United States: Ohio Supreme Court Determines That an Assignee of The Statutory Vendor is Not a Vendor For Purposes of Ohio Bad Debt Deduction Statute

The Ohio Supreme Court recently held that a deduction or refund from sales tax for bad debt is limited to statutory vendors, and that an assignee is not a statutory vendor for purposes of R.C. 5739.121, the bad debt deduction statute. Chrysler Financial Company, L.L.C. v. Wilkins, 102 Ohio St. 3d 443 (2004).

Chrysler Financial Company, L.L.C. ("Chrysler") accepts assignments of retail installment contracts from automobile dealers. These retail installment contracts include the cost of the sales tax and the purchase price of the motor vehicle. If the loan is deemed uncollectible after a customer fails to make the required installment payments, Chrysler charges off the loan. Chrysler repossesses the motor vehicle and may sell it at auction. Any amount recovered from auction is deducted from the balance owed by the customer and the balance is considered by Chrysler to be a loss. These losses are claimed as a bad debt deduction on Chrysler’s federal tax returns. Chrysler holds a vendor’s license in Ohio and files Ohio sales tax returns for its direct sales of leased cars in its leasing business. Chrysler did not sell the motor vehicles or remit any of the sales tax for any of the sales involved in its refund claim.

The Tax Commissioner denied Chrysler’s refund claim on the basis that Chrysler was not a "vendor" for sales tax purposes, but instead was a provider of financing. On appeal, the Board of Tax Appeals agreed with the Tax Commission. It found that Chrysler was not a vendor within the statutory definition and could not claim the refund.

Pursuant to R.C. 5739.121, a vendor is permitted to deduct the amount of bad debt charged off as uncollectible from its taxable receipts. Chrysler did not claim the bad debt deduction but sought a refund under Ohio Adm. Code 5703- 9-44(E) which permits a vendor to seek a refund if the bad debt deduction exceeds the net taxable sales for the refund period. The Court denied Chrysler’s refund claim because it did not meet the statutory definition of vendor. In order to be a vendor for purposes of R.C. 5739.121, the Court found that the person must make the transfer of title or possession effected by the sale for a consideration. Since Chrysler did not make any transfer of title or possession of any of the motor vehicles to the customers at issue here, Chrysler is not a statutory vendor under R.C. 5739.01(C) and cannot seek a bad debt deduction or refund under R.C. 5739.121.

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