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Case Number: CGC-08-47 1479
Filing Date: Jan-28-2008 3:55
Juke Box: 001 Image: 02008093
COMPLAINT
STRIC CAPITAL CORPORATION A DELAWARE VS. STATE BOARD OF EQUALIZATION, :
001002008093
Instructions:
Please place this sheet on top of the document to be scanned.ORIGINAL ~_¢
SUMMONS ron cour use omy
(CITACION JUDICIAL) ororanawooernconm
NOTICE TO DEFENDANT:
(AVISO AL DEMANDADO):
STATE BOARD OF EQUALIZATION,
an agency of the State of California
YOU ARE BEING SUED BY PLAINTIFF:
(LO ESTA DEMANDANDO EL DEMANDANTE):
GENERAL ELECTRIC CAPITAL CORPORATION
You have 30 CALENDAR DAYS after thls summons and legal papers are served on you to file a written response at this court and have a
copy served onthe plaintiff, A letter or Phone call will not protect you. Your written response must be In proper legal form if you want the
court to hear your case, There may be a court form that you can use for your response. You can find these court forms and more
information at the Catifornta Courts Online Self-Help Center (www.courtinfo.ca.gov/setfhelp), your county law !ibrary, or the courthouse
nearest you. tfyou cannot pay the filing fee, ask the court clerk fora fee walver form. If you do not file your response on time, you may
tose the case by default, and your wages, money, and property may be taken without further warning from the court.
There are other legal requirements. You may want to call an attorney right away. ff you do not know an attorney, you may want to cailan
attorney referral service. {f you cannot afford an attorney, you may be eligible for free legal services from a nonprofit legal services
program. You can locate these nonprofit groups: at the California Legal Services Web site (www.tawhelpcalifornla.org), the California
Courts Online Self-Help Center (www.courtinfo.ca.govisetfhelp), or by contacting your local court or county bar association.
Tiene 30 DIAS DE CALENDARIO después de que le entrequen esta citacion y papeles fegates para presentar una respuesta por escrito
en esta corte y hacer que se entregue una copia al demandante. Una carta o una Hamada telefénica no lo protegen. Su respuesta por
escrito tene que estar en formato fegal correcto si dese que procesen su caso en la corte, Es posible que haya un formulario que usted
pueda usar para su respuesta. Puede encontrar estos formutarios de fa corte y mas Informacion en ef Centro de Ayuda de Jas Cortes de
California (www.courtinfo.ca.gov/selfhetp/espanol)), en la biblioteca de leyes de su condado o en /a corte que fe quede mas cerca. Sino
puede pagar la cuota de presentaci6n, pida al ‘secretario de ta corte que fe dé un formulario de exencién de pago de cuotas. Sino presenta
‘su respuesta a tempo, puede perder ef caso por Incumplimlento yla corte le podré quitar su sueldo, dinero y blenes sin més advertencia.
Hay otros requisites tegales. Es recomendable que flame a un abogado Inmediatamente. Sino conoce aun abogado, puede llamar aun
servicio de remisin a abogados. Sino puede pagar a un abogado, es posible que cumpla con Ios requisitos para obtener servicios
legales gratuitos de un programa de servicios legates sin fines delucro. Puede encontrar estos grupos sin fines de iucro en el sitio web de
California Legal Services, (www.lawhelpcatifornia.org), en ef Centro de Ayuda de fas Cortes de California,
(www.courtinfo.ca.gov/selhelp/espanol) o poniéndose en contacto con fa corte o el colegio de abogados locales.
eA B-- 471479
fe name and address of the court ts:
(El nombre y direccién de fa corte es):
Superior Court of the State of California
City and County of San Francisco, Unlimited Civil Jurisdiction
400 McAllister Street, San Francisco, CA 94102
The name, address, and telephone number of plaintiff's attorney, or plaintiff without an attorney, is:
(Ef nombre, la direccién y ef numero de teléfono del abogado del demandante, o def demandante que no tiene abogado, es):
Amy L. Silverstein & Edwin P. Antolin, Silverstein & Pomerantz LLP, 55 Hawthorne Street, Suite 440,
San Francisco, CA 94105; A. Silverstein, (415) GORIONT: { in, (415) 598;3598 : ht
DATE: Clerk, by , Deputy
frecnay! AN 2 8 2008 (Secretario) (Adjunto)
(For proof of service of this summons, use Proof ‘of Service of Summons (form POS-010).)
(Para prueba de entrega de esta citation use ef formulario Proof of Service of Summons, (POS-010)).
NOTICE TO THE PERSON SERVED: You are served
1. [) as an individual defendant.
2. [[-] as the person sued under the fictitious name of (specify):
3, GZ on behalf of (specify): State Board of Equalization
under; [_] CCP 416.10 (corporation) () CCP 416.60 (minor)
([] CCP 416.20 (defunct corporation) [-] CCP 416.70 (conservatee)
(1 CCP 416.40 (association or partnership) [1 CCP 416.90 (authorized person)
CZ1 other (specify): CCP 416.50 (public entity)
4. [) by personal delivery on (date): pagetott
ee
Form Adopied for Mandatory Use ‘Code of Grvd Procedure §§ 41220, 465
SUNAOD [Rev Jeruary 1, 2004] SUMMONS (Greece Copan Te] [rere Carros cory| Pr
MOREY ORI iverstenn (Bar No, 154zal
Edwin P. Antolin (Bar No. 172599)
Silverstein & Pomerantz LLP
55 Hawthorne Street, Suite 440, San Francisco, CA 94105
‘TELEPHONE NO: g') 593-3502 raxno: (415) 593-3501
eneral Electric Capital Corporation
ISUPERIOR COURT OF CALIFORNIA, COUNTY OF San Francisco
street aporess: 400 McAllister Street
MAILING ADDRESS:
cmyanozp cove: San Francisco, CA 94102-3680
BRANCH NAME:
CASE NAME:
General Electric Capital Corporation v. State Board of Eq alization
CIVIL CASE COVER SHEET Complex Case Designation
Untimited [2] united (CO counter (J Joinder
mabe. 71479 |
E08 2; 9
(Amount (Amount "
demanded demanded Is Filed with first appearance by defendant "
exceeds $25,000) _ $25,000 or less)’ (Cal. Rules of Court, ule 3.402) DEPT:
Ttems 1-6 below must be completed (see instructions on page. 2).
1. Check one box below for the case type that best describes this case:
Auto Tort Contract Provistonally Complex Civil Litigation
Auto (22) L_] Breach of contractvarranty (06) (Cal. Rules of Court, rutes 3.400-3.403)
Uninsured motorist (48) J Rute 3.740 cottections (09) [1 antirusttrade regutation (03)
Other PUPDMWD (Personal Injury/Property [_] Other cottections (09) (1 construction detect (10)
Damage/Wrongful Death) Tort [J insurance coverage (18) (J mass tort (40)
Asbestos (04) ([) otter contract (37) () securities tigation (28)
LJ Product Fabitty (24) Real Property (] Environmental/Toxie tort (30)
Medical matpractice (45) [F) Eminent domainiinverse (TJ insurance coverage claims arising from the
CD otner Prpoann (23) ‘condemnation (14) above listed provisionally complex case
Non-PUPDAVD (Other) Tort LJ wrongful eviction (33) types (41)
Business tortunfalr business practice (07) (] otter real property (26) Enforcement of Judgment
Civit rights (08) Unlawful Detainer [1 Enforcement of judgment (20)
[=] Detamation (13) LJ commercial (31) Miscellaneous Civil Complaint
CJ Fraud 16) [1 Residential (32) CD ricoe7
Intetlectual property (19) (21 bags 38) [4] other complaint (not specified above} (42)
Professional negligence (25) dudictal Review Miscellaneous Civil Petition
LJ otter non-PUPDAWD tort (35) oO Asset forfeiture (05) (1 Partnership and corporate governance (21)
ee one Petition re: arbitration award (11) Co Other petition (not specified above) (43)
Wrongful termination (36) [1 wat of mandate (02)
[1 other employment (15) [_]_Other Judicial review (39)
D Thiscase Llis Lx] isnot complex under rule 3.400 of the Califomia Rutes of Court. If the case is complex, mark the
factors requiring exceptional judicial management:
a.(] Large number of separately represented parties ¢.(__] Large number of witnesses
b.[_] Extensive motion practice raising difficutt or novel @. L_] Coordination with related actions pending in one or more courts
issues that will ba time-consuming to resolve In other counties, states, or countries, or in a federal court
c. oO Substantial amount of documentary evidence i oO Substantial postjudgment judicial supervision
3. Remedies sought (check all that apply): a.[¥] monetary b.[_] nonmonetary; declaratory or injunctive relief ¢. CC Jpunitive
4, Number of causes of action (specify):
5. This case Lis) Wisnot actass action suit.
6. Ifthere are any known related cases, file and serve a notice of related case. (You may use form CM-015,)
Date: January 28, 2008
Amy L. Silverstein 2
(TYPE OR PRINT NAME) (SIGNATURE TOR ATTORNEY FOR PARTY)
NOTICE
Plaintiff must file this cover sheet with the first paper filed in the action or proceeding (except small claims cases or cases filed
under the Probate Code, Family Code, or Welfare and Institutions Code). (Cal. Rules of Court, rule 3.220.) Failure to file may resutt
In sanctions,
© File this cover sheet in addition to any cover sheet required by tocat court rule.
© If this case is comptex under rule 3.400 et seq. of the California Rules of Court, you must serve a copy of this cover sheet on all
other parties to the action or proceeding.
¢ Untess this Is a collections case under rule 3.740 ora complex case, this cover sheet will be used for statistical purposes only. tot
Fora een tx enn ust ——SIVIL CASE COVER SHEET Ca aa ar
Councl of
CM-010 [Rev. July 1, 2007] wwerw courtinte o2
Tameacan Vecnined WeORGINAL oc
wo mem IY DAH hw
tv nN yo eae
Amy L. Silverstein (Bar No. 154221) = os
Edwin P, Antolin (Bar No. 172599) E j kL D
Silverstein & Pomerantz up
55 Hawthorne Street, Suite 440 San Frantiseo IuBerinr Court
San Francisco, California 94105
Telephone: (415) 593-3500 Want Wo 2008
Facsimile: (415) 593-3501 ane ae Glark
—_— jeputyCrem =
Attomeys for Plaintiff * Er
GENERAL ELECTRIC CAPITAL CONFERENCES
CORPORATION CASEMANAOENENT
JAN 2 8 2008 jun 27 2008 -QO2ANM
DRARIMENT2U2
SUPERIOR COURT OF THE STATE OF CALIFORNIA
AND CITY AND COUNTY OF SAN FRANCISCO
UNLIMITED CIVIL JURISDICTION
GENERAL ELECTRIC CAPITAL No. G25 o-~
CORPORATION, a Delaware corporation 0 8 4714 79
Plaintiff, COMPLAINT FOR REFUND OF
SALES AND USE TAXES
v.
