statutes.'" State ex rel. Peninsula Neigh. Ass'n v. Dep't of Transp., 142
Wash. 2d 328, 342, 12 P.3d 134 (2000)(alteration in original)(internal quotation marks
omitted)(quoting Employco Pers. Servs., Inc. v. City of Seattle, 117 Wash. 2d 606, 614,
817P.2d 1373(1991)).
Lowe's argues that its contractual payments constitute "sales taxes previously
paid" under the statute because they covered some of the banks' losses that included
6
Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
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sales tax funds. Pet. for Review at 13-15; Suppl. Br. of Pet'r at 11-14. The majority
agrees without performing any substantive analysis. Majority at 14. I would reject this
conclusion because under the statutory scheme Lowe's profit reductions do not
constitute sales taxes previously paid.
A. Lowe's fullv recovered sales tax from the banks, and its reductions in
profits from the bank do not qualifv as sales tax
Because "sales tax" is not defined in RCW 82.08.037, we look to the statutory
scheme as a whole and related statutes in order to define "sales tax previously paid."
RCW 82.08.050(1)details the protocol for "tax payable in respect to each taxable sale,"
or sales tax. Under the unambiguous language, this statute detailing sales tax explains
that sales tax is collected by a seller from a buyer and that the tax collected is then
"deemed to be held in trust by the seller" until it has been used for its sole purpose:
paying DOR. RCW 82.08.050(2). This indicates that the legislature intended that sales
tax payments can be used only to pay DOR and cannot be used to pay for any other
type of debt. Here, after each transaction, Lowe's informed the banks of the purchase
price, including sales tax. The banks then paid Lowe's, and Lowe's properly remitted
sales tax funds to DOR. These payments constitute the only sales taxes Lowe's has
previously paid.
When the banks could not collect funds from defaulting credit card holders, the
banks reduced the profits shared with Lowe's subject to the profit and loss sharing
agreement. These reductions in Lowe's profits cannot constitute "sales taxes previously
paid." As section .050 requires, Lowe's can use sales tax funds only to pay DOR.
Lowe's cannot purport to use sales tax funds to pay an obligation to the banks. This is
Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
Wiggins, J., dissenting
especially true when the monthly reconciliation of defaulting customers did not include
an inquiry into whether any individual customers had previously paid some, if not all, of
the sales tax on the purchases on which they defaulted. Defaulting customers can fail
to pay the purchase price, the sales tax, interest, and other fees. Without an
individualized determination of each default, one cannot determine what, if any, sales
tax loss Lowe's made up for with the profit sharing. Interpreting the phrase "sales taxes
previously paid" within the statute to include Lowe's reduction in profits results in Lowe's
receiving a sales tax refund for its payments to third parties for a private debt. This
effectively permits Lowe's to characterize private payments as payments of sales tax
when, under the statute, sales tax is only that tax deemed held in trust and then remitted
to DOR. This cannot be the legislature's intent as it violates section .050 and creates
inconsistency in our tax statutes in that it would allow sales taxes to be used for private
debts when sales taxes can be used only for paying DOR. See Bash, 130 Wn.2d at
602("This court assumes that the Legislature did not intend to create an inconsistency
in statutes, and seeks to construe statutes so as to avoid inconsistency."); Peninsula
Neigh., 142 Wash. 2d at 342 (citing the same). The majority fails to reconcile this
inconsistency.
Even if we assume Lowe's payments to the banks are not strictly "sales tax" as
contemplated by section .050 but, instead, cover the banks' sales tax funds, permitting
Lowe's to receive a sales tax refund based on these repayments essentially allows a
private corporation to transform non-sales-tax funds into sales tax funds by contract.
Private agreements cannot disrupt the characterizations of a business's transactions
for tax purposes. Wash. Imaging Servs., LLC v. Dep't of Revenue, 171 Wash. 2d 548,
8
Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
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556-57, 252 P.Sd 885(2011)(citing Rho Co. v. Dep't of Revenue, 113 Wash. 2d 561, 782
P.2d 986 (1989)); see also Ford Motor Co., 160 Wash. 2d at 43-44(out-of-state seller
could not avoid business and occupation tax by contractually transferring title at the
point of shipment).
