Relates to the refund of certain taxes paid on certain credit card acounts determined to be worthless

Summary of provisions

This bill amends Section 1132 of the Tax Law by adding a new subdivision (e-1) to clarify that a retailer or lender may claim a sales tax refund on an account that has been charged-off for federal income tax purposes.

Justification

New York State Law requires a retailer to remit sales tax from credit sales on its monthly returns prior to receiving payment from the customer. However, longstanding New York State policy has permitted retailers to claim a refund for sales taxes already paid on debts that were subsequently charged off as uncollectible for Federal Income Tax purposes. Sales tax in New York is imposed on the consumer, with the retailer merely acting as a collection agent for the State. When the customer defaults on their obligation, the State's longstanding policy has been to refund the previously remitted sales taxes to the retailer.

Prior to 2006, the sales and use tax law and regulations permitted a taxpayer to claim a refund of sales tax remitted by the retailer on defaulted accounts when the following three requirements were met:

* the taxpayer is the original retailer of a taxable product or service; * the purchaser defaults on the financial obligation; and, * the purchaser's debt is charged off on the taxpayer's retailer books.

However, the retail credit market has evolved over the years. More and more retailers have contracted with third party private label credit card lenders to operate and service their store credit cards. Private label credit card companies typically handle all transactions with retail customers, including issuing the credit card in the name of the retailer, mailing the monthly bills and collecting payments. The private label credit card can only be used in the retail establishment for which it is issued.

When a retailer contracts with a third party private label credit card lender, neither the retailer nor the private label credit card lender satisfies all three requirements for receiving a refund of sales taxes paid. The original retailer no longer holds the accounts, so it cannot make the claim. Further, the third party private label credit card lender, which wrote off the accounts, is not the original

retailer. Therefore, the State receives a windfall of sales tax associated with these bad debts. In 2006, the NYS Legislature recognized these developments and unanimously passed (and the Governor signed into law) what is referred to as the "Bad Debt Law." The law specified that either a retailer or its third party private label credit card lender could claim a sales tax refund when it pays sales tax up front on behalf of a customer on the cost of a purchase only to have the purchaser then default on all or part of a debt.

The 2006 law corrected inequities that existed in the sales and use tax law by updating the statute to reflect these current commerce practices and allow financial stakeholders to recover sales tax on worthless accounts (i.e., debts that are charged off as uncollectible for Federal Income Tax purposes). The intent of the law is to provide relief to retailers and lenders who unjustly suffer an economic loss when they ultimately fail to collect amounts upon which the retailer/lender has essentially advanced the sales tax to the State on behalf of the purchaser.

However, given the State's difficult financial situation in 2010, the 2006 law was repealed. This legislation would reinstate the "bad debt" law as it was originally properly intended.

Legislative history

Originally passed the NYS Legislature by unanimous vote in 2006 (Chapter 664 of 2006). Repealed in 2010-11 NYS Enacted Budget (Chapter 57 of 2010, Part W)

Fiscal implications

According to the 2010-11 NYS Budget estimates, approximately $18 million per year. However, since the State of New York is currently keeping these sales tax payments remitted by the third party private label credit card but which have not actually been paid by the purchaser, it is appropriate that this revenue be returned to the appropriate source.

Effective date

This act shall take effect on the first of January next succeeding the date on which it shall have become a law.