CHICAGO — A state appeals panel has ruled the Illinois Department of Revenue misapplied a 2015 state law, resulting in improper denial of sales tax refunds and, essentially, double taxation on certain car dealers.
The issue began when Kishwaukee Auto Corral, a Rockford car dealership, sought more than $61,000 in refunds from the IDOR for Retailers’ Occupation Tax Act payments on vehicles sold through installment contracts when those deals end in repossession. IDOR denied the refunds, prompting the dealer to ask for an administrative review from the Illinois Independent Tax Tribunal. After that body sided with the Department of Revenue, Kishwaukee appealed to the Illinois First District Appellate Court.
Justice Mary Ellen Coghlan wrote the panel’s opinion, issued Nov. 8; Justices Michael Hyman and Carl Walker concurred.
According to the panel, Kishwaukee’s use of installment loan contracts establishes it as both a dealer and a lender. Dealers have to pay the full tax to the state when executing a contract with a buyer. They then recover that money by figuring it in to monthly payments, unless the buyer doesn’t satisfy the loan.
“Since many of the buyers have poor credit, the loans have a high default rate, and Kishwaukee repossesses many of the cars before they are fully paid off,” Coghlan wrote.
Before the law changed on July 31, 2015, Kishwaukee could apply for a refund or credit of state sales tax on defaulted loans. IDOR called these allocations bad debt or repossession credit. After the amendment, IDOR regulations said retailers pursuing sales tax refunds had to both charge off bad debt on their books and claim a deduction on federal returns.
However, the panel said, businesses that file federal returns on a cash basis, rather than accrual, can’t under Internal Revenue law claim deductions and therefore can’t qualify for the IDOR refund. This is because cash-basis taxpayers record revenue only when it is received and expenses only when they are paid, so Kishwaukee can’t claim a deduction for revenue it expects that later can’t be collected.
When arguing before the Tribunal, IDOR didn’t articulate the difference between companies that pay taxes on cash and accrual bases, “nor did it assert, much less argue, that such differences bore a reasonable relationship to the object of the legislation or to public policy,” Coghlan wrote.
The panel further said the challenged section of the 2015 ROTA amendment “as a whole does not mention cash basis taxpayers, much less purport to bar them from obtaining refunds.” Because the law is ambiguous, the panel looked at the debate leading to its enactment to discern its purpose, which revealed the intent was making sure retailers didn’t have to give the state tax money when they didn’t get the full value of an item sold.
“Notably, the purpose was not to prohibit cash basis taxpayers from obtaining such refunds,” Coghlan wrote. “There was no discussion pertaining to cash basis taxpayers and no indication that the legislators considered the amendment’s potential impact on small businesses that file their federal income tax returns on a cash basis.”
Although state agencies charged with administering an ambiguous law can correctly apply their own constructions, IDOR’s “regulation in this case is not reasonable,” Coghlan wrote. “When Kishwaukee sells a car, it is required to pay (sales tax) on the car’s entire value up front. If the buyer defaults and Kishwaukee repossesses the car, it resells the car and again pays the full (sales tax) up front. To deny Kishwaukee a refund under these circumstances would be to allow the state double recovery, which is both unreasonable and contrary to the express intent of the Legislature.”
The panel said Kishwaukee is entitled to its refund, enjoined IDOR from refusing any subsequent or future claims and reversed the Tribunal’s summary judgment.
Attorneys Lane Gensburg and Anne Kim, of Gensburg Calandriello & Kanter, of Chicago, represented Kishwaukee in the case.