Attorneys for Appellant
Attorney for Appellee
Steve Carter B. Keith Shake
Attorney General of Indiana Indianapolis, IN
Nandita G. Shepherd
Deputy Attorney General
Appeal from the Indiana Tax Court,
The Honorable Thomas G. Fisher, Judge
On Petition for Review from the Indiana Tax Court
June 22, 2004
For purposes of Indiana sales tax law, 1 Stop is a retail merchant.
Ind. Code §§ 6-2.5-1-8 & 6-2.5-4-2. The regulations of the Indiana
Department of Revenue require retail merchants to file the prescribed returns and make
tax payments for each month (or other reporting period) within 30 days after
the last day of the reporting period. 45 Ind. Admin. Code 2.2-6-1.
To determine sales tax liability for a particular reporting period, a retail
merchant multiplies the retail merchant's total gross retail income from taxable transactions made
during the reporting period by the sales tax rate. 45 Ind. Admin.
Code 2.2-6-8. Among the adjustments permitted in calculating a retail merchants sales
tax liability is one for bad debts or uncollectible receivables. The Legislature
In determining the amount of state gross retail and use taxes which he must remit , a retail merchant shall deduct from his gross retail income from retail transactions made during a particular reporting period, an amount equal to his receivables which:
(1) Resulted from retail transactions in which the retail merchant
did not collect the state gross retail or use tax from the purchaser;
(2) Resulted from retail transactions on which the retail merchant
has previously paid the state gross retail or use tax liability to the
(3) Were written off as an uncollectible debt for federal
tax purposes during the particular reporting period.
Ind. Code § 6-2.5-6-9(a) (emphasis supplied). See footnote The Revenue Department regulation implemen ting this statute provides:
(a) In determining the taxpayer's sales and use tax liability , a retail merchant shall deduct from his gross retail income from retail transactions made during a particular reporting period, the retail merchant's bad debts or uncollectible receivables.
(b) In order to qualify for this exemption the retail merchant must have:
(1) Previously reported the transaction and remitted the sales or use tax to the Department;
(2) Not collected the tax from the customer; and
(3) Written the receivable off for federal income tax purposes.
45 Ind. Admin. Code 2.2-6-12 (emphasis supplied).
This case is about the written off for federal tax purposes clause in the foregoing statute and regulation. More precisely, the question is whether a retail merchant is entitled to deduct the total amount of any receivable that constitutes an uncollectible debt for federal tax purposes or only to deduct that portion of the amount of the receivable equal to the amount actually written off for federal income tax purposes.
In October, 1996, the Revenue Department noticed that 1 Stop was reducing its
current month taxable sales by the total amount of prior bad debts.
On August 4, 1997, the Department sent 1 Stop a letter notifying the
corporation that it would be audited for the years January 31, 1994 through
December 31, 1996. On August 5, 1997, 1 Stop filed an amended
federal income tax return for the 1993-1995 tax years. As a result
of the audit, the Department assessed 1 Stop for an additional sales tax
in the amount of $131,625.94 plus interest of $3,407.84. 1 Stop paid
the assessment and then filed claims of refund of sales tax for the
years 1993 to 1997.
On June 10, 1998, the Department denied 1 Stops claims. 1 Stop
then initiated an original tax appeal on which the Tax Court held a
hearing. On December 2, 2002, the Tax court held that 1 Stop
was entitled to a bad debt deduction from the total amount of its
retail sales for purposes of calculating sales tax due to be remitted to
the Department; and that amount of the deduction to which 1 Stop was
entitled was equal to that portion of the amount of uncollectible receivables equal
to the amount written off for federal income tax purposes. 1 Stop
Auto Sales, Inc. v. Ind. Dep't of State Revenue, 779 N.E.2d 614 (Ind.
Tax Ct. 2002)
1 Stop sought rehearing of the Tax courts decision. On March 31,
2003, the Tax Court reversed itself and held that 1 Stop may deduct
an amount equal, in part, to the amount of its uncollectible Indiana receivables
it removed from its books as a loss for federal tax purposes, not
merely the amount it deducted as federal bad debt. 1 Stop Auto
Sales, Inc. v. Indiana Dept of Revenue, 785 N.E.2d 672, 674 (Ind. Tax
2003) (op. on rehg).
We granted review and now reverse the Tax Courts opinion on rehearing.
The parties only discuss the impact of repossessed collateral on these calculations.
That is, when a customer fails to repay its obligations to 1 Stop
and 1 Stop writes off the loan as u
ncollectible, the I.R.S. requires 1
Stop, in calculating the federal income tax deduction to which it is entitled,
to reduce the amount written off by the value of any repossessed collateral.