The majority reasons that "Lowe's did not receive payment from its buyers who
had defaulted" and "a seller making a credit sale to a customer who later defaults in
payment will have remitted sales tax to the State that it could not collect from a
customer." Majority at 14 (citing Puget Sound Nat'! Bank v. Dep't of Revenue, 123
Wash. 2d 284, 287, 868 P.2d 127(1994)). But this ignores the fact that Lowe's was never
going to receive payment directly from the buyers, even if it did pay back the banks in
full, because the banks had already paid Lowe's. After the banks had paid Lowe's in
full, there was nothing left for Lowe's to collect, and Lowe's had no ownership or interest
in any payments from the cardholders to the banks.
The majority further reasons,"That the bad debt was created in two steps rather
than one is of no moment—the policy underpinning the bad debt deduction is to 'provide
relief to vendors' left holding uncollectible sales tax." Majority at 14-15 (quoting Home
Depot USA, Inc. v. Dep't of Revenue, 151 Wash. App. 909, 917, 215 P.3d 222 (2009)).
But Lowe's is not a vendor left holding uncollectible sales tax. Lowe's collected all of
the sales tax from the banks and remitted the tax to DOR. That Lowe's profits are
reduced"^ because of a customer's failure to repay the banks does not mean that Lowe's
The majority itself refers to the guarantor payments between Lowe's and the banks as
"deductions from [Lowe's] profit share." Majority at 15. This cuts against the majority's own
assertion that Lowe's is holding uncollectible sales taxes and supports instead that the banks
are holding the uncollectible sales taxes but pays Lowe's less profits if customers default.
Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
Wiggins, J., dissenting
is "holding an uncollectible sales tax." The banks are holding an uncollectible sales tax
in which Lowe's has no interest per the contractual agreement.
Although I would find the statute unambiguous, at best Lowe's and the majority
have identified an ambiguity in the sales tax statutory scheme. But an ambiguity is not
sufficient to meet the burden of showing that the assessed tax is incorrect. Because
any ambiguity is construed against the taxpayer, Lowe's cannot meet the burden, and
DOR correctly assessed the tax.
B. Lowe's did not incur bad debt
Lowe's is not entitled to bad debt relief because under the statutory and
regulatory language, Lowe's did not incur bad debt or write it off as uncollectible.
ROW 82.08.037(1) defines "bad debts" "as that term is used in 26 U.S.C. Sec.
166." 26 U.S.C. section 166(a)(1) allows a bad debt deduction for "any debt which
becomes worthless within the taxable year." Former WAC 458-20-196(2)(a) (2005)
provides,"Taxpayers may claim the credit or refund for the tax reporting period in which
the bad debt is written off as uncollectible in the taxpayer's books and records and
would be eligible for a bad debt deduction for federal income tax purposes." See also
ROW 82.08.037(6)("The department must allow an allocation of bad debts . . . If the
books and records of the person claiming bad debts support the allocation.). The plain
language of the WAC thus indicates that the taxpayer can receive the refund only in
the year that they have written the debt off as uncollectible.
Lowe's did not incur bad debt because it received full payment on credit card
purchases from the banks. Lowe's did not write off any debt because Lowe's recorded
the purchase price and sales taxes on its books as it did for cash, checks, and other
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Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
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credit card transactions. See CP at 60. Lowe's books did not reflect unpaid debt
obligations on any credit card accounts because the accounts were managed by the
banks. CP at 41, 136, 160.
