One of the standard pitches big box retailers like to use to woo local officials is the revenues such stores will generate for the city and state. The only trouble is, these retailers don’t like to pay the taxes, and often fight to get their tax burden lowered. This week, Home Depot, the richest home improvement chain in the world, was in the news for trying to lower its sales tax payment to the state of Rhode Island — apparently to pay off a settlement it made with a credit card company from another state. According to the Providence Journal, Home Depot is in a “nasty legal dispute” with the state over its 7% sales tax. The dispute centers over Home Depot’s use of its own store credit card. When Home Depot customers buy on credit using their Home Depot credit card, the credit card is actually issued by a bank, not Home Depot. When a customer makes a purchase with their Home Depot card, Home Depot forwards the sales tax to the state. The credit card issuer pays Home Depot for the merchandise and the sales tax, minus a discount to pay the credit card company. Home Depot is now suing Rhode Island over cases where the customer does not pay the credit card bill. “It is Home Depot that pays the sales tax to the Division [of Taxation] on credit sales, and it is Home Depot that suffers the economic loss resulting from customers who subsequently refuse to pay their accounts,” the company said in its court documents. Home Depot says it should receive a sales-tax refund from the state in such situations. Rhode Island officials agree that normally when a customer buys something and doesn’t pay the bill, the retailer writes it off as a bad debt, and gets a refund of the sales tax it handed over to the state. But when a Home Depot credit card is used, the transaction isn’t really between the consumer and Home Depot, but between the consumer and the bank that issued the credit card. So Home Depot can’t treat the sale as a bad debt — only the credit card issuer can. Since the credit card issuer isn’t a retailer, it doesn’t qualify for a refund of the sales tax paid, state lawyers argue. The state says it keeps the sales tax revenue in these cases, and no refund is issued. Home Depot applied to the Rhode Island Division of Taxation in 2003 for a refund of nearly $100,000 in sales tax paid on items bought at Home Depot stores — with credit cards carrying the Home Depot brand — over a three-year period ended in July 2003. The state tax agency refused to make the refund, so Home Depot then filed an “internal” state appeal — and lost. Now the company, has filed an appeal in District Court, Providence, and the taxpayers of Rhode Island are paying the legal costs of the Home Depot appeal.
Many large national chain stores don’t own or service their credit cards. They use a third party, usually a bank, to actually issue and service the card. Home Depot used the Monogram Credit Card Bank of Georgia to issue credit cards — carrying the Home Depot brand. “Whether Home Depot owns its own accounts or partners with a financial institution, however, should be irrelevant for determining whether Home Depot is entitled to a sales tax refund” under Rhode Island sales tax rules, the company argued in its court papers. The retailer charges that Rhode Island “is unjustly retaining sales tax that was paid by Home Depot . . .No legal or equitable principle authorizes the Division [of Taxation] to retain sales tax under these circumstances,” the company said. Rhode Island replies that in order to claim a sales-tax refund, the business has to be a retailer that turns over to the state the sales tax that it collects on a transaction. The business also must have suffered a loss on the account. In addition, the business must have treated the loss as a bad debt on its books for income-tax purposes. In this case, Home Depot did not claim the transactions as bad debts — the credit card issuer did. And the credit card issuer, which is a bank, can’t claim a sales tax refund because it’s not a retailer. Earlier this year the courts granted Home Depot a “protective order” to keep company documents and information in this case confidential. But according to the Providence Journal, Home Depot and the Georgia Bank reached an agreement to part ways in a financial dispute. As part of that settlement, Home Depot agreed to pay money to the Monogram Bank by “filing sales tax refund claims against various states.” If Home Depot wins the Rhode Island case, the proceeds will go to Monogram Bank. State officials claim that “Monogram Bank and Home Depot expressly combined to raid the public coffers of the various states to fund their settlement agreement.” According to the Providence Journal, if Home Depot wins this case, it would have serious financial implications for state taxpayers. Rhode Island already is facing budget deficits, and the Home Depot case “could open the floodgates for refund claims by other retailers.” Similar cases in Massachusetts and Connecticut have already been decided against other retailers, so state officials are hoping the Rhode Island judge will prevent Home Depot from getting a windfall in refunds that taxpayers in Rhode Island would have to pay for.