When a retailer's private-label credit card program (run by an independent, non-owned finance company) writes off a customer's debt as uncollectible, can either the retailer or the finance company get a refund or credit for the New York sales tax already paid on that sale?

Plain-English summary

Price Waterhouse LLP presented an anonymized arrangement between "Company A" (a card-issuing finance company) and "Company B" (a consumer-products retailer). Under their contract, Company A issues credit cards branded with Company B's name to Company B's qualifying customers, and settles daily with Company B for card sales at a negotiated discount rate that bakes in Company A's projected profit margin, funding costs, operating expenses, and expected bad debts. Critically, Company A's daily payment to Company B includes the FULL amount of sales tax due on those sales -- not a discounted amount. Cardholders pay Company A directly, and if a balance later proves uncollectible, Company A writes it off for federal income tax purposes; since Company B's bad-debt experience feeds back into how the discount rate is set going forward, Company B indirectly bears the economic risk of those write-offs over time, even though Company A absorbs each individual bad debt.

New York law lets a "retail-vendor" -- the party actually liable for collecting and remitting the sales tax -- claim a refund or credit when a sale later proves uncollectible (§ 1132(e), 20 NYCRR § 534.7). But that refund path is generally closed to debts "financed by a third party," UNLESS that third party qualifies as a "captive finance company" (wholly owned by the retailer, financing only that retailer's receivables, and meeting several other tight ownership/structural conditions). The Department found Company A wasn't the vendor at all -- Company B sold the goods, so Company B remains the vendor personally liable for collecting and remitting sales tax under §§ 1132(a) and 1133(a), a statutory obligation the private contract can't modify. And Company A wasn't a "captive finance company" either, since (among other things) it received customer payments directly rather than routing them through Company B, disqualifying it under the regulation's specific ownership/structure tests. That combination proved fatal to any refund: Company A can't claim one because it isn't the vendor, and Company B can't claim one because Company A already paid Company B the FULL sales tax amount on every sale up front, regardless of the discount rate -- meaning Company B never actually bears the tax loss on an uncollectible account that a refund would compensate for.

What this means for you

Retailers running private-label credit card programs with an independent (non-owned) finance partner

If your card-issuing partner isn't wholly owned by you and doesn't meet the regulation's tight "captive finance company" structural tests (in particular, receiving customer payments only through you, not directly), don't expect either you or your finance partner to recover New York sales tax on accounts that later go bad -- structure your discount-rate negotiations with that reality priced in, since this ruling closes off the bad-debt refund path for both sides of a typical third-party-financed private-label arrangement.

Businesses considering a wholly owned "captive" finance subsidiary instead

This opinion implicitly highlights the payoff of the captive-finance-company structure: only a properly structured captive (meeting ALL the regulatory conditions, including recourse to the retailer and payments routed through the retailer) preserves a path to bad-debt sales-tax refunds that an independent third-party financer forecloses.

Finance companies issuing private-label cards for retailers

If you receive cardholder payments directly rather than through the retailer, you likely won't qualify as a "captive finance company" even if you're closely affiliated with the retailer -- check the specific ownership and payment-routing conditions in 20 NYCRR § 534.7(a)(5) before assuming otherwise.

Common questions

Q: Why can't Company A (the finance company) claim the bad-debt refund itself?
A: Because a refund under § 1132(e) is only available to the "vendor" of the goods or services -- and Company A isn't the vendor, since Company B sold the goods; Company A merely extends credit.

Q: Why can't Company B (the retailer) claim the refund either, even though it IS the vendor?
A: Because Company A already paid Company B the full sales tax amount on every credit card sale as part of the daily settlement, regardless of the discount rate applied to the underlying sale -- so Company B never actually loses the tax amount when an account later proves uncollectible, leaving nothing to refund.

Q: What would need to be true for a refund to be available in an arrangement like this?
A: The financing company would need to qualify as a "captive finance company" under 20 NYCRR § 534.7(a)(5) -- wholly owned by the retailer, financing only that retailer's receivables, having recourse to the retailer on bad debts, and receiving customer payments only through the retailer rather than directly.