Rather than incurring bad debt, Lowe's agreed to pay for the banks' bad debt
and seeks to make up this ioss through a state sales tax deduction. This might have
been a necessary compromise on Lowe's part in order to make the PLCC program
viable. But Lowe's risk mitigation decisions do not allow it to escape the tax
consequences of those decisions. E.g., Wash. Imaging Servs., 171 Wash. 2d at 556."The
risk that the private label credit card program will be less profitable than anticipated
does not qualify as a bad debt." Sears, Roebuck & Co. v. Roberts, No. M2014-02567-
C0A-R3-CV, 2016 WL 2866141, at *6 (Tenn. Ct. App. May 11, 2016)(unpublished),
review denied. No. M2014-02567-SC-R11-CV (Tenn. Sept. 23, 2016).
The majority contends that because Lowe's is a guarantor its debt is a worthless
debt under 26 C.F.R. section 1.166-9(a) and that this is sufficient to meet the
requirements for bad debt. Majority at 15. As will be discussed below, meeting the
federal requirements is not sufficient to qualify for a deduction in Washington. See Part
II, infra.
The majority also concludes that "written off on the books" is not a requirement
but, instead, indicates when the deduction can be taken. This is somewhat true in that
it does indicate the year in which the deduction can be taken: the year that the taxpayer
has written the debt off as uncollectibie. If within the year the taxpayer does not write
off the debt as uncollectible, then the taxpayer does not qualify. Further, the majority
concludes, but does not explain, that Lowe's meets the write-off requirement. Majority
11
Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
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at 16. As noted, Lowe's does not show that it meets this requirement and cannot meet
its burden.
Even if it were ambiguous whether the write-off is a requirement, this ambiguity
would be strictly construed against the taxpayer and, thus, is a requirement that Lowe's
has not met. Therefore, DOR properly assessed the tax.
C. Case law supports the conclusion that Lowe's is not entitled to a deduction
Both Lowe's and DOR rely on the only two Washington cases interpreting
ROW 82.08.037(1): Puget Sound an6 Home Depot. The majority concludes that Puget
Sound supports Lowe's claim for bad debt relief and that Home Depot is materially
distinguishable. Majority at 13-15. The majority misreads these cases.
In Home Depot, Division Two of the Court of Appeals addressed whether a
retailer could obtain a sales tax refund based on losses from a private credit card
program. 151 Wash. App. at 912. Home Depot contracted with a bank to finance its
private credit cards. Id. at 913. The bank was the exclusive owner and bore all the
loss on the accounts; Home Depot had no interest in the accounts or any indebtedness
created by the program. Id. at 914. After close of business each day. Home Depot
transmitted credit card sales to the bank. Id. The bank would pay Home Depot the
proceeds and sales tax, minus service fees that partially covered the bank's losses for
uncollectible funds. Id. The bank took a federal bad debt deduction for defaulting
accounts; Home Depot did not. Id. at 913. Home Depot sought a sales tax credit under
subsection .037(1), which DOR denied. Id. at 914.
On appeal, the court concluded that reimbursement was not warranted. Id. at
922. A unanimous panel reasoned that when buyers purchased goods with PLCCs and
12
Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
Wiggins, J., dissenting
Home Depot paid the sales tax to DOR,this created a statutory debt owed by the buyer
to the seller. Id. at 921. When the bank reimbursed Home Depot for the purchase price
and sales tax, buyers no longer owed any debt to Home Depot—thus Home Depot no
longer held any debt "directly attributable to its sales tax payment to DOR." Id. at 922.
The court specifically recognized that federal and state tax law demonstrate that the
party seeking a deduction must be the one holding the bad debt as well as the one to
whom repayment on the debt would be made. Id. (citing cases from multiple
jurisdictions in support). Furthermore, contrary to Home Depot's assertion that it
"actually bore the loss for the defaulted debts" based on service fee payments to the
bank, the court held that these payments constituted ordinary business expenses that
can never constitute bad debt. Id. at 923-24(citing Spring City Foundry Co. v. Comm'r,
292 U.S. 182, 189, 54 8. Ct. 644, 78 L. Ed. 1200(1934); RCW 82.08.010(1)(excluding
overhead and other costs of doing business from sales tax calculations)).