Treas. Reg. § 1.166-2(a) (as amended in 1993); Riss v. Commr, 478
F.2d 1160 (8th Cir. 1973); C.I.R. v. Commercial Casualty Ins. Co., 131 F.2d
222, Standard Federal Tax Reporter (CCH) ¶ 10,650.623 (3rd Cir. 1942). 1
Stop argues that, in calculating the deduction from gross retail income, it should
not be required for Indiana sales tax purposes to reduce the amount written
off by the value of any repossessed collateral. As noted, the Tax
Court on rehearing agreed.
The Tax Courts reasoning on this point is terse:
The plain language of Ind. Code § 6-2.5-6-9(a)(3) allows 1 Stop to deduct the amount of its uncollectible Indiana receivables that were "written off as an uncollectible debt for federal tax purposes during the particular reporting period." Ind. Code § 6-2.5-6-9(a)(3) (emphasis added). Thus, for the purposes of Indiana's Bad Debt statute, 1 Stop may deduct an amount equal, in part, to the amount of its uncollectible Indiana receivables it removed from its books as a loss for federal tax purposes, not merely the amount it deducted as federal bad debt.
1 Stop, 785 N.E.2d at 674. 1 Stop itself gives us a more extended argument:
Under statute the amount of the deduction equals the amount of the receivable. Element 3 of the deduction (referencing "for federal tax purposes") is an eligibility criteria that made the receivable deductible. The "equal to" language applies to the receivables", not to "for federal tax purposes". Nothing in the sales tax statute suggests that the Indiana Legislature intended to incorporate Internal Revenue Code Section 166 mathematics into the calculation. Further, given that the Indiana sales tax is a gross tax, not a net tax, it would be illogical to apply the federal rules for determining the amount of bad debt deduction to a sales tax deduction. Stated another way, the reference to "federal tax purposes" is a qualifier, not a quantifier.
Appellee's Br. in Resp. to Pet. for Review at 2 (emphasis in original). 1 Stop goes on to give a policy justification for this interpretation:
The Legislature made the policy decision that when a retail merchant pays the sales tax for customer, i.e., the retail merchant loans not only the amount of the purchase but also the sales tax on the purchase, in a customer fails in repayment, the retail merchant should recover from the Department the amount of sales tax that the customer did not pay. To accomplish this goal, the retail merchant must be able to deduct the entire amount of the "receivable" that became uncollectible. By deducting the entire amount of the receivable, the retail merchant will receive a credit in the amount of 5% of that receivable. In this fashion he recovers the amount of sales tax that he was unable to collect from its customer.
Id. at 3.
While we appreciate 1 Stops argument, we are unable to agree with either its reading of the statute or the intent it attributes to the Legislature.
If the Legislature did not want the Department to use Internal Revenue Code
Section 166 mathematics to calculate the amount of the deduction, we believe it
would not have referenced federal tax law at all; it would have simply
provided that the receivables were written off as an uncollectible debt. Indeed,
the Tax Court itself took a similar approach to the benefit of the
appealing taxpayer in Cooper Indus. v. Indiana Dep't of State Revenue, 673 N.E.2d
1209, 1213 (Ind. Tax Ct. 1996)
To the extent that there is ambiguity on this point,
i.e., whether the
Section 166 reference is only a qualifier or both a qualifier and a
quantifier, ambiguous exemption statutes are to be strictly construed against the taxpayer.
General Motors Corp. v. Indiana Dep't of State Revenue, 578 N.E.2d 399, 404
(Ind. Tax Ct. 1991), aff'd 599 N.E.2d 588 (Ind. 1992). We also note
that this statutory provision has been on the books since 1980 and the
regulation since 1982. The Revenue Department advises us that it has consistently
upheld the interpretation that a companys bad debt deduction is limited to the
amount deducted as federal bad debt. Pet. for Review at 5.
Where the meaning of a regulation is in question, the interpretation of the
relevant administrative agency should have great weight unless this interpretation would be inconsistent
with the regulation itself. Indiana Dep't of State Revenue v. Bulkmatic Transp.
Co., 648 N.E.2d 1156, 1158 (Ind. 1995).
As to the policy argument 1 Stop advances, we are unable to discern
legislative intent to provide assistance for retail merchants who lend the amount of
sales tax on transactions to their customers and are not repaid. The
language of the statute indicates to us that the Legislature intended retail merchants
like 1 Stop to be entitled to a bad debt deduction but that
that deduction be limited to an amount not greater than the debt that
was unable to be collected.
Finally, we are also attracted to the Revenue Department's argument that, wholly independent
of the debate over the reference to Section 166, conventional legal, accounting, and
tax parlance considers an "uncollectible debt" or "bad debt" to be the net
debt that is unable to be collected or the actual total loss suffered.
As such, the value of repossessed collateral should be taken into account
in calculating the deduction for "uncollectible debt" that has been "written off," irrespective
of the reference to Section 166.
Shepard, C.J., Dickson, and Boehm, JJ., concur.
Rucker, J., concurs in result.