(California Revenue and Taxation Code
STATE BOARD OF EQUALIZATION, an §§ 6933-34)
agency of the State of California
Defendant.
Plaintiff complains and alleges as follows:
PARTIES
1, Plaintiff, General Electric Capital Corporation, is a corporation. Prior to 2000,
Plaintiff was organized and existing under the laws of New York. Beginning in 2000 and
continuing to the present, Plaintiff was and is incorporated under the laws of Delaware. Atall
times relevant to this complaint, Plaintiff's principal place of business was located in
Connecticut.
COMPLAINT FOR REFUND OF SALES AND USE TAXES1
0 Om N DH eB WN
v yo oN RRR eet
BPrHeepRRRBEB Ga AABEEKR HAS
2. Defendant, State Board of Equalization, is, and at all times mentioned herein in was,
an agency of the State of California empowered to assess and collect taxes under the California
Sales and Use Tax Law, and to make refunds of overpayments of such taxes with interest.
BASIS OF THE ACTION
3. Plaintiff brings this action against Defendant pursuant to sections 6933 and 6934 of
the Revenue and Taxation Code (“Rev. & Tax. Code”). This is an action for refund of taxes
under the provisions of the Sales and Use Tax Law.
JURISDICTION
4, Jurisdiction and venue for this action are vested in this Court under section 6933 and
6934 of the Rev. & Tax. Code. The Attorney General of the State of California maintains an
office in the City and County of San Francisco. Venue is proper in this Court pursuant to
section 6933 of the Rev. & Tax. Code.
ALLEGATIONS APPLICABLE TO ALL_ CLAIMS FOR RELIEF
5. Plaintiffis, and at all relevant times was, registered as a California retailer pursuant
to California’s sales and use tax laws. Plaintiff collects sales and use taxes, files monthly sales
and use tax retums with Defendant, and makes payment of sales and use taxes with these
returns to Defendant.
6. The subject of this lawsuit is the propriety of Plaintiff's deductions, during the
period January 1, 1994 through March 31, 2001 (the “Period in Issue”), of certain amounts as
bad debts from its taxable gross receipts for sales and use tax purposes.
7. The origin of those bad debts is as follows. Consumers made purchases from Levitz
Fumiture (“Levitz”) stores located within California. Like Plaintiff, Levitz was registered as a
California retailer pursuant to California’s sales and use tax Jaws, Accordingly, Levitz was
required to and did remit sales and use taxes to Defendant on the gross receipts from these sales
on timely California sales and use tax retums. Levitz calculated the tax it remitted based upon
the entire amount of the taxable portion of the sales price of the purchases, even though the
customers had not yet paid Levitz the sales price or any portion thereof, Customers used
private label credit cards to pay for their purchases.
2
COMPLAINT FOR REFUND OF SALES AND USE TAXESwe oN A DH BR YW NY =
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8. Plaintiffand Levitz entered into an Account Purchase Agreement (“Agreement”)
whereby Plaintiff purchased customer receivables from Levitz without recourse, i.e., ifa
customer failed to pay its charges, Plaintiff had no recourse against Levitz.
9. Pursuant to the Agreement, the credit card application executed by Levitz’s
customers provided that the parties expected the credit application would be submitted for
approval to Plaintiff. If the credit application was approved, as the customer made charges, the
customer’s account and purchases would be assigned by Levitz to Plaintiff. (Hereinafter, the
amounts assigned to Plaintiff are referred to as “Accounts.”)
10. In purchasing the credit card Accounts from Levitz, Plaintiff paid the entire
purchase price of the merchandise, plus all applicable California sales or use taxes that were
temitted by Levitz to Defendant. Thus, Plaintiff paid the sales and use tax that is the subject of
this lawsuit.
11. Pursuant to the terms of the Agreement, Levitz sold and assigned the Accounts to
Plaintiff, and Plaintiff acquired all of Levitz’s rights, title, and interest to any and all amounts
due with respect to the Accounts, including the right to sales or use tax refunds attributable to
such Accounts.
12, Having paid full consideration for the receivables acquired from Levitz, its
predecessor, and having acquired through purchase an assignment all of Levitz’s rights with
respect to the Accounts, Plaintiff was the successor of Levitz.
13, With respect to any amount of a customer’s credit card balance that he/she failed to
pay in full, Plaintiff treated such amount as a worthless bad debt, and charged off such
amounts, for federal income tax purposes.
14. Because, under the Agreement, Plaintiff purchased the credit card Accounts without
recourse, Plaintiff fully bore such losses, and Levitz was not obligated to reimburse Plaintiff for
any portion of the losses.
15, On or about April 27, 2001, Plaintiff filed a timely refund claim with Defendant
covering the Period in Issue claiming a refund of sales and use taxes attributable to the portion
3
COMPLAINT FOR REFUND OF SALES AND USE TAXESow fe NY A UW F&F YW NY
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of the Accounts that Plaintiff had written off as bad debts. Plaintiff's refund claim is attached
as Exhibit A and incorporated by reference as if fully set forth herein.
16. Plaintiff subsequently participated in a!l administrative proceedings afforded by
Defendant with respect to that claim, including appeals conferences and multiple hearings
before the Board of Equalization.
17. However, even after extensive administrative proceedings, Defendant has failed to
take any conclusive action with respect to Plaintiff's claims, Accordingly, Plaintiff deemed its
claim denied pursuant to Rev. & Tax. Code § 6934 and has timely filed this lawsuit.
EXHAUSTION OF ADMINISTRATIVE REMEDIES
18, Plaintiff has exhausted all available administrative remedies.
FIRST CAUSE OF ACTION
(Refund of Tax and Interest; Statutory Construction of Part 13 of the Rev. & Tax. Code)
19. Plaintiff repeats, realleges and incorporates herein as if fully set forth in this
paragraph each and every allegation contained in paragraphs 1 through 18 hereof.
20, Plaintiff is entitled to the refund it has claimed for bad debts plus interest for the
reasons stated below.
21. Plaintiff is entitled to a deduction under Rev. & Tax. Code § 6055 which read, in
relevant part, as follows during the Period in Issue: “a retailer is relieved from liability for sales
tax... insofar as the measure of the tax is represented by accounts which have been found to
be worthless and charged off for income tax purposes . . . If the retailer has previously paid the
tax, he may, under rules and regulations prescribed by the board, take as a deduction the
amount found worthless and charged off...” Because Plaintiffis a retailer that paid tax on
gross receipts later determined to be worthless and charged off by Plaintiff for federal income
tax purposes, the deductions claimed by Plaintiff satisfy all of the requirements of Section
6055.
22. Plaintiff is also entitled to a deduction under Cal. Code Regs. tit. 18,
§ 1642(h)(1)(A) which read, in relevant part, as follows during the Period in Issue: “A
successor who pays full consideration for receivables acquired from the predecessor is entitled
4
COMPLAINT FOR REFUND OF SALES AND USE TAXESDo on A nH F&F WN
nN Nn oN Nie
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to a bad debt deduction to the same extent that the predecessor would have been entitled had
the predecessor continued the business.” Because Plaintiff is the successor for purposes of the
receivables purchased for full consideration from Levitz and determined to be worthless and
written off for federal income tax purposes, the deductions claimed by Plaintiff satisfy all of the
requirements of Reg. Section 1642(h)(1)(A).
23. Defendant State Board of Equalization (“SBE”) interprets and applies Rev. & Tax.
Code § 6055 and Cal. Code Regs. tit. 18, § 1642(h)(1)(A) to afford a bad debt deduction where
the following conditions are satisfied: (1) Claimant’s representatives were either present on the
dealers’ premises or immediately available by telephone, facsimile, or computer connection at
the time the [items] in question were sold; (2) Claimant paid full consideration to the dealers
for the receivables in question, ie., claimant did not purchase the receivables at a discount; and
(3) the retailers’ assignments to claimant of the receivables in question were substantially
contemporaneous with the execution of the sales agreements between the retailers and the
purchaser. Under these circumstances, the SBE deems the claimant to be a “successor that paid
full consideration for receivables” and, thus, that qualifies for the bad debt deduction. See
Appeal of WFS Financial, Inc., Memorandum Opinion (attached hereto as Exhibit B); see also
State Board of Equalization Operations Memorandum, August 2002 (attached hereto as
Exhibit C).
24. As Plaintiff's audit staff concluded, Plaintiff satisfies all of the conditions
enumerated in paragraph 23, above. See Memorandum dated September 16, 2004 from Leon
Adams, Sacramento District Principal Auditor, to Jeff McGuire, Tax Policy Manager (attached
hereto as Exhibit D). Therefore, Plaintiff is entitled to the claimed deductions on the basis of
Appeal of WFS Financial, Inc.
25. Any other interpretation of Rev. & Tax. Code § 6055 and Cal. Code Regs. tit. 18,
§ 1642(h)(1)(A) and application thereto to Plaintiff would violate Plaintiff's Equal Protection
guarantees under the federal and California Constitutions.
5
COMPLAINT FOR REFUND OF SALES AND USE TAXESoOo oN DH WH Fk WN
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WHEREFORE, Plaintiff prays for judgment as follows:
1. For a refund of taxes paid in the amount of $6,983,601.83, plus interest from the
dates of payment as provided by law;
2. For attomey’s fees;
3. For costs of suit; and
4, For such other and further relief as the Court deems appropriate.