While not identical, the facts of Home Depot are remarkably similar to the present
case, and any differences in the present case are minor and fail to distinguish it from
Home Depot. Both cases involve third-party lenders financing a retailer's private credit
card program. The retailers do not own, manage, or have any interest in the accounts,
and the third-party lenders bore all loss from the accounts. Despite Lowe's claim that
its contractual repayments are distinct from Home Depot's service fees, the nature of
the transactions are the same for sales tax purposes. Home Depot and Lowe's both
claimed their respective payments demonstrated that they bore losses on bad debt, but
neither's payments covered debt because neither retailer incurred debt—in both cases
the banks incurred the debt and were the sole parties who could collect from the
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Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
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customers. There was no continuing sales tax debt between Lowe's or Home Depot
and its customers. Both Lowe's and Home Depot properly paid DOR the full amount
of sales tax funds; thus no debt existed for either retailer. The only continuing debt
concerned the customers and the banks. Lowe's contractual guaranty of the banks'
debt does not transfer that debt to Lowe's for sales tax relief. Wash. Imaging Servs.,
171 Wash. 2d at 556-57 (private agreements cannot disrupt the proper characterizations
of its transactions for tax purposes).
In addition, though Home Depot did not concern contractual guaranty payments,
the tax consequence of Lowe's guaranties is the same as Home Depots service fees:
the funds constitute the costs of business to run the private credit card program. They
were not "sales taxes" or payments for bad debt. RCW 82.08.010(1)(excluding costs
of doing business from sales tax calculations). Lowe's contractual payments and Home
Depot's service fees thus constitute ordinary business expenses, which cannot be
included for sales tax calculations. I would hold Lowe's does not qualify for the
deduction.
The majority concludes that Home Depot does not control because "the financier
was completely responsible for all its bad debt relating to nonpayment of retail sales
tax and never agreed to act as Home Depot's guarantor, while Lowe's agreed to
guarantee a portion of the banks' credit card related bad debt for sales taxes previously
paid." Majority at 15. This brief discussion® oversimplifies Home Depot and attempts
® Although the majority dedicates over three pages to discussing the Home Depot opinion and
another page to DOR's arguments in relation to Home Depot, it concludes the case does not
control with little substantive explanation as to why beyond the above-quoted text. See majority
at 9-15.
14
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to distinguish the case when the distinguishabie facts are not material to the resolution
of the present case, as discussed above.
The majority further takes issue with the '"directly attributable' to its B&O or sales
tax payments to DOR" language in Home Depot, as it is "nowhere in the statutes or
regulations." Majority at 13.
Although the words do not appear in the statutory scheme, the Court of Appeals
appropriately used "directly attributable" to limit the sales tax refund. The "directly
attributable" language provides a helpful test to determine whether debts and payments
should qualify under the statutory scheme. As the majority emphasizes, the policy
surrounding the deduction is to provide relief to a vendor holding uncollectible sales
tax. Majority at 14-15. The "directly attributable" language provides a framework for the
trial courts to determine whether the vendor, or another, is holding uncollectible sales
tax. if the debt is not directly attributable to the sales tax payments to DOR, then the
party is not holding the debt. Here, the debt cannot be directly attributable to the sales
tax payments to DOR because that tax has already been paid and remitted in full. The
debt at issue is contractual as part of the profit sharing agreement, and the banks—not
Lowe's—are holding the uncollectible sales taxes.
Where Home Depot Is persuasive in the present case, Puget Sound presents a
completely distinguishable factual scenario and, thus, an unpersuasive analysis. In
Puget Sound, we addressed whether a contract assignee could receive a bad debt
reduction as a "seller." 123 Wash. 2d at 287. A car dealership financed customer car
purchases through installment contracts. Id. at 285-86. When a contract was signed,
the dealer paid the full amount of the sales tax due for the car. Id. at 285. Puget Sound
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National Bank (PSNB) bought these contracts, including the balance of uncollected
sales tax. Id. at 286. PSNB wrote off the loss on its books for defaulting customers,
and applied for sales tax relief; DOR denied the claim. Id. at 285-86. On appeal, the
parties disputed whether PSNB, as a contract assignee, constituted a "seller" under
ROW 82.08.037. Id. at 287. We recognized that a "seller" is a person making sales at
retail, including an assignee. Id. at 288-89. Because the car dealer assigned all its
rights and liabilities for the contracts to PSNB, PSNB stepped into the seller's shoes
and its status therefore included that of"making sales at retail." Id. at 293. Thus, PSNB
was entitled to a sales tax refund. Id.
