News and Insights

Alabama Court of Civil Appeals Denies Home Depot’s Attempt to Take Bad Debt Deduction

Tax Development Dec 27, 2011

On November 4, 2011, the Alabama Court of Civil Appeals (“Court”) denied Home Depot’s petition for refund of sales tax paid on uncollectible debts. Similar to the facts in cases heard in Oklahoma, Ohio, and Washington, Home Depot entered into contracts with finance companies to extend credit to its customers through the use of private-label credit cards. When a customer made a purchase, the finance company paid Home Depot the amount of the purchase, including any applicable taxes, less a service fee. The customer then paid the finance company. If a customer failed to make payments, the finance company bore the loss and deducted the bad debts on its federal corporate income tax return.

The Court reversed the decision of the Montgomery Circuit Court and declared that Home Depot was not eligible to claim a deduction for sales tax paid on uncollectible debts because Home Depot was fully paid for the goods sold and was not the owner of the bad debt. The basis for the Court’s decision was that Alabama’s regulation regarding bad debt deductions provides that only retailers who actually extend the credit to customers may take bad debt deductions. In addition, the regulation provides that a bad debt is the portion of the sales price that the retailer is unable to collect.

Because finance companies paid Home Depot in full for customer purchases and owned the unpaid credit accounts, the bad debts were not amounts that Home Depot was unable to collect. Alabama’s bad debt deduction is only available to retailers that extend credit to the customers, own the credit accounts, and deduct the uncollectible debt for federal income tax purposes.


James M. Trester