Dated: January 28, 2008
AMY L. SILVERSTEIN
EDWIN P. ANTOLIN
SILVERSTEIN & POMERANTZ up
LZ
Amy L. Silvers’
By:
Attomeys for Plaintiff
GENERAL ELECTRIC CAPITAL
CORPORATION
6
COMPLAINT FOR REFUND OF SALES AND USE TAXESWiliam JS. McConnelf Corporate Taxes
Manager - Sales, Use & Excise Taxes General Electric Company
4415 Metro Parkway, 2nd Floor, Ste. 208
Fort Myers, Fl. 33916
941 448-5186
F941 418-5170
Emaik wiliammeeonnet@corporate.ga.com
April 27, 2001
FEDERAL EXPRESS AND
CERTIFIED MAIL RETURN RECEIPT REQUESTED
State of California
Board of Equalization
Refund Section
450 N. Street, MIC: 39
Sacramento, California 94279
Re: General Electric Capital Corporation
Registration Number: SS OHB 98-018911
Sales and Use Tax
Period: January 1, 1994 through March 31, 2001
Dear Sir or Madam:
1. REQUEST FOR REFUND:
GE Capital Corporation hereby files a refund claim pursuant to Revenue and Taxation
Code (RTC) sections 6055 and 6203.5. Taxpayer respectfully requests a refund of sales
and use tax and interest involving bad debts.
2, AMOUNT OF REFUND AND PERIOD:
Amount of refund requested for the period January J. [994 through March 31. 2001 is
greater than $1.00 to be verified on audit. Taxpayer wants to be considered for credit
interest.
YCalifornia State Board of Equalization
Refund Section
April 27, 200)
Page2
3. NAME AND ADDRESS OF TAXPAYER:
GE Capital Corporation
c/o William J. McConnell
Manager - Sales, Use & Excise Tax
4415 Metro Parkway, 2nd Floor, Suite 208
Fort Myers, Florida 33916
4, BASIS FOR THE CLAIM:
A, Statement of Facts
GE Capital provides financing services for private-label credit card programs
involving retailers in many industries, including retailers in California. GE Capital kas a
waiver for the period January 1, 1994 through December 31. 1997 (see Exhibit 7A”).
GE Capital also engages in equipment leasing activities. as a lessor. and has a
California transaction privilege tax license for such leasing activities that oceur here in
California. GE Capital has regularly filed and paid California sales tax on its gross
receipts from the lease of equipment to California lessees.
The transactions which give rise to the bad debt deduction begin with the sale of
tangible personal property or taxable services by a retailer to a purchaser on a eredit basis.
where the purchaser has used the retailer’s private label credit eard to finance the
purchase.
In a non-recourse assignment, as at issue here. if a credit card holder does not pay GE
Capital, and defaults under the terms of the credit card agreement, the retailer is not liable
to GE Capital to make up that default amount, Rather. GE Capital will take that loss, As
the assignee of the retailer, GE Capital has all of the rights, title and interest of the retailer
in the credit card account, when that account has been assigned on a non-recourse basis.
In other words, GE Capital. as the assignee, is the equivalent of the retailer. When a
purchaser defaults. GE Capital attempts to collect and when it cannot recover theCalifornia State Board of Equalization
Refund Section
April 27, 2001
Page 3
outstanding balance, the unrecovered portion of the debt becomes a worthless debt: for
federal income tax purposes.
The terms of the Credit Card Program Agreements provided that the retailers sold and
assigned the credit card accounts to GE Capital without recourse and provided that GE
Capital acquired all of the rights, title, and interest of the retailers, including, but not
limited to, the right to any and all payments with respect to the customers’ accounts under
the Credit Card Program Agreement. GE Capital accordingly acquired all of the rights of
the retailers with respect to the customer accounts.
The credit card application, executed by each customer of a retailer, provided that it
was expected the credit application would be submitted for approval to GE Capital. and if
approved, the customer's agreement and account would be assigned by the retailer to GE
Capital.
The amounts financed by the customer pursuant to the retailers’ private label credit
card program, included both the purchase price of the merchandise plus the full amount of
applicable California state and local sales taxes.
GE Capital charged off on its books as worthless the amount of bad debt which
included state and local sales taxes attributable to the amount of unpaid taxable charges
remaining in that bad debt, which amount of taxes GE Capital had paid the retailers. GE
Capital also deducted the amount of that bad debt for federal income tax purposes.
The amount that GE Capital is seeking as a sales tax refund was paid by the retailers
to the Board of Equalization, was reimbursed to the retailers by GE Capital. was included
in amounts deducted as bad debt for federal income tax purposes, was charged off by GE
Capital on its books as worthless and was attributable to the unpaid taxable charges
remaining in the debts from the credit card customers.
By the way ofits claim for refund, GE Capita! has asserted its entitlement to claim bad
debt deductions pursuant to RTC sections 6055 and 6203.5 for the unrecoverable and
uncollected balances of the eredit card accounts assigned by the various retailers to GE
Capital on a non-recourse basis.California State Board of Equalization
Refund Section
April 27, 2001
Page 4
B. Discussion and Legal Analysis
Revenue and Taxation Code section 6055 provides, in pertinent part, that:
"A retailer is relieved from liability:for sales tax... insofar as the measure of the
tax is represented by accounts which have been found to be worthless and charged
off for income tax purposes... If the retailer has previously paid.the tax, he may,
under rules and regulations prescribed by the board, take as a deduction the
amount found worthless and charged off..."
The board has interpreted this statute in California Code of Regulations, title 18,
section 1642, subdivision (b)(1), which presently provides, in relevant part, that:
"(h) SPECIAL SITUATIONS.
(1) Bad Debt Deductions to Persons Other than the Retailer.
(A) A successor who pays full consideration for receivables acquired from
the predecessor is entitled to a bad debt deduction to the same extent that
the predecessor would have entitled had the predecessor continued the
business.”
In WFS Financial, Inc, the Board concluded a bad debt deduction or refund should be
granted when all of the following conditions are shown to have occurred:
1, Claimant's representatives were either present on the dealers’ premises or
immediately available by telephone, facsimile or computer connection at the time
the vehicles in question were sold;
nm
. Claimant paid full consideration to the dealers for the receivables in question. i.e.,
claimant did not purchase the receivables at a discount: and
3. The dealers’ assignments to claimant of the receivables in question were
substantially contemporaneous with the execution of the sales agreements between
the dealers and the purchasers.California State Board of Equalization
Refund Section
April 27, 2001
Page 5
5. REQUEST FOR A CONFERENCE:
GE Capital respectfully requests a conference to review its refund claim with the
Board of Equalization.
6. ADDITIONAL INFORMATIONS
GE Capital respectfully reserves the right to produce additional material. further
explain its position and to advance additional arguments.
Respectfully submitted,
GE Capital Corporation
By: wk \s Spl
William J. MaConnell
Manager Sales, Use & Excise Taxes
(941) 418-5186EXHIBIT “A”pemernes es 1D ND BEATE UP Gaurunren
WAIVER OF LIMITATION C € “goaro OF EQUALIZATION
Account No. SZ OHC 98-018F11
BEFORE SIGNING THE WAIVER OF LIMITATION SEE THE REVERSE FOR INFORMATION
In consideration that the Board of Equalization of the State of California forbear maklng deficiency determinations within
tha limitation peried prescribed by:
Oo Section 6487 of the California Sates and Use Tax Law and, where applicable, local ordinances pursuant to
the Uniform Leeal Sales and Use Tax, ang ransectans (Sales) and Use Tax.
fi
( —s Other-
(Copies of appiicable Revenue and Taxatlon code sections will be provided upon request)
Until the Board has made further examination of records, the undersigned hereby consents to an extension
thraugh Agcil BO, ZOO! _ ofthe timawithin whieh such determinations may be mailed for the period
from Taavarg 1 149% through December 31,1997 «
Ifthe undersigned has previously granted extensions for period(s) inctuded In the period noted above, those extensions
are incorporated herein,
we
The undersigned further agrees to rotain for audit purposes all records and supporting cata pertaining to the perlod to
which an extenison Is granted, The undarsigned is aware that this agreement also allows a claim for refund to be filed for
overpayments or for bffsexting any overpayments made with respect to the agreed periad through the extension dats,
Dated %
Re edly His
STATE
CAPACITY
Accepted: Stats Board of Equalization
“Signatory, if not « corporate officer, partner or owner, certifies
unger penalty of pedury thet he or ane heids a power of ettomcy
to execute tla document,BEFORE THE BOARD OF EQUALIZATION
OF THE STATE OF CALIFORNIA
In the Matter of the Claim for Refund Under the
Sales and Use Tax Law of:
WES Financial, Inc.
- SR EAA 52-009479
56535
Appearances:
For Claimant: Mr. Peter Larson, Attorney At Law
Akerman, Senterfitt & Eidson, P.A.
Mr. Richard Neilsen, Attomey At Law
Pillsbury, Madison & Sutro, L.L.P.
For Appeals Section: Ms. Susan Wengel, Senior Tax Counsel
For the Sales and Use Tax Department: Ms. Janice Thurston, Senior Tax Counsel
MEMORANDUM OPINION
This opinion considers the merits ofa claim for refund of an unspecified amount for the.
period Jamuary 1, 1996, through November 29, 1999. The claim for refund is for bad debt
deductions for defaults on certain finance contracts purchased without recourse from various
vehicle dealers.
WFS Financial, Inc. and affiliates (Claimant), is a financial institution that during the
period at issue did not hold a seller’s permit with the Board of Equalization (Board). Claimant
described the transactions at issue as follows. The taxable sales were made through installment
sales agreements with the dealers. Those dealers made credit sales of motor vehictes at retail,
entered into with various California purchasers. Pursuant to these installment sales agreements,
the purchasers promised to pay the agreed upon sales price and additional charges, plus sales tax
reimbursement, to the dealers, The dealers reported the sales tax to the Board, based on the
agreed upon sales price. Under the sales agreements, after receiving credit for down payment
amounts, the purchasers financed the balance due with the dealers at a specified interest rate.
The agreements also provided that the dealers held security interests in the vehicles until the
purchasers paid off the vehicles. The dealers then, immediately assigned the sales agreements to
claimant without recourse, The dealers always intended to assign all the sales agreements to
claimant and obtained claimant's approval of the purchasers, the financed balances, and the
interest rates before the dealers entered into the sales agreements with the purchasers.
