Attorneys for Appellant Attorney for Appellee
Steve Carter B. Keith Shake
Attorney General of Indiana Indianapolis, IN
Indianapolis, IN
Nandita G. Shepherd
Deputy Attorney General
Indianapolis, IN
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__
In the
Indiana Supreme Court
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No. 49S10-0308-TA-358
Indiana Department of Revenue,
Appellant (Respondent below),
v.
1 Stop Auto Sales, Inc.,
Appellee (Petitioner below).
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Appeal from the Indiana Tax Court,
No. 49T10-9809-TA-108
The Honorable Thomas G. Fisher, Judge
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On Petition for Review from the Indiana Tax Court
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June 22, 2004
Sullivan, Justice.
The Tax Court held that 1 Stop Auto Sales, Inc., an auto dealership
that financed its customers’ purchases, was not required to reduce the
amount of its bad debt deduction by the value of repossessed collateral
when calculating its sales tax liability. We reverse the Tax Court’s
decision, finding that the Legislature intended that only the net debt that
is unable to be collected may be deducted for these purposes.
Background
1 Stop is an automobile dealership that sells vehicles on what it
describes as a “buy-here, pay-here” basis. That is, customers may purchase
a vehicle on an installment contract with no money down. Under this
financing arrangement, 1 Stop loans its customers not only the entire
amount of the purchase price of the vehicle but the sales tax due on the
vehicle as well.
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 merchant’s sales tax liability is one for
bad debts or uncollectible receivables. The Legislature has provided:
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 department; and
(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).[1] The Revenue Department
regulation implementing 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 Stop’s 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 court’s 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 Dep’t of Revenue, 785 N.E.2d 672, 674 (Ind. Tax 2003) (op.
on reh’g).
We granted review and now reverse the Tax Court’s opinion on
rehearing.
Discussion
As discussed above, this case requires us to decide whether 1 Stop was
entitled to deduct the total amount of its receivables that constituted
uncollectible debts for federal tax purposes or only to a deduction equal
to that portion of the amount of its receivables equal to the amount
actually written off for federal income tax purposes.
The parties only discuss the impact of repossessed collateral on these
calculations.[2] That is, when a customer fails to repay its obligations
to 1 Stop and 1 Stop writes off the loan as uncollectible, 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. Comm’r, 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 Court’s 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 Stop’s 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) [3]
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
company’s 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.
Conclusion
We hold that the bad debt deduction for which 1 Stop was entitled was
limited to that portion of the amount of its receivables equal to the
amount written off for federal income tax purposes. The judgment of the Tax
Court is reversed.
Shepard, C.J., Dickson, and Boehm, JJ., concur.
Rucker, J., concurs in result.
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[1] Substantial amendments were made to this section by the Legislature in
2003, including provisions directly addressing the issues raised by this
litigation. P.L. 257-2003, § 30, effective January 1, 2004. We express no
opinion about the statute as amended.
[2] There may be other factors in addition to repossessed collateral that
could affect this calculation such as financing charges or interest; sales
or use taxes charged on the purchase price; uncollectible amounts on
property that remain in the possession of the seller until the full
purchase price is paid; and expenses incurred in attempting to collect any
debt. See Ind. Code § 6-2.5-6-9 as amended by P.L. 257-2003, § 30. The
parties do not call our attention to any such factors and we express no
opinion with respect to them.
[3] In Cooper Indus., the Revenue Department argued that that a corporate
taxpayer must begin calculating its Indiana adjusted gross income with the
total amount the taxpayer reported as taxable income on its federal return.
The statute provided that "the term 'adjusted gross income' shall mean . .
. . in the case of corporations, the same as 'taxable income' as defined in
Section 63 of the Internal Revenue Code." Ind. Code § 6-3-1-3.5. The Tax
Court held that the Department was required to calculate taxable income in
accordance with Section 63 – to use Internal Revenue Code Section 63
mathematics. 673 N.E.2d at 1212.