Q: Can another retailer/finance-company pair rely on this exact result?
A: No. This advisory opinion binds the Department only as to Price Waterhouse LLP's client relationship as described (with the parties anonymized as Company A and Company B); a different contractual or ownership structure could change the analysis.

Citations and references

Statutes and regulations:

• Tax Law § 1132(a) (trust-fund status of collected tax)
• Tax Law § 1132(e) (refund/credit for uncollectible receipts)
• Tax Law § 1133(a) (personal liability for the tax)
• 20 NYCRR § 534.7 (refunds and credits attributable to bad debts)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a96_61s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (61)S
Sales Tax
October 1, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S950925B

On September 25, 1995, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Price Waterhouse LLP, Attn: Alan Floria, 400 South Hope Street, Los
Angeles, CA 90071.
The issue raised by Petitioner, Price Waterhouse LLP, is whether Company B may claim a
credit or file a claim for refund for the sales tax paid on debts written off by Company A for Federal
income tax purposes, and, if not, whether Company A is entitled to file a claim for refund for such
amount.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Company A has entered into a contract with Company B, a retailer of consumer products,
to issue lines of credit to Company B's customers. Petitioner indicates that the contract provides as
follows:
Company A will issue a credit card utilizing Company B's name to qualified
Company B customers. Company A will remit payment to Company B for the
amounts associated with the credit card sales based upon a predetermined discount
rate.
In determining the price to be paid to Company B, Company A has calculated the
discount rate so that it achieves its targeted profit margin. As a result, program
revenue (cardholder finance charges, other income, etc.) and expenses (funding costs,
operating expenses, bad debts, etc.) are estimated to compute the discount rate.
Although the base discount rate will be negotiated annually as part of the budgeting
process, the rate is adjusted throughout the year for anticipated changes in program
revenues and expenses. Consequently, Company A's targeted profit margin will
remain relatively constant throughout the term of its contract with Company B.
Company B's sales are generally subject to sales tax. Company B will charge sales tax on its
taxable sales of merchandise and remit the tax to the New York State Department of Taxation and
Finance. On a daily basis, Company A will settle with Company B for the amount of the credit card
sales on a discounted basis. Such payments made by Company A to Company B include the full
amount of sales tax due on the credit card sales.
Under the terms of the credit card agreement, the credit cardholders will be responsible for
remitting all payments directly to Company A. Any amounts subsequently determined to be
uncollectible will be written off by Company A for Federal income tax purposes.

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The allowance for bad debts is a material consideration in calculating the discount rate. If all
other factors (program revenues and expenses other than bad debts) were to remain constant and the
actual bad debt experience for the credit card sales exceeds the amount forecasted by Company A,
the discount rate will increase. Alternatively, if the other factors are constant and the bad debt
experience is less than the forecasted amount, the discount rate will decrease. Company B's bad debt
experience is directly related to the discount rate on an ongoing basis. Company B, therefore, bears
the risk of economic loss associated with those accounts ultimately found to be uncollectible by
Company A.
Applicable Law and Regulations
Section 1132(a) of the Tax Law provides:
(a) Every person required to collect the tax shall collect the tax from the
customer when collecting the price, amusement charge or rent to which it applies. If
the customer is given any sales slip, invoice, receipt or other statement or
memorandum of the price, amusement charge or rent paid or payable, the tax shall
be stated, charged and shown separately on the first of such documents given to him.
The tax shall be paid to the person required to collect it as trustee for and on account
of the state.
Section 1132(e) of the Tax Law provides, in part:
(e) The tax commission may provide, by regulation, for the exclusion from
taxable receipts, amusement charges or rents of amounts representing sales where the
contract of sale has been cancelled, the property returned or the receipt, charge or rent
has been ascertained to be uncollectible or, in case the tax has been paid upon such
receipt, charge or rent, for refund of or credit for the tax so paid.
Section 1133(a) of the Tax Law provides:
(a) Except as otherwise provided in section eleven hundred thirty-seven,
every person required to collect any tax imposed by this article shall be personally
liable for the tax imposed, collected or required under this article. Any such person
shall have the same right in respect to collecting the tax from his customers or in
respect to nonpayment of the tax by customers as if the tax were a part of the
purchase price of the property or service, amusement charge or rent, as the case may
be, and payable at the same time; provided, however, that the tax commission shall
be joined as a party in any action or proceeding brought to collect the tax.
Section 534.7 of the New York State Sales and Use Tax Regulations provides, in pertinent
part, as follows:

