Virginia Court Denies Best Buy’s Bad Debt Credit, Leaves Hope For Other Retailers

A Virginia circuit court recently held that Best Buy was not entitled to a refund of sales tax remitted to the Virginia Department of Taxation on certain credit card sales.1

When Best Buy made sales to customers using a Best Buy private-label credit card at its Virginia stores, it remitted Virginia sales tax to the Virginia Department of Taxation on the full purchase price of the goods that were sold. However, some of Best Buy's Virginia retail customers ultimately defaulted on their payments on their Best Buy credit card. Best Buy claimed a refund of the sales tax remitted with respect to those "bad debts." This claim was based on a Virginia statutory provision that provides a sales tax credit for bad debts "owed to the dealer."2 The Department of Taxation challenged Best Buy's entitlement to the credit.

In its decision, the Circuit Court for the City of Richmond focused on Best Buy's use of a third-party financing arrangement for the credit card sales in reaching its conclusion that Best Buy was not the "dealer" to whom the bad debt was owed.3 As of today, it does not appear that Best Buy has requested that the circuit court's decision be reviewed by the Supreme Court of Virginia.

The Best Buy decision appears to follow the trend of court decisions that have interpreted state sales tax credits for bad debts in an extremely narrow manner. It does, however, offer a glimmer of hope that Virginia's bad debt credit may still be available in limited circumstances—even when the financing is provided by a separate finance company.

The Best Buy Facts and Holding

The Best Buy decision involved Best Buy's contract with Beneficial National Bank USA ("BNB USA"), pursuant to which BNB USA provided financing to Best Buy customers through the issuance of a private label Best Buy credit card. When a customer made a purchase in Virginia with his or her Best Buy credit card, Best Buy remitted the sales tax on the purchase to the commonwealth. BNB USA would then purchase the receivables from the Best Buy credit card transactions from Best Buy at a price designated by their agreed purchase plan. The price that BNB USA paid to Best Buy incorporated a discount for a loss debt ratio (this ratio was intended to take into account the likelihood that a portion of the purchased receivables would prove uncollectable).

Best Buy argued that it was entitled to claim the credit for bad debts because it "economically bore the cost of the bad debts on an overall portfolio...