Marks-Fitzgerald Furniture Co. v. State Department of Revenue

Citations: 678 So. 2d 121; 1995 Ala. Civ. App. LEXIS 663; 1995 WL 681768Docket: No. 2940822

Court: Court of Civil Appeals of Alabama; November 16, 1995; Alabama; State Appellate Court

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Following an audit of Marks-Fitzgerald Furniture Company, the Alabama Department of Revenue issued a preliminary sales tax assessment totaling $17,063.85. The taxpayer requested a hearing, which resulted in a final order upholding the assessment. An appeal in the Circuit Court of Madison County led to a trial de novo, where the court upheld the assessment but adjusted it by excluding a penalty. The revised amounts determined were $313.54 plus interest for additional tax on credit card sales, and $12,791.53 plus interest for discounted accounts receivable. The taxpayer's motion for a new trial was effectively denied, prompting an appeal.

The relevant state sales tax statutes impose a four percent tax on gross proceeds from retail sales of tangible personal property, defined without deductions for costs or expenses. The taxpayer sold furniture in Huntsville, accepting various payment methods and collecting sales tax accordingly. Retailers must remit sales tax collected on cash sales and a portion of sales tax on credit sales as payments are received.

The dispute arose from the taxpayer's decision to sell discounted credit accounts to a finance company rather than collect payments directly from customers. The taxpayer argued that its tax remittance should only be based on the discounted amount received, while the Department contended that the full sales tax liability was established at the time of the sale and could not be reduced by the discount charged by the finance company, which was deemed a non-deductible business expense.

The trial court ruled that a taxpayer's discounted sale of doubtful accounts receivable to a finance company is akin to the cash basis taxpayer’s deduction for bad debt losses. It found that Section 40-23-1(a)(6) expressly prohibits the taxpayer from remitting sales taxes on only the discounted amount received from the finance company. Under Section 40-23-2(1), a four percent sales tax applies to "the gross proceeds of sales," defined in Section 40-23-1(a)(6) to include the total value from the sale of tangible personal property without any deductions for losses or expenses. 

The taxpayer contended that Section 40-23-8 allows for remitting taxes based on cash sales and delaying tax payments on credit collections until received. The administrative law judge decided that Section 40-23-8 applies only if the retailer is also the collecting party, affirming this with a prior decision. The trial court agreed with this interpretation. It was concluded that while discounted accounts receivable involve credit sales, the retailer must remit tax on the full amount paid by customers, regardless of whether the account is transferred to a third party. If the retailer sells the account, the tax is due on the full sales price as per the department's argument. 

The administrative law judge referenced a previous case where tax was computed on the amount received for delinquent accounts. However, it was determined that the tax owed should not be less than what customers pay. Thus, the retailer cannot reduce its legal tax obligation by transferring accounts receivable to a third party.

A retailer remains liable for any accounts transferred and must report and pay tax on amounts collected from customers. The retailer is required to maintain records for the department's verification of collected amounts. Failure to provide these records results in the retailer being liable for the full tax amount due. Retailers are not to pay taxes before collections occur but must keep records of any payments made. The trial court's ruling regarding the taxpayer's sales tax liability on discounted accounts receivable is upheld. The taxpayer disputes the court's finding on sales tax owed for credit card transactions, claiming no concession was made on this issue. For credit card sales, sales tax is applied to the sale price and charged through an electronic terminal. The credit card company deducts a fee (1%-5%) before transferring the balance to the taxpayer. The taxpayer reported sales tax only on the amount received post-fee, which is incorrect. "Gross proceeds of sales" includes the full sale amount without expense deductions. Credit card fees are deemed non-deductible business expenses and must be included in gross receipts for sales tax purposes. Credit card sales are classified differently from credit sales; they involve immediate payment to the retailer. Consequently, the trial court's judgment is affirmed. The opinion was authored by Retired Appellate Judge L. Charles Wright, with full judicial concurrence.