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Facts. Taxpayer is a national retailer not based in North Carolina. It used a private label credit card to finance its credit sales. Banks issued the credit cards and owned the accounts and paid taxpayer the amount of the gross sales including the sales tax and also charged taxpayer a service fee "which applied without regard to whether the customer ultimately defaulted." This finding of fact, which presumably was uncontested, determined the outcome of the case. Presumably the banks were not related to the taxpayer; the decision did not state that they were related and called them "third party banks."
Decision's reasoning. The administrating hearing judge and the DOR reasoned that the taxpayer was not a credit seller, did not own the receivables and when they went bad did not suffer a loss. The decision found that the taxpayer was not in a joint venture with the bank. The fact that the service fee might indirectly reflect the bad accounts was not sufficient to allow taxpayer to obtain a refund of sales taxes paid on those sales.
Evidently the taxpayer relied on its generalized "risk of loss" relative to the bad accounts. However, this reliance flies in the face of what the judge found the true relationship between the bank and the taxpayer to be: the bank hoped to make money on the fee by suffering fewer bad debts than the fee might have indicated.
Planning Pointer. There is no sadder tax to pay than a sales tax not collected from the customer, because it is wholly out of pocket and the retailer is not even guaranteed a profit to pay it from. That problem is certain to occur in this type of case where the retailer does not retain ownership of the receivables. In theory the retailer needs to either (1) agree to a dollar for dollar charge back of the bad debts (which may defeat the purpose of the private label credit card), or (2) build the sales tax cost into the fee structure negotiated with the bank.