“4WFS Financial, Inc, € C -2-
SR EAA 52-009479
ID 56535
Under the sales agreements, the purchasers continued to pay sales tax reimbursement as
part of their installment payments to claimant. If the purchasers defaulted on their finance
contracts, claimant had the right to repossess the subject vehicles.
The claim at issue pertains to transactions where the purchasers defaulted and, in most
cases, claimant repossessed and resold the subject vehicles. After claimant applied all
repossession proceeds and all proceeds from other collection efforts to the amounts still owed by
the purchasers, unpaid balances remained. After deeming the unpaid balances to be
uncollectable, claimant wrote off the unpaid balances as bad debts for income tax purposes.
The Board's audit staff denied the claim for refund of the alleged bad debts on the basis
that only two types of persons who hold seller's permits are entitled to claim bad debt deductions
under Revenue and Taxation Code section 6055. One is the retailer who sold the property, and
the other is a successor to the business of the original retailer, if the successor purchased the
retailer's accounts receivable for full consideration (i.c., not at a discount).
Claimant’s position is that it is entitled to a refund under section 6055 for the portions of
the unpaid balances that are attributable to sales tax reimbursement that the purchasers failed to
pay.
OPINION
Revenue and Taxation Code section 6055 provides, in pertinent part, that:
“A retailer is relieved from liability for sales tax... insofar as the measure of the
tax is represented by accounts which have been found to be worthless and charged
off for income tax purposes.,.. If the retailer has previously paid the tax, he may,
under niles and regulations prescribed by the board, take as a deduction the
amount found worthless and charged off...”
The Board has interpreted this statute in California Code of Regulations, title 18,
section 1642, subdivision (b)(1), which presently provides, in relevant part, that:
“(h) SPECIAL SITUATIONS.
“ (1) Bad Debt Deductions to Persons Other Than the Retailer.
“(A) A successor who pays full consideration for receivables acquired from
the predecessor is entitled to a bad debt deduction to the same extent that the
predecessor would have been entitled had the predecessor continued the
business.” r
xWFS Financial, Inc. Cc Cc -3-
SR EAA 52-009479
ID 56535
We find that claimant should be granted a bad debt deduction or refund when all of the
following conditions are shown to have occurred:
1. Claimant's representatives were either present on the dealers’ premises or immediately
available by telephone, fascimile, or computer connection at the time the vehicles in
question were sold;
2, Claimant paid full consideration to the dealers for the receivables in question, ie.,
claimant did not purchase the receivables at a discount; and
3, The dealers’ assignments to claimant of the receivables in question were substantially
contemporaneous with the execution of the sales agreements between the dealers and the
purchasers.
We find that, in this case, all of the above conditions have been met, and that claimant is
a successor that paid full consideration for receivables and qualifies for a bad debt deduction or
refund, Because claimant's refund request has not specified an exact amount, we direct the
Board's audit staff to review claimant’s records to ascertain the amount of the refund in
accordance with Regulation 1642. Once this dollar amount is computed, a bad debt deduction or
refund should be granted for that amount.
Done at Sacramento, California, this 14th day of December, 2000.
Mr, Andal » Chairman
Mr. Parrish 0, Member
Mr, Chiang , Member
Ms, Mandel* » Member
*For Kathleen Connell, per Government Code section 7.9.IL.
State Board of Equalization
OPERATIONS MEMO
For Public Release
No: 1101
Date: August 20, 2002
SUBJECT: Bad Debts Incurred by Lenders on Purchased Accounts
PURPOSE
This operations memo provides guidelines and procedures required as a result of the revisions
to Revenue and Taxation Code sections 6055 and 6203.5 enacted by Assembly Bill (AB) 599,
(Stats. 2000, Ch. 600.) Sates and Use Tax Regulation 1642, Bad Debts—In General has been
amended to incorporate these statutory changes. The provisions of AB 599 apply to
transactions for which taxes were remitted on or after January 1, 2000. Since the taxes for the
4® quarter 1999 were, in most cases, remitted on or after January 1, 2000, with respect to this
requirement bad debts incurred in connection with almost all transactions occurring on or after
October 1, 1999, are cligible under the provisions of AB 599.
GENERAL BACKGROUND
An account receivable (“account”) may be sold with or without recourse. “With recourse”
means the retailer must reimburse the purchaser of the account (“lender”) for any losses the
lender suffers. “Without recourse” means the retailer has no obligation to reimburse the
purchaser of the account (“lender”) even if the lender cannot recover the full amount of the
debt. A lender who purchases an account with recourse may not take a bad debt deduction
under the Sales and Use Tax Law with respect to any loss it suffers on that account (ie.
uncollectible debt for which it fails to obtain reimbursement from the retailer). However, 3
retailer who sells an account with recourse may take a bad debt deduction for the amount of
uncollectible debt for which the retailer actually reimburses the lender pursuant to their
contract, to the extent that such loss represents amounts on which the retailer reported and
paid tax. The mules discussed in this paragraph remain the lew, and have not been affected
by the changes discussed below.
Prior to the adoption of AB 599, a lender who purchased an account was not entitled to
claim a sales tax deduction or refund in connection with its losses on the account, whether
purchased with or without recourse. In addition, when a retailer sold an account without
recourse, the retailer was unable to claim a sales tax deduction or refund for losses suffered
by the tender on the account, This meant neither party was eligible to claim abad debt
deduction with respect to losses suffered on accounts sold without recourse. (As discussed
below, the Board's memorandum opinion in JS Financtal, {nc. (WFS) sets forth an
exception allowing lenders, under specified conditions, to take deductions for their losses on
accounts which were purchased without recourse and for which tax was paid prior to
January 1, 2000.) Under the amendments to sections 6055 and 6203.5 adopted by AB 599,
cither the retailer or the lender, per their agreement, may now qualify to claim a deduction
YAOperations Memo No, 1101 Page 2 August 20, 2002
or refund for losses on an account the lender purchases without recourse, provided the
retailer had remitted tax to the Board on or after January 1, 2000. Although the retailer and
lender can agree the retailer is entitled to claim the benefit for any losses, we anticipate this
will be a rare occurrence. Therefore, this memorandum focuses on transactions where the
lender has the right to claim the bad debt deduction or refund. For this reason, the term
“lender” is used throughout this memo with the assumption the tender will be the person
claiming the deduction or filing a claim for refund. :
For purposes of AB 599, the term “lender” includes any person who purchases an account
receivable without recourse directly from the retailer who reported and paid tax. This
includes, for example, the purchase of an account where the dealer has financed its own sale
ofa vehicle. “Lender” also includes a person who holds an account without recourse
pursuant to that person’s contract directly with a retailer, This means, for example, a private
label credit card, which is one issued by a financial institution in the name ofa retailer.
Such a card usually has the name of the retailer on the front of the card, but since the card is
actually issued by a third-party lender, this information is usually on the back of the card.
‘These are not general-purpose credit cards, Rather they can be used to make purchases
only from the retailer in whose name they are issued, or in some cases from retailers who
are part of the same corporate family.
On or before claiming a bad debt deduction or refund under AB 599, the election agreement
between the retailer and the lender specifying which party has the right to claim the bad debt
deduction for that account must be filed with the Board. This election agreement may be in
any form, but must contain the following elements specified in subdivision G)GBYA) of
Regulation 1642:
1. The name, address, and seller’s permit number of the retailer who reported or
wilt report the tax and the name, address, and seller’s permit number, if any, or
Certificate of Registration — Lender account number of the lender to whom the
account(s) is assigned.
2, Anagreement that the retailer relinquishes to the lender all rights to the account.
3. A statement clearly specifying whether the retailer or the lender is entitled to
claim any (and all) deductions or refunds as a result of any bad debt losses charged
off by the lender for the account(s) covered by the election, the effective date of that
election, and a statement that the other party relinquishes all rights to claiming such
deductions or refunds.
4. A list of accounts to which the election pertains, If the election is a blanket
election for all accounts assigned without recourse by the retailer to the lender or all :
accounts held by the lender without recourse pursuant to the lender's contract |
directly with the retailer, the election must so state.Operations Memo No. 1101 Page 3 August 20, 2002
5. The agreement of both the retailer and the lender to furnish any and all
documentation requested by the Board to support the deductions or refunds
claimed.
6. The acknowledgement by both the retailer and the Iender that the Board may
disclose relevant confidential information to all parties involved in order to support
and confirm any deductions or refunds claimed.
7. If the lender is the person entitled to claim any deduction or refund for bad debts
on the account, list the Lender’s Certificate of Registration — Lender account
number. If the lender does not yet hold such a registration, the agreement of the
lender that it will apply for the Certificate of Registration - Lender no later than on
the date the lender first claims a deduction or refund for bad debts charged off on
the account.
8. A statement that the election may not be amended or revoked unless a new
election signed by both the retailer and the lender is filed with the Board.
9, The date of the election and the signatures of the retailer and the lender, or their
authorized representatives. Ifa copy of the signed election is filed with the Board
rather than the original, the person with the right under the election to claim the bad
debt deduction or refund must retain the election with the original signatures. An
election may be signed in counterparts, and its filing would be regarded as perfected
as of the filing of the second signed counterpart, provided each counterpart is
identical except for the signature and date of the signature. If copies of the signed
counterparts are filed with the Board, the person with the right under the election to
the bad debt deduction or refund must retain all counterparts with the original
signatures,
A retailer with the right to the bad debt deduction pursuant to its election agreement with the
lender may, in tum, assign that right to an affiliate pursuant to a separate election agreement
between the retailer and its affiliate. A lender with the right to the bad debt deduction
pursuant to its election agreement with the retailer may, in tum, assign that right to any other
person (whether an affiliate or not) pursuant to a separate election agreement between the
lender and its assignee. The right to the bad debt deduction or refund cannot be further
assigned other than as described in this paragraph.
Ifa retailer with the right to the bad debt deduction or refiind assigns that right to an affiliate,
the election agreement between the retailer and its affiliate must also be filed with the Board
(along with the election agreement between the retailer and the lender). The election
agreement between a retailer and its affiliate must include all the elements specified in
subdivision (h)(3)A) of Regulation 1642,
While a retailer with the right to a bad debt deduction or refiind may assign that right only to
an affiliate, a lender with the right to a bad debt deduction or refiind may assign that right toOperations Memo No. 1101 Page 4+ August 20, 2002
an affiliate or fo any other person. The election agreement between a lender and its assignee
must include all the elements specified in subdivision (i)(4)(A) of Regulation 1642.