The present case is distinguishable from Puget Sound because a guaranty is
materially distinguishable from an assignment and, as noted above, Lowe's did not pay
sales tax to the banks such that it is entitled to a sales tax credit. In Puget Sound, we
noted that when the car dealer assigned its customers' installments contracts to PSNB,
PSNB took on the car dealer's tax rights and liabilities. 123 Wash. 2d at 292-93. In effect,
PSNB became the car dealer, which included the dealer's right to bad debt relief. Id. at
293. Here, the banks owned and managed the PLCC accounts; Lowe's had no "right,
title or interest" in them. CP at 136. Unlike Puget Sound, Lowe's did not step into the
banks'shoes by repaying the banks because the banks did not assign their tax benefits
and liabilities to Lowe's. Nor could the banks assign Lowe's the right to claim bad debt
relief because the banks were not the original seller under subsection .037(1)—again,
unlike Puget Sound. Furthermore, the Puget Sound car dealer(and eventually PSNB)
was out of pocket when it could not collect sales tax from defaulting customers. 123
Wash. 2d at 285-86. Lowe's, however, received from the banks and remitted to DOR the
16
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full amount of sales tax. Thus, Lowe's was not out of pocket when credit card holders
defaulted—the banks were. Lowe's contracted to be almost immediately reimbursed
by the banks for the sales, unlike PSNB, which had to accept the uncollectible debt it
owned because it stepped into the car dealer's shoes.®
In contrast, the majority incorrectly concludes that similar to PSNB, which paid
the balance of uncollectible tax by buying customer installment contracts, Lowe's also
paid for uncollected sales tax by guaranteeing the banks' losses (which included
uncollectible sales tax). Majority at 14. Thus, the majority concludes that when the
banks deducted from Lowe's profit share, Lowe's discharged its obligation as guarantor
and was entitled to a tax credit for the profit reduction. Id. at 15. But this ignores that
Lowe's cannot have paid sales tax to the banks, that Lowe's had no interest in the
payments from the cardholders, and the material distinction between a guaranty and
an assignment, as indicated above.
® Lowe's repeatedly emphasizes that its contractual bad debt guaranties made it subject to
recourse to the banks for defaulting accounts. Suppl. Br. of Pet'r at 11. Lowe's argues the
statement that it received the full purchase price and sales tax from the banks is "false"; in
reality, Lowe's contends, it '"paid sales taxes [it] could not collect from the buyer.'" Id. at 11-12
(alteration in original)(quoting CP at 2668). For the reasons discussed above, this argument
fails.
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D. Legislative history also undermines the majority's conclusion that Lowe's
is not entitled to the deduction
Legislative history discloses that Washington lawmakers appear to agree that
RCW 82.08.037 does not allow retailers like Lowe's to receive sales tax reimbursement
for bad debt incurred by third parties. In 2017, a bipartisan group of legislators
introduced a bill recognizing that
[u]nder current law, if a customer who uses a credit card owned by the
retailer fails to pay their bill, the retailer is entitled to a credit or refund of
the sales tax. However, if that same customer uses a private label credit
card, neither the retailer nor the private label credit card company is
entitled to a credit or refund of the tax.
