Don't Mess With Taxes

Rhode Island tax officials are battling Home Depot over state sales-tax refunds.

Neil Downing, who writes the MoneyLine column for the Providence Journal, notes that it's strictly a business tax issue, but that the ultimate resolution could have far-reaching implications.

Here's the deal, paraphrased from Downing's Nov. 24 report:

When a Rhode Island shopper buys something that's subject to the state's 7 percent sales tax, the purchaser pays the retailer for the cost of the item, plus the sales tax. The retailer then forwards the tax to the state.

But what if the merchandise is purchased using a so-called "private label" credit card and the customer then doesn't pay the credit card bill? Does the retailer get to claim a refund from the state for the sales tax that the business already paid but for which the seller was stiffed by the nonpaying customer?

Home Depot says that in these cases, it should receive a sales tax refund.

Rhode Island tax officials disagree.

The usual tax collection/remitting process: Retailers typically treat instances of unpaid transactions as bad debts, and claim a refund of the sales tax on these purchases that it handed over to the state.

But since the Home Depot credit card is issued by a bank and not the retail chain itself, Rhode Island says that puts a whole different spin on things. Such transactions aren't really between the consumer and home improvement chain, argue state tax officials, but rather between the consumer and the bank that issues the credit card.

The logical conclusion, at least from the state's perspective, is that the credit card issuer, not Home Depot, can treat the transaction as a bad debt.

And because the credit card issuer isn't a retailer, it doesn't qualify for a refund of the sales tax paid, contend the state's lawyers.

The case, which began in February 2006, is now in the hands of a District Court judge in Providence.

"Should Home Depot win," writes Downing, "it could open the floodgates for refund claims by other retailers. And Rhode Island -- which faces a budget deficit for the current year and a steeper deficit for the coming fiscal year -- would have to find a way to pay."

Downing's full column (here) has more case details, as well as recounts some similar cases in neighboring states that could affect the judge's decision.