A lender who has the right to take a bad debt deduction pursuant to an election agreement
with a retailer (which includes an assignee of the lender) must register with the Board for a
Certificate of Registration ~ Lender prior to claiming the deduction or refund. (See
Regulation 1642(i)(5)(B).) A person registered as a Lender is required to file a return to
report subsequent recoveries, and the return must be filed whether or not the lender makes
any recoveries during that reporting period. The tender may claim its bad debt losses on
fine 10(a)(2) and if that amount exceeds the reported amount of taxable recoveries, the
completed retum will qualify as a claim for refund. For claims on accounts found worthless
and written off prior to January t, 2002, lenders will need to file separate claims for refund
for amounts due them. For accounts found worthless and written off after January 1, 2002,
most lenders will use their returns to file their claims for refund.
WFS Memorandum Opinion
Prior to the passage of AB 599, the Board considered a claim by a financial institution,
WES, for a refund for bad debts incurred from accounts purchased without recourse, and
jssued a memorandum decision dated December 14, 2000, setting forth when such.
transactions can qualify for bad debt deductions. Although the property financed in WFS
were automobiles, financing of other types of property, such as vessels and aircraft, may
qualify if all requirements of the opinion are satisfied. The Boatd’s decision in WFS
provides that a financial institution can claim a bad debt deduction or refund for accounts
purchased without recourse if each of the following conditions is met:
“I, Claimant's representatives were either present on the dealers’ premises or
immediately available by telephone, facsimile, or computer connection at the time
the vehicles in question were sold,
“2, Claimant paid full consideration to the dealers for the receivables in question,
i.e. claimant did not purchase the receivables at a discount.
“3, The dealers’ assignments to claimant of the receivables in question were
substantially contemporaneous with the execution of the sales agreements between
the dealers and the purchasers.”
The Legislature’s adoption of AB 599 superseded and replaced the WFS decision. The WFS
decision applies through December 31, 1999, but not after the provisions of AB 599 became
operative on January 1, 2000. As discussed above, AB 599 generally applies to bad debts
incurred in connection with transactions occurring during the 4th quarter 1999 since the taxes
on those transactions were generally paid after the January 1, 2000 date specified in AB 599.
However, the WES decision itself applied to a claim for refund that included the 4th quarter
1999. Accordingly, to ensure fair and uniform treatment of alt tenders and for administrative
ease, a lender may rely on the provisions of either WFS or AB 599 for bad debts incurred in
connection with transactions that occurred during the 4th quarter 1999, The provisions of
WFS and AB 599 are otherwise mutually exclusive.Operations Memo No. 1101 Page 5 August 20, 2002
It is imperative to note that the determination of whether WFS or AB 599 applies is based on
the date the taxes were remitted (usually ascertained based on the date at which the sale
occurred), not the date the bad debts were incurred. For bad debts incurred in connection with
sales of tangible personal property during the 3" quarter 1999 and earlier, only the provisions
of WES apply and not the provisions of AB 599. Generally for bad debts incurred in
connection with sales of tangible personal property during the Ist quarter 2000 and later, only
the provisions of AB 599 apply and not the provisions of Wrs.!
Since the determination of whether WFS or AB 599 applies is based on the date tax was paid
but the timing of the bad debt deduction is based on the date the loss is written off, there will
be claims submitted which include losses covered by both WFS and AB 599 which were
written off in the same reporting period. To illustrate, in the 2nd quarter 2002, a lender writes
off two accounts as worthless, one for a sale that occurred in the Ist quarter 1999 and the other
for n sale that occurred in the Ist quarter 2000. Tax had been paid for the first transaction
prior to January 1, 2000, and the provisions of WES apply to the loss from that account, Tax
had been paid for the second transaction after Jenuary 1, 2000, therefore provisions of AB 599
apply to that loss. Since the lender's right to claim the losses from these two accounts was
established during the 2nd quarter of 2002, the deduction for both accounts should be taken on
the lender’s return for that reporting period. ‘This means the statute of limitations for filing
the lender’s claim related to the losses on both accounts starts to run on July 31, 2002 (the due
date of the return for the 2nd quarter 2002).
Indirect Loans
Ifa consumer wishes to make a purchase on credit without using an existing credit account,
the consumer may apply for a Joan for that particuler purchase. This is the method used for
most purchases of automobiles, aircraft, and vessels, as well as many other large purchases,
such as jewelry” The retailer may coordinate the loan application process, with the consumer
signing a credit contract with the retailer who thereafter assigns the account toa lender. This
type of loan is commonly called an “indirect loan” because the consumer does not contract
directly with the lender who will service the loan, b
Preview
ECM San Francisco Superior Courts Information Technology Group Document Scanning Lead Sheet Jan-28-2008 3:59 pm Case Number: CGC-08-47 1479 Filing Date: Jan-28-2008 3:55 Juke Box: 001 Image: 02008093 COMPLAINT STRIC CAPITAL CORPORATION A DELAWARE VS. STATE BOARD OF EQUALIZATION, : 001002008093 Instructions: Please place this sheet on top of the document to be scanned.ORIGINAL ~_¢ SUMMONS ron cour use omy (CITACION JUDICIAL) ororanawooernconm NOTICE TO DEFENDANT: (AVISO AL DEMANDADO): STATE BOARD OF EQUALIZATION, an agency of the State of California YOU ARE BEING SUED BY PLAINTIFF: (LO ESTA DEMANDANDO EL DEMANDANTE): GENERAL ELECTRIC CAPITAL CORPORATION You have 30 CALENDAR DAYS after thls summons and legal papers are served on you to file a written response at this court and have a copy served onthe plaintiff, A letter or Phone call will not protect you. Your written response must be In proper legal form if you want the court to hear your case, There may be a court form that you can use for your response. You can find these court forms and more information at the Catifornta Courts Online Self-Help Center (www.courtinfo.ca.gov/setfhelp), your county law !ibrary, or the courthouse nearest you. tfyou cannot pay the filing fee, ask the court clerk fora fee walver form. If you do not file your response on time, you may tose the case by default, and your wages, money, and property may be taken without further warning from the court. There are other legal requirements. You may want to call an attorney right away. ff you do not know an attorney, you may want to cailan attorney referral service. {f you cannot afford an attorney, you may be eligible for free legal services from a nonprofit legal services program. You can locate these nonprofit groups: at the California Legal Services Web site (www.tawhelpcalifornla.org), the California Courts Online Self-Help Center (www.courtinfo.ca.govisetfhelp), or by contacting your local court or county bar association. Tiene 30 DIAS DE CALENDARIO después de que le entrequen esta citacion y papeles fegates para presentar una respuesta por escrito en esta corte y hacer que se entregue una copia al demandante. Una carta o una Hamada telefénica no lo protegen. Su respuesta por escrito tene que estar en formato fegal correcto si dese que procesen su caso en la corte, Es posible que haya un formulario que usted pueda usar para su respuesta. Puede encontrar estos formutarios de fa corte y mas Informacion en ef Centro de Ayuda de Jas Cortes de California (www.courtinfo.ca.gov/selfhetp/espanol)), en la biblioteca de leyes de su condado o en /a corte que fe quede mas cerca. Sino puede pagar la cuota de presentaci6n, pida al ‘secretario de ta corte que fe dé un formulario de exencién de pago de cuotas. Sino presenta ‘su respuesta a tempo, puede perder ef caso por Incumplimlento yla corte le podré quitar su sueldo, dinero y blenes sin més advertencia. Hay otros requisites tegales. Es recomendable que flame a un abogado Inmediatamente. Sino conoce aun abogado, puede llamar aun servicio de remisin a abogados. Sino puede pagar a un abogado, es posible que cumpla con Ios requisitos para obtener servicios legales gratuitos de un programa de servicios legates sin fines delucro. Puede encontrar estos grupos sin fines de iucro en el sitio web de California Legal Services, (www.lawhelpcatifornia.org), en ef Centro de Ayuda de fas Cortes de California, (www.courtinfo.ca.gov/selhelp/espanol) o poniéndose en contacto con fa corte o el colegio de abogados locales. eA B-- 471479 fe name and address of the court ts: (El nombre y direccién de fa corte es): Superior Court of the State of California City and County of San Francisco, Unlimited Civil Jurisdiction 400 McAllister Street, San Francisco, CA 94102 The name, address, and telephone number of plaintiff's attorney, or plaintiff without an attorney, is: (Ef nombre, la direccién y ef numero de teléfono del abogado del demandante, o def demandante que no tiene abogado, es): Amy L. Silverstein & Edwin P. Antolin, Silverstein & Pomerantz LLP, 55 Hawthorne Street, Suite 440, San Francisco, CA 94105; A. Silverstein, (415) GORIONT: { in, (415) 598;3598 : ht DATE: Clerk, by , Deputy frecnay! AN 2 8 2008 (Secretario) (Adjunto) (For proof of service of this summons, use Proof ‘of Service of Summons (form POS-010).) (Para prueba de entrega de esta citation use ef formulario Proof of Service of Summons, (POS-010)). NOTICE TO THE PERSON SERVED: You are served 1. [) as an individual defendant. 2. [[-] as the person sued under the fictitious name of (specify): 3, GZ on behalf of (specify): State Board of Equalization under; [_] CCP 416.10 (corporation) () CCP 416.60 (minor) ([] CCP 416.20 (defunct corporation) [-] CCP 416.70 (conservatee) (1 CCP 416.40 (association or partnership) [1 CCP 416.90 (authorized person) CZ1 other (specify): CCP 416.50 (public entity) 4. [) by personal delivery on (date): pagetott ee Form Adopied for Mandatory Use ‘Code of Grvd Procedure §§ 41220, 465 SUNAOD [Rev Jeruary 1, 2004] SUMMONS (Greece Copan Te] [rere Carros cory| Pr MOREY ORI iverstenn (Bar No, 154zal Edwin P. Antolin (Bar No. 172599) Silverstein & Pomerantz LLP 55 Hawthorne Street, Suite 440, San Francisco, CA 94105 ‘TELEPHONE NO: g') 593-3502 raxno: (415) 593-3501 eneral Electric Capital Corporation ISUPERIOR COURT OF CALIFORNIA, COUNTY OF San Francisco street aporess: 400 McAllister Street MAILING ADDRESS: cmyanozp cove: San Francisco, CA 94102-3680 BRANCH NAME: CASE NAME: General Electric Capital Corporation v. State Board of Eq alization CIVIL CASE COVER SHEET Complex Case Designation Untimited [2] united (CO counter (J Joinder mabe. 71479 | E08 2; 9 (Amount (Amount " demanded demanded Is Filed with first appearance by defendant " exceeds $25,000) _ $25,000 or less)’ (Cal. Rules of Court, ule 3.402) DEPT: Ttems 1-6 below must be completed (see instructions on page. 2). 