On September 19, 2017, the Illinois Supreme Court (Court) heard arguments on whether a large national bank is entitled to a refund of Retail Occupation Tax Act (ROTA) taxes attributable to uncollected debts assigned by retailers (Citibank, N.A. v. Illinois Department of Revenue).¹ If the Court upholds the appellate court's decision, similarly situated taxpayers could be eligible for refunds. Since the Court's decision has no time limit, taxpayers should consider filing protective refund claims.

In November 2016, the Illinois Appellate Court held the bank was entitled to a refund of ROTA tax paid on bad debt because statute² did not limit or preclude the retailers' ability to assign the right to refunds. The appellate court reasoned the assignment of the right to a ROTA tax refund does not violate public policy even though it allowed the bank to collect a tax refund when it has already been compensated through vendor discounts, cardholder charges and interest payments. The basis of the appellate court's rationale indicated the compensation the bank receives for its services had no bearing on whether the right to a tax refund is assignable, and it was not the court's province to police what is considered to be fair compensation for the bank's services.

The state appealed the appellate court's ruling, asking the Court to determine whether a credit card lender is prohibited (by Section 6 of ROTA and long-standing principles of Illinois sales tax law) from seeking a ROTA tax refund for tax related to bad debt supposedly paid to the State by its retail merchants "in error." Additionally, the state asked the Court whether underlying public policies prohibit credit card lenders from filing refund claims as assignees.

The Illinois Department of Revenue (Department) contended that the bank lacks standing to seek a refund under Section 6 of ROTA because it incurred no tax and never remitted the tax for which it sought a refund, and as such was not the "Person who made the erroneous payment."³ In 1964, the Court established the rule that only a remitter of tax has standing to seek a refund. In Snyderman v. Isaacs,⁴ the Court determined it is not enough for the claimant to have "borne the burden" of an erroneous tax, but he must also have been the same person obligated to remit it to the Department in the first place. Furthermore, the Department contended that the public policies underlying Section 6d establish that the bank is not entitled to a refund claim under Section 6. According to the Department, the bank's actions amount to an end-run around the legislative objectives of Section 6d.

The bank contended retailers are clearly entitled to ROTA tax refunds under the General Refund Statute and the Bad Debt Regulation, which creates a valid claim against the Department that could be assigned to the bank by the retailers.⁵ That assignment gave the bank standing to seek its refund claim. The bank also argued Illinois recognizes a broad ability of parties to assign claims; in order for an assignment to be prohibited, the legislature must clearly and unequivocally prohibit assignment in the plain language of the statute, not by implication. Furthermore, the Department's reliance on Snyderman was irrelevant because that case addressed standing to seek direct refund claims and did not address standing as an assignee.

Implications

If the appellate court's decision is upheld, similarly situated taxpayers could be eligible for refunds of Illinois ROTA attributable to the uncollected bad debts as a result of assignments by retailers. There is no time limit for a decision from the Court, so taxpayers should consider filing protective refund claims for open periods. Under Illinois law, the statute of limitations for filing refund claims is three years from the date of payment closing either June 30 or December 31.

Further, in 2015, Pub. Act 99-0217 amended the ROTA Act to specifically include a section covering refunds related to uncollectible debts. Under the new provision, a retailer that has previously paid the ROTA tax may deduct the amount it charged off. In regard to tax payments on purchases made through a private-label credit card, the retailer may claim bad debt relief (either a deduction on a return or a refund of tax remitted) on the unpaid balance due if: (a) the accounts or receivables have been charged off as a bad debt on the lender's books and records on or after January 1, 2016; (b) the accounts or receivables have been claimed as a deduction under Section 166 on the federal income tax return filed by the lender; and (c) a deduction was not previously claimed and a refund was not previously allowed on that portion of the account or receivable.

This deduction or refund has several limitations. It does not apply to credit sales from the purchase of titled property. It only includes credit sale purchases from the retailer whose name or logo appears on the private-label credit card. It may only be taken by the taxpayer (or its successors) that filed the return and remitted tax on the original sale on which the claim is based. It does, however, include all eligible credit sale transactions outstanding with respect to the specific private-label credit card account or receivable at the time the account or receivable is charged off, regardless of the date the credit sale transaction actually occurred. The retailer and lender must maintain adequate books and records, as well as other supporting documentation.

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ENDNOTES

¹ Citibank, N.A. v. Illinois Department of Revenue, Dkt. No. 121634 (Ill. S. Ct., oral arguments Sept. 19, 2017).

² Citibank, N.A. v. Ill. Dept. of Rev., 2016 IL App (1st) 133650 (Ill. App. Ct., 1st Jud. Dist., Nov. 2, 2016).

³ Brief of Defendants-Appellants, No. 121634 (July 12, 2017).

⁴ Snyderman v. Isaacs, 31 Ill. 2d 192 (1964).

⁵ Brief of Plaintiff-Appellee, No. 121634 (Aug. 16, 2017).