Recently, the Michigan Court of Appeals held that retailers were not entitled to claim a refund for "bad debt" after their customers failed to pay their credit card bills.
The retailers had contracts with financing companies under which the financing companies issued private label credit cards to the retailers' customers. When customers paid for purchases with these credit cards, the retailers remitted sales tax to the state. The financing companies reimbursed the retailers for these purchases and the sales tax remitted. If customers did not pay their credit card bills, the financing companies wrote off the bad debts. The retailers also sought a refund of the sales tax remitted on purchases for which the customers did not pay the financing company.
Michigan law allows taxpayers to seek refunds for tax paid on certain bad debts. Such bad debts may include purchases, made on credit, for which the taxpayer did not receive payment. If a consumer or other person pays off all or part of the debt, the taxpayer remains liable for tax on the amount of payment received.
The court held that the retailers were not entitled to the refund. Because the financing company reimbursed the retailer for the purchase, the retailer remained liable for tax on the purchases. The consumer's failure to pay the credit card bill did not cause the retailer to lose money. The financing company lost money by reimbursing the retailer but not receiving payment from the consumer. The financing company had "bad debt" from this situation. The retailer did not. The retailer was therefore not entitled to the refund.