1. Check one box below for the case type that best describes this case: Auto Tort Contract Provistonally Complex Civil Litigation Auto (22) L_] Breach of contractvarranty (06) (Cal. Rules of Court, rutes 3.400-3.403) Uninsured motorist (48) J Rute 3.740 cottections (09) [1 antirusttrade regutation (03) Other PUPDMWD (Personal Injury/Property [_] Other cottections (09) (1 construction detect (10) Damage/Wrongful Death) Tort [J insurance coverage (18) (J mass tort (40) Asbestos (04) ([) otter contract (37) () securities tigation (28) LJ Product Fabitty (24) Real Property (] Environmental/Toxie tort (30) Medical matpractice (45) [F) Eminent domainiinverse (TJ insurance coverage claims arising from the CD otner Prpoann (23) ‘condemnation (14) above listed provisionally complex case Non-PUPDAVD (Other) Tort LJ wrongful eviction (33) types (41) Business tortunfalr business practice (07) (] otter real property (26) Enforcement of Judgment Civit rights (08) Unlawful Detainer [1 Enforcement of judgment (20) [=] Detamation (13) LJ commercial (31) Miscellaneous Civil Complaint CJ Fraud 16) [1 Residential (32) CD ricoe7 Intetlectual property (19) (21 bags 38) [4] other complaint (not specified above} (42) Professional negligence (25) dudictal Review Miscellaneous Civil Petition LJ otter non-PUPDAWD tort (35) oO Asset forfeiture (05) (1 Partnership and corporate governance (21) ee one Petition re: arbitration award (11) Co Other petition (not specified above) (43) Wrongful termination (36) [1 wat of mandate (02) [1 other employment (15) [_]_Other Judicial review (39) D Thiscase Llis Lx] isnot complex under rule 3.400 of the Califomia Rutes of Court. If the case is complex, mark the factors requiring exceptional judicial management: a.(] Large number of separately represented parties ¢.(__] Large number of witnesses b.[_] Extensive motion practice raising difficutt or novel @. L_] Coordination with related actions pending in one or more courts issues that will ba time-consuming to resolve In other counties, states, or countries, or in a federal court c. oO Substantial amount of documentary evidence i oO Substantial postjudgment judicial supervision 3. Remedies sought (check all that apply): a.[¥] monetary b.[_] nonmonetary; declaratory or injunctive relief ¢. CC Jpunitive 4, Number of causes of action (specify): 5. This case Lis) Wisnot actass action suit. 6. Ifthere are any known related cases, file and serve a notice of related case. (You may use form CM-015,) Date: January 28, 2008 Amy L. Silverstein 2 (TYPE OR PRINT NAME) (SIGNATURE TOR ATTORNEY FOR PARTY) NOTICE Plaintiff must file this cover sheet with the first paper filed in the action or proceeding (except small claims cases or cases filed under the Probate Code, Family Code, or Welfare and Institutions Code). (Cal. Rules of Court, rule 3.220.) Failure to file may resutt In sanctions, © File this cover sheet in addition to any cover sheet required by tocat court rule. © If this case is comptex under rule 3.400 et seq. of the California Rules of Court, you must serve a copy of this cover sheet on all other parties to the action or proceeding. ¢ Untess this Is a collections case under rule 3.740 ora complex case, this cover sheet will be used for statistical purposes only. tot Fora een tx enn ust ——SIVIL CASE COVER SHEET Ca aa ar Councl of CM-010 [Rev. July 1, 2007] wwerw courtinte o2 Tameacan Vecnined WeORGINAL oc wo mem IY DAH hw tv nN yo eae Amy L. Silverstein (Bar No. 154221) = os Edwin P, Antolin (Bar No. 172599) E j kL D Silverstein & Pomerantz up 55 Hawthorne Street, Suite 440 San Frantiseo IuBerinr Court San Francisco, California 94105 Telephone: (415) 593-3500 Want Wo 2008 Facsimile: (415) 593-3501 ane ae Glark —_— jeputyCrem = Attomeys for Plaintiff * Er GENERAL ELECTRIC CAPITAL CONFERENCES CORPORATION CASEMANAOENENT JAN 2 8 2008 jun 27 2008 -QO2ANM DRARIMENT2U2 SUPERIOR COURT OF THE STATE OF CALIFORNIA AND CITY AND COUNTY OF SAN FRANCISCO UNLIMITED CIVIL JURISDICTION GENERAL ELECTRIC CAPITAL No. G25 o-~ CORPORATION, a Delaware corporation 0 8 4714 79 Plaintiff, COMPLAINT FOR REFUND OF SALES AND USE TAXES v. (California Revenue and Taxation Code STATE BOARD OF EQUALIZATION, an §§ 6933-34) agency of the State of California Defendant. Plaintiff complains and alleges as follows: PARTIES 1, Plaintiff, General Electric Capital Corporation, is a corporation. Prior to 2000, Plaintiff was organized and existing under the laws of New York. Beginning in 2000 and continuing to the present, Plaintiff was and is incorporated under the laws of Delaware. Atall times relevant to this complaint, Plaintiff's principal place of business was located in Connecticut. COMPLAINT FOR REFUND OF SALES AND USE TAXES1 0 Om N DH eB WN v yo oN RRR eet BPrHeepRRRBEB Ga AABEEKR HAS 2. Defendant, State Board of Equalization, is, and at all times mentioned herein in was, an agency of the State of California empowered to assess and collect taxes under the California Sales and Use Tax Law, and to make refunds of overpayments of such taxes with interest. BASIS OF THE ACTION 3. Plaintiff brings this action against Defendant pursuant to sections 6933 and 6934 of the Revenue and Taxation Code (“Rev. & Tax. Code”). This is an action for refund of taxes under the provisions of the Sales and Use Tax Law. JURISDICTION 4, Jurisdiction and venue for this action are vested in this Court under section 6933 and 6934 of the Rev. & Tax. Code. The Attorney General of the State of California maintains an office in the City and County of San Francisco. Venue is proper in this Court pursuant to section 6933 of the Rev. & Tax. Code. ALLEGATIONS APPLICABLE TO ALL_ CLAIMS FOR RELIEF 5. Plaintiffis, and at all relevant times was, registered as a California retailer pursuant to California’s sales and use tax laws. Plaintiff collects sales and use taxes, files monthly sales and use tax retums with Defendant, and makes payment of sales and use taxes with these returns to Defendant. 6. The subject of this lawsuit is the propriety of Plaintiff's deductions, during the period January 1, 1994 through March 31, 2001 (the “Period in Issue”), of certain amounts as bad debts from its taxable gross receipts for sales and use tax purposes. 7. The origin of those bad debts is as follows. Consumers made purchases from Levitz Fumiture (“Levitz”) stores located within California. Like Plaintiff, Levitz was registered as a California retailer pursuant to California’s sales and use tax Jaws, Accordingly, Levitz was required to and did remit sales and use taxes to Defendant on the gross receipts from these sales on timely California sales and use tax retums. Levitz calculated the tax it remitted based upon the entire amount of the taxable portion of the sales price of the purchases, even though the customers had not yet paid Levitz the sales price or any portion thereof, Customers used private label credit cards to pay for their purchases. 2 COMPLAINT FOR REFUND OF SALES AND USE TAXESwe oN A DH BR YW NY = BR BR NR ROR meme BARRRBEBRRBEGEeDAABREEBEKRAS C Cc 8. Plaintiffand Levitz entered into an Account Purchase Agreement (“Agreement”) whereby Plaintiff purchased customer receivables from Levitz without recourse, i.e., ifa customer failed to pay its charges, Plaintiff had no recourse against Levitz. 9. Pursuant to the Agreement, the credit card application executed by Levitz’s customers provided that the parties expected the credit application would be submitted for approval to Plaintiff. If the credit application was approved, as the customer made charges, the customer’s account and purchases would be assigned by Levitz to Plaintiff. (Hereinafter, the amounts assigned to Plaintiff are referred to as “Accounts.”) 10. In purchasing the credit card Accounts from Levitz, Plaintiff paid the entire purchase price of the merchandise, plus all applicable California sales or use taxes that were temitted by Levitz to Defendant. Thus, Plaintiff paid the sales and use tax that is the subject of this lawsuit. 11. Pursuant to the terms of the Agreement, Levitz sold and assigned the Accounts to Plaintiff, and Plaintiff acquired all of Levitz’s rights, title, and interest to any and all amounts due with respect to the Accounts, including the right to sales or use tax refunds attributable to such Accounts. 12, Having paid full consideration for the receivables acquired from Levitz, its predecessor, and having acquired through purchase an assignment all of Levitz’s rights with respect to the Accounts, Plaintiff was the successor of Levitz. 13, With respect to any amount of a customer’s credit card balance that he/she failed to pay in full, Plaintiff treated such amount as a worthless bad debt, and charged off such amounts, for federal income tax purposes. 14. Because, under the Agreement, Plaintiff purchased the credit card Accounts without recourse, Plaintiff fully bore such losses, and Levitz was not obligated to reimburse Plaintiff for any portion of the losses. 15, On or about April 27, 2001, Plaintiff filed a timely refund claim with Defendant covering the Period in Issue claiming a refund of sales and use taxes attributable to the portion 3 COMPLAINT FOR REFUND OF SALES AND USE TAXESow fe NY A UW F&F YW NY NY BB BD ND Nm eee € € of the Accounts that Plaintiff had written off as bad debts. Plaintiff's refund claim is attached as Exhibit A and incorporated by reference as if fully set forth herein. 16. Plaintiff subsequently participated in a!l administrative proceedings afforded by Defendant with respect to that claim, including appeals conferences and multiple hearings before the Board of Equalization. 17. However, even after extensive administrative proceedings, Defendant has failed to take any conclusive action with respect to Plaintiff's claims, Accordingly, Plaintiff deemed its claim denied pursuant to Rev. & Tax. Code § 6934 and has timely filed this lawsuit. EXHAUSTION OF ADMINISTRATIVE REMEDIES 18, Plaintiff has exhausted all available administrative remedies. FIRST CAUSE OF ACTION (Refund of Tax and Interest; Statutory Construction of Part 13 of the Rev. & Tax. Code) 19. Plaintiff repeats, realleges and incorporates herein as if fully set forth in this paragraph each and every allegation contained in paragraphs 1 through 18 hereof. 20, Plaintiff is entitled to the refund it has claimed for bad debts plus interest for the reasons stated below. 21. Plaintiff is entitled to a deduction under Rev. & Tax. Code § 6055 which read, in relevant part, as follows during the Period in Issue: “a retailer is relieved from liability for sales tax... insofar as the measure of the tax is represented by accounts which have been found to be worthless and charged off for income tax purposes . . . If the retailer has previously paid the tax, he may, under rules and regulations prescribed by the board, take as a deduction the amount found worthless and charged off...” Because Plaintiffis a retailer that paid tax on gross receipts later determined to be worthless and charged off by Plaintiff for federal income tax purposes, the deductions claimed by Plaintiff satisfy all of the requirements of Section 6055. 