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Sales Tax
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Refunds and credits attributable to bad debts.--(Tax Law, Secs. 1132(e), 1139(e)).(a)
Definitions. The following definitions apply for the purpose of determining
entitlement and computation of the refunds and credits authorized in this section
only--(1) The term "uncollectible" means worthless, as used for federal income tax
purposes. Legal action to enforce payment when it would probably not result in
satisfaction of a judgment upon a showing of the underlying facts is not a necessary
prerequisite in determining worthlessness.
(2) The term "retail-vendor" means a vendor of tangible personal property or
services, payment for which is made, in whole or in part, by the extension of credit
to the purchaser by such vendor who is responsible for remitting applicable sales tax
to the department and includes a lessor-vendor which meets the conditions of
paragraph (b)(2) of this section.
(3) The term "account-obligor" means the purchaser of tangible personal
property or services, the receipts of which are paid, in whole or in part, by the
extension of credit by the retail-vendor.
(4) The term "receivables of a retail-vendor" means indebtedness to the retail­
vendor incurred by an account-obligor upon his purchases whether or not subject to
the sales and use taxes.
(5) The term "captive finance company" means a company that meets all of
the following conditions:
(i) it is wholly owned by the retail-vendor or is wholly owned by a company
which is related to such retail-vendor through an unbroken chain of wholly owned
companies;
(ii) it does not finance receivables of any vendor other than its retail-vendor
or any company related to such retail-vendor by an unbroken chain of wholly owned
related companies;
(iii) it does not extend credit to anyone other than in the form of the purchase
of receivables created as a result of extension of credit by the retail-vendor, except
that the requirement of this subparagraph shall not be violated by the investment of
excess cash funds in the short or long-term financial markets or by advancing funds
to its retail-vendor or a company which is related to such retail-vendor through an
unbroken chain of wholly owned companies;
(iv) it does not sell receivables to a third party other than a transfer of a
receivable to its retail-vendor; and
(v) it does not receive payments on the receivable directly from the account­
obligors. Instead, the foregoing payments, including interest, on the receivable must
be made by the account-obligors directly to the retail-vendor, and

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Sales Tax
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must be reported as income by the retail-vendor for income and franchise tax
purposes.
(6) The term "recourse" means that all bad debts are transferred back to the
retail-vendor or such bad debts are charged against the retail-vendor's reserve account
established for that purpose.
(b) Allowance of refund or credit. (1) Where a receipt, amusement charge, or
hotel rent has been ascertained to be uncollectible, either in whole or in part, the
vendor of the tangible personal property or services, the recipient of the amusement
charges, or the operator of the hotel (as such terms are defined in section 1101 of the
Tax Law) may apply for a refund or credit of the tax paid on such receipt, amusement
charge, or hotel rent within three years from the date the tax was payable by such
person to the Tax Department. However, no refund or credit shall be allowed based
upon the fact that receipts are not actually paid on transactions described in section
527.15(e) of this Title.
(2) A vendor will be considered the vendor of the tangible personal property
or services giving rise to the bad debt even though the property or services are sold
by a leased department or concession (as described in section 526.10(f) of this Title),
provided all the following conditions are met:
(i) the leased department or concession accounts for and pays over all of its
receipts to the lessor-vendor;
(ii) the lessor-vendor reports and remits to the Department of Taxation and
Finance the tax on all of the leased department or concession's receipts; and
(iii) the transfer of all receivables from the leased department or concession
to the lessor-vendor is made without any discount for any credit transactions which
involve the lessor-vendor's receivables and without recourse to the leased department
or concession.
(3) A refund or credit is not available for a transaction which is financed by
a third party or for a debt which has been assigned to a third party, whether or not
such third party has recourse to the vendor on that debt.
(4) Receivables transferred to a captive finance company by its retail-vendor
(as such terms are defined in subdivision (a) of this section) will not be treated as
debts assigned to a third party provided the following conditions are met:
(i) such captive finance company has recourse (as defined in paragraph (a)(6)
of this section) on all bad debts to the transferor retail-vendor; and