S.B. 5910, at § 1(3), 65th Leg., Reg. Sess. (Wash. 2017)(emphasis added). The
proposed legislation would have altered section .037 to allow sellers to claim a sales
tax deduction for "tax previously reported by the seller on the unpaid balance due on
the accounts or receivables that are charged off as bad debt on the books and records
of the lender." id. § 2(8)(a). The fiscal note attached to S.B. 5910 echoed the bill's
language, noting that "[u]npaid charges made with private label credit cards .. . are
currently not entitled to a bad debt reduction." Agency Fiscal Note to S.B. 5910, 65th
Leg., Reg. Sess.(Wash. 2017)(prepared by DOR).^ S.B. 5910 was not enacted by our
legislature. Unpassed legislation reveals little about legislative intent, but it does
indicate that some lawmakers have acknowledged that current law precludes Lowe's
from bad debt relief and have sought to change the law.
^ Passage of S.B. 5910 would have affected about 250 taxpayers and resulted In state revenue
losses of $8.4 million In fiscal year 2018 and $9.6 million In fiscal year 2019. Agency Fiscal
Note to S.B. 5910, supra, at 2-3.
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Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
Wiggins, J., dissenting
II. RCW 82.08.037(1) requires more than a federal bad debt deduction
Lowe's asserts, and the majority appears to agree,® that if Lowe's qualified for a
federal deduction, it automatically meets state requirements for a deduction. Majority
at 7 (citing Pet. for Review at 3, 11-12; Suppl. Br. of Pet'r at 3). I disagree with this
interpretation of the statute.
This conclusion ignores the plain language of our State's bad debt provisions. In
RCW 82.08.037(1), federal law is invoked in relation to bad debt "as that term is used
in 26. U.S.C. Sec. 166." (Emphasis added.) The phrase "that term" is specific. It
modifies only "bad debt" and does not modify any other words in the statute. WAG 458-
20-196(2)(a)'s reference to federal income tax standards is similarly limited: that our
State's bad debt provisions are "based on federal ... standards" is descriptive. Federal
deductibility is required, but it does not supplant subsection .037(1 )'s additional
requirement that a seller must also pay "sales tax."
RCW 82.08.037(1) and WAC 458-20-196 plainly require more than a federal
deduction. As the State succinctly put it, "a federally-qualified bad debt is a necessary
but not sufficient condition" for Washington sales tax relief. DOR's Suppl. Br. at 14.
Thus, I would hold that Lowe's is not entitled to state bad debt relief based on its federal
deduction alone.
® Although the majority refers to Lowe's assertion in the previous sentence when stating that a
federai deduction automaticaiiy meets state requirements, the opinion appears to conciude in
a roundabout way that because Lowe's meets the federai deduction under 26 C.F.R.§ 1.166-
9(a) and (d), it meets the requirements of Washington's bad debt statutes. See majority at 7
("Therefore, ... a federai deduction automaticaiiy meets state requirements."), 15(conciuding
that under 26 C.F.R. § 1.166-9(a) and (d), not the state statutory scheme, Lowe's is entitied to
the deductions). This is incorrect because, as discussed in this section, a federai deduction is
oniy one of the requirements and does not automaticaiiy entitie a taxpayer to a state deduction.
19
Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
Wiggins, J., dissenting
III. Lowe's similarly does not qualify for a B&Q tax refund because it did not incur
bad debt
Lowe's also seeks relief for its B&O taxes pursuant to RCW 82.04.4284(1).
Lowe's does not distinguish its argument between RCW 82.08.037 (sales tax) and
RCW 82.04.4284 (B&O tax) for bad debt purposes. See Pet. for Review at 1 n.3
(referring to RCW 82.08.037 and RCW 82.04.4284 collectively as the "Bad Debt
Statutes"). For the same reasons that I would hold Lowe's does not qualify for a sales
tax deduction, I would hold that Lowe's does not qualify for a B&O tax deduction.
"Upon every person engaging within this state in the business of making sales
at retail . . . the amount of tax with respect to such business is equal to the gross
proceeds of sales of the business, multiplied by the rate of 0.471 percent." RCW
82.04.250(1). RCW 82.04.4284(1) further indicates that "[i]n computing [the B&O] tax
there may be deducted from the measure of tax bad debts, as that term is used in 26
U.S.C. Sec. 166,... on which tax was previously paid."