22. Plaintiff is also entitled to a deduction under Cal. Code Regs. tit. 18, § 1642(h)(1)(A) which read, in relevant part, as follows during the Period in Issue: “A successor who pays full consideration for receivables acquired from the predecessor is entitled 4 COMPLAINT FOR REFUND OF SALES AND USE TAXESDo on A nH F&F WN nN Nn oN Nie BR RRR RBBB Ge ARAADAEBHAS to a bad debt deduction to the same extent that the predecessor would have been entitled had the predecessor continued the business.” Because Plaintiff is the successor for purposes of the receivables purchased for full consideration from Levitz and determined to be worthless and written off for federal income tax purposes, the deductions claimed by Plaintiff satisfy all of the requirements of Reg. Section 1642(h)(1)(A). 23. Defendant State Board of Equalization (“SBE”) interprets and applies Rev. & Tax. Code § 6055 and Cal. Code Regs. tit. 18, § 1642(h)(1)(A) to afford a bad debt deduction where the following conditions are satisfied: (1) Claimant’s representatives were either present on the dealers’ premises or immediately available by telephone, facsimile, or computer connection at the time the [items] in question were sold; (2) Claimant paid full consideration to the dealers for the receivables in question, ie., claimant did not purchase the receivables at a discount; and (3) the retailers’ assignments to claimant of the receivables in question were substantially contemporaneous with the execution of the sales agreements between the retailers and the purchaser. Under these circumstances, the SBE deems the claimant to be a “successor that paid full consideration for receivables” and, thus, that qualifies for the bad debt deduction. See Appeal of WFS Financial, Inc., Memorandum Opinion (attached hereto as Exhibit B); see also State Board of Equalization Operations Memorandum, August 2002 (attached hereto as Exhibit C). 24. As Plaintiff's audit staff concluded, Plaintiff satisfies all of the conditions enumerated in paragraph 23, above. See Memorandum dated September 16, 2004 from Leon Adams, Sacramento District Principal Auditor, to Jeff McGuire, Tax Policy Manager (attached hereto as Exhibit D). Therefore, Plaintiff is entitled to the claimed deductions on the basis of Appeal of WFS Financial, Inc. 25. Any other interpretation of Rev. & Tax. Code § 6055 and Cal. Code Regs. tit. 18, § 1642(h)(1)(A) and application thereto to Plaintiff would violate Plaintiff's Equal Protection guarantees under the federal and California Constitutions. 5 COMPLAINT FOR REFUND OF SALES AND USE TAXESoOo oN DH WH Fk WN RN ee Be ee Se se Be Se Ss = © 0 oe QA nH kF BW NH = 22 € “ WHEREFORE, Plaintiff prays for judgment as follows: 1. For a refund of taxes paid in the amount of $6,983,601.83, plus interest from the dates of payment as provided by law; 2. For attomey’s fees; 3. For costs of suit; and 4, For such other and further relief as the Court deems appropriate. Dated: January 28, 2008 AMY L. SILVERSTEIN EDWIN P. ANTOLIN SILVERSTEIN & POMERANTZ up LZ Amy L. Silvers’ By: Attomeys for Plaintiff GENERAL ELECTRIC CAPITAL CORPORATION 6 COMPLAINT FOR REFUND OF SALES AND USE TAXESWiliam JS. McConnelf Corporate Taxes Manager - Sales, Use & Excise Taxes General Electric Company 4415 Metro Parkway, 2nd Floor, Ste. 208 Fort Myers, Fl. 33916 941 448-5186 F941 418-5170 Emaik wiliammeeonnet@corporate.ga.com April 27, 2001 FEDERAL EXPRESS AND CERTIFIED MAIL RETURN RECEIPT REQUESTED State of California Board of Equalization Refund Section 450 N. Street, MIC: 39 Sacramento, California 94279 Re: General Electric Capital Corporation Registration Number: SS OHB 98-018911 Sales and Use Tax Period: January 1, 1994 through March 31, 2001 Dear Sir or Madam: 1. REQUEST FOR REFUND: GE Capital Corporation hereby files a refund claim pursuant to Revenue and Taxation Code (RTC) sections 6055 and 6203.5. Taxpayer respectfully requests a refund of sales and use tax and interest involving bad debts. 2, AMOUNT OF REFUND AND PERIOD: Amount of refund requested for the period January J. [994 through March 31. 2001 is greater than $1.00 to be verified on audit. Taxpayer wants to be considered for credit interest. YCalifornia State Board of Equalization Refund Section April 27, 200) Page2 3. NAME AND ADDRESS OF TAXPAYER: GE Capital Corporation c/o William J. McConnell Manager - Sales, Use & Excise Tax 4415 Metro Parkway, 2nd Floor, Suite 208 Fort Myers, Florida 33916 4, BASIS FOR THE CLAIM: A, Statement of Facts GE Capital provides financing services for private-label credit card programs involving retailers in many industries, including retailers in California. GE Capital kas a waiver for the period January 1, 1994 through December 31. 1997 (see Exhibit 7A”). GE Capital also engages in equipment leasing activities. as a lessor. and has a California transaction privilege tax license for such leasing activities that oceur here in California. GE Capital has regularly filed and paid California sales tax on its gross receipts from the lease of equipment to California lessees. The transactions which give rise to the bad debt deduction begin with the sale of tangible personal property or taxable services by a retailer to a purchaser on a eredit basis. where the purchaser has used the retailer’s private label credit eard to finance the purchase. In a non-recourse assignment, as at issue here. if a credit card holder does not pay GE Capital, and defaults under the terms of the credit card agreement, the retailer is not liable to GE Capital to make up that default amount, Rather. GE Capital will take that loss, As the assignee of the retailer, GE Capital has all of the rights, title and interest of the retailer in the credit card account, when that account has been assigned on a non-recourse basis. In other words, GE Capital. as the assignee, is the equivalent of the retailer. When a purchaser defaults. GE Capital attempts to collect and when it cannot recover theCalifornia State Board of Equalization Refund Section April 27, 2001 Page 3 outstanding balance, the unrecovered portion of the debt becomes a worthless debt: for federal income tax purposes. The terms of the Credit Card Program Agreements provided that the retailers sold and assigned the credit card accounts to GE Capital without recourse and provided that GE Capital acquired all of the rights, title, and interest of the retailers, including, but not limited to, the right to any and all payments with respect to the customers’ accounts under the Credit Card Program Agreement. GE Capital accordingly acquired all of the rights of the retailers with respect to the customer accounts. The credit card application, executed by each customer of a retailer, provided that it was expected the credit application would be submitted for approval to GE Capital. and if approved, the customer's agreement and account would be assigned by the retailer to GE Capital. The amounts financed by the customer pursuant to the retailers’ private label credit card program, included both the purchase price of the merchandise plus the full amount of applicable California state and local sales taxes. GE Capital charged off on its books as worthless the amount of bad debt which included state and local sales taxes attributable to the amount of unpaid taxable charges remaining in that bad debt, which amount of taxes GE Capital had paid the retailers. GE Capital also deducted the amount of that bad debt for federal income tax purposes. The amount that GE Capital is seeking as a sales tax refund was paid by the retailers to the Board of Equalization, was reimbursed to the retailers by GE Capital. was included in amounts deducted as bad debt for federal income tax purposes, was charged off by GE Capital on its books as worthless and was attributable to the unpaid taxable charges remaining in the debts from the credit card customers. By the way ofits claim for refund, GE Capita! has asserted its entitlement to claim bad debt deductions pursuant to RTC sections 6055 and 6203.5 for the unrecoverable and uncollected balances of the eredit card accounts assigned by the various retailers to GE Capital on a non-recourse basis.California State Board of Equalization Refund Section April 27, 2001 Page 4 B. Discussion and Legal Analysis Revenue and Taxation Code section 6055 provides, in pertinent part, that: "A retailer is relieved from liability:for sales tax... insofar as the measure of the tax is represented by accounts which have been found to be worthless and charged off for income tax purposes... If the retailer has previously paid.the tax, he may, under rules and regulations prescribed by the board, take as a deduction the amount found worthless and charged off..." The board has interpreted this statute in California Code of Regulations, title 18, section 1642, subdivision (b)(1), which presently provides, in relevant part, that: "(h) SPECIAL SITUATIONS. (1) Bad Debt Deductions to Persons Other than the Retailer. (A) A successor who pays full consideration for receivables acquired from the predecessor is entitled to a bad debt deduction to the same extent that the predecessor would have entitled had the predecessor continued the business.” In WFS Financial, Inc, the Board concluded a bad debt deduction or refund should be granted when all of the following conditions are shown to have occurred: 1, Claimant's representatives were either present on the dealers’ premises or immediately available by telephone, facsimile or computer connection at the time the vehicles in question were sold; nm . Claimant paid full consideration to the dealers for the receivables in question. i.e., claimant did not purchase the receivables at a discount: and 3. The dealers’ assignments to claimant of the receivables in question were substantially contemporaneous with the execution of the sales agreements between the dealers and the purchasers.California State Board of Equalization Refund Section April 27, 2001 Page 5 5. REQUEST FOR A CONFERENCE: GE Capital respectfully requests a conference to review its refund claim with the Board of Equalization. 