The Illinois Supreme Court has upended Cook County and appellate rulings, saying Citibank has no claim to $1.6 million in state sales taxes paid through defaulted auto loans, because such tax refunds should go to the auto dealer, not the lender.
The Nov. 30 opinion was penned by Chief Justice Lloyd Karmeier, with concurrence from Justices Rita Garman, Charles Freeman, Robert Thomas, Anne Burke, Thomas Kilbride and Mary Jane Theis. The ruling favored the Illinois Department of Revenue in an action brought against it by Citibank, the global consumer financial services institution headquartered in New York City.
The case began its seesaw in 2010, when Citibank asked the department to refund to Citibank $1.6 million in sales taxes wrung up on vehicle purchases financed by Citibank loans through Chrysler, on which car buyers later defaulted, prompting the bank to write them off as bad debts in 2008 and 2009. The Citibank loans also covered payment of the sales taxes, with the Chrysler dealers sending the taxes on to the Illinois Department of Revenue.
The department refused, prompting Citibank to ask a Cook County judge in 2013 to overturn the department's decision. The judge agreed to do so, but the department appealed to Illinois First District Appellate Court, which upheld the judge by a 3-0 decision in November 2016.
In backing the judge, the appellate court concluded Chrysler dealers did not collect the taxes from the auto buyers, but from Citibank, with Citibank properly “stepping into the shoes” of the dealers, for refund purposes.
The state next went to the Illinois Supreme Court, where the issue centered on interpretation of the Retailers' Occupation Tax Act, which governs state sales taxes and refunds.
Chief Justice Karmeier reasoned the Act only allows refunds to retailers, not lenders.
“State law makes abundantly clear that all refund or credit claims (for sales tax) – whether on a bad debt or otherwise – go through the retailer, the original remitter of the tax. We conclude it is not the intent of the legislature, as expressed in its statutory enactments, to allow a direct action for a refund by a lender against the Department under these circumstances,” Karmeier observed.
As a consequence, Karmeier found Citibank's position “untenable” and an “end-run around” the Act.
Karmeier noted that if legislators did not intend the court's interpretation of the Act, they should revisit the Act and “make their intent manifest.”
Karmeier added that the question was not before the court as to whether the state deserves a sales tax windfall on autos bought with loans, which end in default.
Karmeier pointed out lenders, such as Citibank, can in future seek refunds, if they “order their commercial relationships accordingly” and account for such eventualities in their loan agreements.
Citibank has been represented by Horwood, Marcus & Berk, of Chicago, and Akerman LLP, of Tampa, Fla.
The Illinois Department of Revenue has been represented by Illinois Attorney General Lisa Madigan's office.