Lowe's is not entitled to a bad debt deduction for B&O tax because, similar to its
"sales tax" payments, Lowe's did not incur bad debt. It paid B&O taxes on sale
proceeds it received. DOR's Suppl. Br. at 19. As with sales taxes, the banks—not
Lowe's—held the bad debt for which a deduction would be warranted. Thus, I would
hold that Lowe's does not satisfy section .4284.
IV. Denving Lowe's sales tax deduction does not violate equal protection
Having disposed with the statutory arguments, I would also reach Lowe's final
claim that denying it bad debt relief violates equal protection. I would hold that it does
not. We review constitutional issues de novo. State v. Gresham, 173 Wash. 2d 405, 419,
20
Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
Wiggins, J., dissenting
269 P.Sd 207 (2012)(citing Optimer Int'l, Inc. v. RP Bellevue, LLC, 170 Wash. 2d 768,
771, 246 P.3d 785 (2011)). The Fourteenth Amendment provides that no state shall
"deny to any person within its jurisdiction the equal protection of the laws." U.S. Const.
amend. XIV. The Washington State Constitution provides that "[n]o law shall be passed
granting to any citizen, class of citizens, or corporation other than municipal, privileges
or immunities which upon the same terms shall not equally belong to all citizens, or
corporations." Wash. Const, art. I, § 12.
A state tax law does not violate equal protection if there is a rational and
legitimate basis for the tax classification. Williams v. Vermont, 472 U.S. 14, 23, 105 S.
Ct. 2465, 86 L. Ed. 2d 11 (1985). The tax classification does not violate due process
unless it is '"arbitrary and irrational.'" United States v. Carlton, 512 U.S. 26, 30, 114 S.
Ct. 2018, 129 L. Ed. 2d 22(1994)(quoting Pension Benefit Guar. Corp. v. R.A. Gray &
Co., 467 U.S. 717, 733, 104 S. Ct. 2709, 81 L. Ed. 2d 601 (1984)). It does not
violate article I, section 12 of the state constitution if "any state of facts can reasonably
be conceived that would sustain the classification." United Parcel Serv., inc. v. Dep't of
Revenue, 102 Wash. 2d 355, 368-69, 687 P.2d 186 (1984)("The Legislature has broad
discretion in making classifications for purposes of taxation."); see also Wash. Const.
art. I, §12.
Lowe's argues that as a guarantor of the banks' debt, it falls within the class of
retailers for whom bad debt relief is available. Pet. for Review at 20. But Lowe's is not
in the same class as retailers entitled to claim bad debt relief because, as discussed,
Lowe's payments to the banks are not sales tax under subsection .037(1), nor did
Lowe's incur bad debt.
21
Lowe's Home Centers, LLC v. Dep't of Revenue, No. 96383-5
Wiggins, J., dissenting
CONCLUSION
Lowe's is not entitled to bad debt relief for two reasons: it was not left paying
sales tax funds it could not recover and it incurred no bad debt. ROW 82.08.037(1).
Lowe's and the banks constructed their PLCC program so that the sales tax obligation
was fully satisfied when the banks paid Lowe's, and Lowe's remitted sales tax to DOR.
Lowe's did not pay sales tax it could not recover—the banks supplied the tax funds,
and the banks attempted to recover those funds from credit card holders, some of
whom defaulted. That Lowe's contracted to reimburse the banks for some of that loss
does not reanimate Lowe's discharged sales tax obligation. Lowe's was not out of
pocket due to sales tax it was required to pay to the State; Lowe's elected to put itself
at risk of loss by contracting with the banks to repay uncollectible debt. But Lowe's
cannot retroactively incur bad debt or transform its payments into sales tax by contract.
Lowe's does not meet the requirements for reimbursement under RCW 82.08.037(1)
or RCW 82.04.4284. I would affirm the Court of Appeals and therefore respectfully
dissent.
22
Lowe's Home Centers, LLC v. Dept. of Revenue, No. 96383-5
Wiggins, J., dissenting
hM/Vii, L) rPT"
23