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Sales Tax
October 1, 1996
(ii) annually (for a period determined from June 1st to May 31st of each year)
not more than 10 percent of the receivables of the retail-vendor are incurred by
account obligors upon purchases from any vendor other than the retail-vendor or a
leased department or concession of the retail-vendor which meets the conditions of
paragraph (2) of this subdivision.
Though a retail-vendor is not denied eligibility for the refund or credit with
respect to debts determined to be uncollectible with respect to its receivables
financed by a captive finance company if no more than 10 percent of its receivables
(whether or not financed by the captive finance company) are derived from sales of
any vendor other than the retail-vendor or a leased department or concession of such
retail-vendor which meets the conditions of paragraph (2) of this subdivision, there
is no refund or credit allowable to such retail-vendor with respect to any receivables
derived from sales of such other vendors. (emphasis added)
Opinion
In this case, Company A has entered into a contract with Company B to issue lines of credit
to Company B's customers. In doing so, Company A will issue a credit card utilizing Company B's
name to qualified Company B customers. Under the terms of the credit card agreement between
Company A and the customers of Company B, Company B's customers will be responsible for
remitting all payments directly to Company A. Company A will remit payment to Company B for
the amounts associated with the credit card sales based upon a predetermined discount rate.
Company B, as the vendor of tangible personal property, is responsible under New York law for
collecting sales tax due on its taxable sales and remitting the tax required to be collected to the New
York State Department of Taxation and Finance. The tax required to be collected must be paid to
the person required to collect it, in this case, Company B, as trustee for and on account of the State.
See Sections 1132(a) and 1133(a) of the Tax Law.
Company B does not itself extend credit to its customers; rather Company A extends the
credit. Company A is not the vendor under Section l101(b)(8) of the Tax Law of the goods which
Company B sells to Company B's customers, since Company B sold the goods. Company B's retail
sales customers use Company A's credit card to make purchases from Company B. Thus, Company
A forwards the customers' payments to Company B and establishes a debt from the customers to
Company A. Since Company A extends the credit to Company B's customers and receives
reimbursement of the debt created from the customers, Company A is not a captive finance company
of Company B for purposes of the Sales and Use Tax Regulations. See Section 534.7(a)(5)(iii) and
(v) of the Sales and Use Tax Regulations.
Company B is required to collect tax due from its customers and is personally liable for the
tax imposed, collected or required to be collected. It is Company B that has the same right under
Section 1133(a) of the Tax Law to collect the tax from its customer or in respect to the customer's
nonpayment of tax as if the tax were part of the purchase price. (See Sections 1132(a) and

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Sales Tax
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1133(a) of the Tax Law). These statutory rights and obligations of Company B cannot be modified
by contract. Any amounts of tax collected by Company A from Company B's customers cannot be
discounted; the full amount of tax required to be paid by Company B's customers must be turned
over to Company B.
Pursuant to Section 1132(e) of the Tax Law, the Commissioner may provide, by regulation,
for the refund of or credit for tax paid on sales receipts that have been ascertained to be uncollectible.
Pursuant to Section 534.7 of the Sales and Use Tax Regulations, where a receipt has been
ascertained, either in whole or in part, to be uncollectible, the vendor of the tangible personal
property or services who has extended credit to the purchaser of the tangible personal property or
services may apply for a refund or credit for the tax paid on such receipt. However, a refund or credit
is not available for a transaction which is financed by a third party whether or not such third party
has recourse to the vendor on such debt, unless the third party is a captive finance company. See
Section 534.7(b)(3),(4) of the Sales and Use Tax Regulations. Accordingly, since Company A is not
the vendor with respect to Company B's sales to its customers (rather Company A is only extending
credit to Company B's customers), and since Company A is not a captive finance company, pursuant
to Section 1132(e) of the Tax Law and Section 534.7 of the Sales and Use Tax Regulations,
Company A may not claim a credit or file a claim for refund for the sales tax paid on debts which
are deemed uncollectible by Company A. Nor may Company B claim such a credit or refund, since
Company A paid to Company B the full amount of the sale, less the discount rate, and the sales tax
due on the entire sales price (without regard to any discount) on behalf of the purchaser.

DATED: October 1, 1996

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.