NOTICE: IC § 6-8.1-3-3.5 and IC § 4-22-7-7 require the publication of this document in the Indiana Register. This document provides the general public with information about the Department's official position concerning a specific set of facts and issues. This document is effective as of its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register. The "Holding" section of this document is provided for the convenience of the reader and is not part of the analysis contained in this Supplemental Final Order Denying Refund.

Company is not entitled to additional refund because the applicable statute subtracts repossessed vehicles from the bad debt calculations.

I. Bad Debt Deduction - Gross Retail Tax.

Authority: IC § 6-2.5-6-9; SAC Finance Inc. v. Indiana Dep't of Revenue, 24 N.E.3d 541 (Ind. T.C. 2014); Caylor-Nickel Clinic, P.C. v. Indiana Dep't of State Revenue, 569 N.E.2d 765 (Ind. T.C. 1991); Miles, Inc. v. Indiana Dept. of State Revenue, 659 N.E.2d 1158 (Ind. Tax 1995).

Taxpayer argues that the Department erred when it disallowed a portion of Taxpayer's refund claim.

Taxpayer is a finance company for a related "buy-here-pay-here" car dealership. Taxpayer's affiliate sells vehicles to customers on an installment basis and then sells the installment contract to Taxpayer. The installment contract includes the sales tax on the price of the vehicle. Taxpayer requested a refund of sales tax in which the installment contract was written off as bad debt. The Indiana Department of Revenue ("Department") conducted an investigation of Taxpayer's business records and reduced Taxpayer's refund request. Taxpayer disagreed with that decision and submitted a protest to that effect. An administrative hearing was conducted during which Taxpayer's representative explained the basis for the protest. The Department issued a Final Order Denying Refund, 04-20190149R, denying Taxpayer's protest. Taxpayer timely filed a rehearing request, and an administrative rehearing was conducted. This Supplemental Final Order Denying Refund results.

I. Bad Debt Deduction - Gross Retail Tax.

Taxpayer requested a refund of sales tax included in defaulted vehicle installment contracts which were then included in bad debt deductions. The Department denied a portion of Taxpayer's refund because the value of repossessed vehicles was removed from the market discount, bad debt calculation. Taxpayer specifically protests the Department's removal of market discount value of repossessed vehicles and argues that it should be included in the bad debt calculation. Taxpayer claims it treated the repossessed vehicles as "partial payments" on the installment contract. These "partial payments" were included in the Taxpayer's calculation of bad debt. Taxpayer also amended its refund claims based on a prior decision from the Department that are addressed in this decision. Taxpayer argues that the Department's previous decision requires the Department to not only grant the refund but grant the amended refund claims resulting in a larger refund request.

This final determination addresses whether pursuant to IC § 6-2.5-6-9(d)(2)(E) the taxpayer's basis in the installment contract is fully reduced by the value of the repossessed vehicle.

IC § 6-2.5-6-9 states in part:

Taxpayer cites to Department's previous Final Order Denying Refund, 04-201900149R. Taxpayer believes that in that Final Order Denying Refund, the Department stated that the value of repossessed vehicles should not be considered in the calculation of bad debt. Taxpayer argues that exclusion of the repossessed vehicles effectively increases the bad debt basis, resulting in a larger refund than originally requested. This argument implies that the value of repossessed vehicles should be treated as non-existent when calculating bad debt.

Taxpayer also argues that:

Taxpayer initially explained it has been treating repossessed vehicles as partial payment on the installment contracts. Taxpayer's protest letter states, "First, there is a fundamental distinction between that portion of a receipt which represents (a) a repayment of principal - it is not taxable and reduces the holder's basis, and (b) ordinary income or capital gain - it is taxable income and does not reduce the basis. A payment is one or the other, not both. Second, the foregoing consequences apply regardless of whether the payment is in the form of money or property. Treas. Reg. § 1.1001.-1(a)." But if the Department excludes the value of repossessed vehicles then the Department needs to grant Taxpayer's refund claim and amended refund claim.

"The Department notes that it cannot agree with Taxpayer for multiple reasons." As the Indiana Tax Court explained in Miles, Inc. v. Indiana Dept. of State Revenue, 659 N.E.2d 1158, 1164 (Ind. Tax 1995), "The Court cannot presume the legislature intended to enact a nullity." Most importantly, Taxpayer's calculation directly contradicts IC § 6-2.5-6-9. Indiana's bad debt statute explicitly states that repossessed property should be excluded from the calculation of bad debt. If taxpayer's argument regarding the Internal Revenue Code treatment of a repossession were to be taken as correct, then the General Assembly clearly intended a different treatment through its requirement that repossessions be excluded from the IRC 166 calculation. This does not mean to treat the value of repossessed vehicles as "nonexistent" as Taxpayer's protest would imply. Rather this means to abide by IRS Publication 537, Installment Sales, https://www.irs.gov/publications/p537, p. 12-13, in that the value of repossessed vehicles is fully subtracted from the bad debt calculation. Furthermore, the repossessed vehicle is often reincorporated into Taxpayer's inventory as a constant revolving door between a sale resulting in bad debt and inventory for the next sale.

Taxpayer states that it relies on the Indiana Tax Court's guidance when calculating its bad debt. Indiana's case law also supports the Department's interpretation and application of IC § 6-2.5-6-9. First, SAC Finance Inc. v. Indiana Dep't of Revenue ("SAC II"), interpreted IC § 6-2.5-6-9 to mean that:

24 N.E.3d 541, 546 (Ind. T.C. 2014). (Internal citation omitted) (Emphasis added).

In SAC II, the Indiana Tax Court specifically stated that repossessed vehicles are excluded from Taxpayer's I.R.C. § 166 bad debt calculation, pursuant to IRS Publication 537. 24 N.E. 3d 541, 546. In addition, the Tax Court also stated that, "the portion of each installment payment [paid by customer] characterized as market discount income for federal income tax purposes is income that has actually been paid to SAC [and not taken by SAC]." Id. at 547. (Emphasis added).

The intent behind allowing a deduction for bad debt is to make the Taxpayer whole; Taxpayer was denied potential income due to circumstances outside its control; it did not receive said income. In instances of repossessed vehicles Taxpayer is made whole; it recaptures the value of the vehicle. The value of the repossessed vehicle must be subtracted from the bad debt calculation because Taxpayer has recouped that value through repossession. Treating the value of the repossessed vehicle as nonexistent, or allowing Taxpayer to include it, results in a double dipping of the bad debt allowance. Furthermore, the Department properly calculated Taxpayer's bad debt deduction pursuant to IC § 6-2.5-6-9. Taxpayer's protest is therefore denied.

Taxpayer's protest is denied.

September 1, 2020