6. ADDITIONAL INFORMATIONS GE Capital respectfully reserves the right to produce additional material. further explain its position and to advance additional arguments. Respectfully submitted, GE Capital Corporation By: wk \s Spl William J. MaConnell Manager Sales, Use & Excise Taxes (941) 418-5186EXHIBIT “A”pemernes es 1D ND BEATE UP Gaurunren WAIVER OF LIMITATION C € “goaro OF EQUALIZATION Account No. SZ OHC 98-018F11 BEFORE SIGNING THE WAIVER OF LIMITATION SEE THE REVERSE FOR INFORMATION In consideration that the Board of Equalization of the State of California forbear maklng deficiency determinations within tha limitation peried prescribed by: Oo Section 6487 of the California Sates and Use Tax Law and, where applicable, local ordinances pursuant to the Uniform Leeal Sales and Use Tax, ang ransectans (Sales) and Use Tax. fi ( —s Other- (Copies of appiicable Revenue and Taxatlon code sections will be provided upon request) Until the Board has made further examination of records, the undersigned hereby consents to an extension thraugh Agcil BO, ZOO! _ ofthe timawithin whieh such determinations may be mailed for the period from Taavarg 1 149% through December 31,1997 « Ifthe undersigned has previously granted extensions for period(s) inctuded In the period noted above, those extensions are incorporated herein, we The undersigned further agrees to rotain for audit purposes all records and supporting cata pertaining to the perlod to which an extenison Is granted, The undarsigned is aware that this agreement also allows a claim for refund to be filed for overpayments or for bffsexting any overpayments made with respect to the agreed periad through the extension dats, Dated % Re edly His STATE CAPACITY Accepted: Stats Board of Equalization “Signatory, if not « corporate officer, partner or owner, certifies unger penalty of pedury thet he or ane heids a power of ettomcy to execute tla document,BEFORE THE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA In the Matter of the Claim for Refund Under the Sales and Use Tax Law of: WES Financial, Inc. - SR EAA 52-009479 56535 Appearances: For Claimant: Mr. Peter Larson, Attorney At Law Akerman, Senterfitt & Eidson, P.A. Mr. Richard Neilsen, Attomey At Law Pillsbury, Madison & Sutro, L.L.P. For Appeals Section: Ms. Susan Wengel, Senior Tax Counsel For the Sales and Use Tax Department: Ms. Janice Thurston, Senior Tax Counsel MEMORANDUM OPINION This opinion considers the merits ofa claim for refund of an unspecified amount for the. period Jamuary 1, 1996, through November 29, 1999. The claim for refund is for bad debt deductions for defaults on certain finance contracts purchased without recourse from various vehicle dealers. WFS Financial, Inc. and affiliates (Claimant), is a financial institution that during the period at issue did not hold a seller’s permit with the Board of Equalization (Board). Claimant described the transactions at issue as follows. The taxable sales were made through installment sales agreements with the dealers. Those dealers made credit sales of motor vehictes at retail, entered into with various California purchasers. Pursuant to these installment sales agreements, the purchasers promised to pay the agreed upon sales price and additional charges, plus sales tax reimbursement, to the dealers, The dealers reported the sales tax to the Board, based on the agreed upon sales price. Under the sales agreements, after receiving credit for down payment amounts, the purchasers financed the balance due with the dealers at a specified interest rate. The agreements also provided that the dealers held security interests in the vehicles until the purchasers paid off the vehicles. The dealers then, immediately assigned the sales agreements to claimant without recourse, The dealers always intended to assign all the sales agreements to claimant and obtained claimant's approval of the purchasers, the financed balances, and the interest rates before the dealers entered into the sales agreements with the purchasers. “4WFS Financial, Inc, € C -2- SR EAA 52-009479 ID 56535 Under the sales agreements, the purchasers continued to pay sales tax reimbursement as part of their installment payments to claimant. If the purchasers defaulted on their finance contracts, claimant had the right to repossess the subject vehicles. The claim at issue pertains to transactions where the purchasers defaulted and, in most cases, claimant repossessed and resold the subject vehicles. After claimant applied all repossession proceeds and all proceeds from other collection efforts to the amounts still owed by the purchasers, unpaid balances remained. After deeming the unpaid balances to be uncollectable, claimant wrote off the unpaid balances as bad debts for income tax purposes. The Board's audit staff denied the claim for refund of the alleged bad debts on the basis that only two types of persons who hold seller's permits are entitled to claim bad debt deductions under Revenue and Taxation Code section 6055. One is the retailer who sold the property, and the other is a successor to the business of the original retailer, if the successor purchased the retailer's accounts receivable for full consideration (i.c., not at a discount). Claimant’s position is that it is entitled to a refund under section 6055 for the portions of the unpaid balances that are attributable to sales tax reimbursement that the purchasers failed to pay. OPINION Revenue and Taxation Code section 6055 provides, in pertinent part, that: “A retailer is relieved from liability for sales tax... insofar as the measure of the tax is represented by accounts which have been found to be worthless and charged off for income tax purposes.,.. If the retailer has previously paid the tax, he may, under niles and regulations prescribed by the board, take as a deduction the amount found worthless and charged off...” The Board has interpreted this statute in California Code of Regulations, title 18, section 1642, subdivision (b)(1), which presently provides, in relevant part, that: “(h) SPECIAL SITUATIONS. “ (1) Bad Debt Deductions to Persons Other Than the Retailer. “(A) A successor who pays full consideration for receivables acquired from the predecessor is entitled to a bad debt deduction to the same extent that the predecessor would have been entitled had the predecessor continued the business.” r xWFS Financial, Inc. Cc Cc -3- SR EAA 52-009479 ID 56535 We find that claimant should be granted a bad debt deduction or refund when all of the following conditions are shown to have occurred: 1. Claimant's representatives were either present on the dealers’ premises or immediately available by telephone, fascimile, or computer connection at the time the vehicles in question were sold; 2, Claimant paid full consideration to the dealers for the receivables in question, ie., claimant did not purchase the receivables at a discount; and 3, The dealers’ assignments to claimant of the receivables in question were substantially contemporaneous with the execution of the sales agreements between the dealers and the purchasers. We find that, in this case, all of the above conditions have been met, and that claimant is a successor that paid full consideration for receivables and qualifies for a bad debt deduction or refund, Because claimant's refund request has not specified an exact amount, we direct the Board's audit staff to review claimant’s records to ascertain the amount of the refund in accordance with Regulation 1642. Once this dollar amount is computed, a bad debt deduction or refund should be granted for that amount. Done at Sacramento, California, this 14th day of December, 2000. Mr, Andal » Chairman Mr. Parrish 0, Member Mr, Chiang , Member Ms, Mandel* » Member *For Kathleen Connell, per Government Code section 7.9.IL. State Board of Equalization OPERATIONS MEMO For Public Release No: 1101 Date: August 20, 2002 SUBJECT: Bad Debts Incurred by Lenders on Purchased Accounts PURPOSE This operations memo provides guidelines and procedures required as a result of the revisions to Revenue and Taxation Code sections 6055 and 6203.5 enacted by Assembly Bill (AB) 599, (Stats. 2000, Ch. 600.) Sates and Use Tax Regulation 1642, Bad Debts—In General has been amended to incorporate these statutory changes. The provisions of AB 599 apply to transactions for which taxes were remitted on or after January 1, 2000. Since the taxes for the 4® quarter 1999 were, in most cases, remitted on or after January 1, 2000, with respect to this requirement bad debts incurred in connection with almost all transactions occurring on or after October 1, 1999, are cligible under the provisions of AB 599. GENERAL BACKGROUND An account receivable (“account”) may be sold with or without recourse. “With recourse” means the retailer must reimburse the purchaser of the account (“lender”) for any losses the lender suffers. “Without recourse” means the retailer has no obligation to reimburse the purchaser of the account (“lender”) even if the lender cannot recover the full amount of the debt. A lender who purchases an account with recourse may not take a bad debt deduction under the Sales and Use Tax Law with respect to any loss it suffers on that account (ie. uncollectible debt for which it fails to obtain reimbursement from the retailer). However, 3 retailer who sells an account with recourse may take a bad debt deduction for the amount of uncollectible debt for which the retailer actually reimburses the lender pursuant to their contract, to the extent that such loss represents amounts on which the retailer reported and paid tax. The mules discussed in this paragraph remain the lew, and have not been affected by the changes discussed below. Prior to the adoption of AB 599, a lender who purchased an account was not entitled to claim a sales tax deduction or refund in connection with its losses on the account, whether purchased with or without recourse. In addition, when a retailer sold an account without recourse, the retailer was unable to claim a sales tax deduction or refund for losses suffered by the tender on the account, This meant neither party was eligible to claim abad debt deduction with respect to losses suffered on accounts sold without recourse. (As discussed below, the Board's memorandum opinion in JS Financtal, {nc. (WFS) sets forth an exception allowing lenders, under specified conditions, to take deductions for their losses on accounts which were purchased without recourse and for which tax was paid prior to January 1, 2000.) Under the amendments to sections 6055 and 6203.5 adopted by AB 599, cither the retailer or the lender, per their agreement, may now qualify to claim a deduction YAOperations Memo No, 1101 Page 2 August 20, 2002 or refund for losses on an account the lender purchases without recourse, provided the retailer had remitted tax to the Board on or after January 1, 2000. Although the retailer and lender can agree the retailer is entitled to claim the benefit for any losses, we anticipate this will be a rare occurrence. Therefore, this memorandum focuses on transactions where the lender has the right to claim the bad debt deduction or refund. For this reason, the term “lender” is used throughout this memo with the assumption the tender will be the person claiming the deduction or filing a claim for refund. : For purposes of AB 599, the term “lender” includes any person who purchases an account receivable without recourse directly from the retailer who reported and paid tax. This includes, for example, the purchase of an account where the dealer has financed its own sale ofa vehicle. “Lender” also includes a person who holds an account without recourse pursuant to that person’s contract directly with a retailer, This means, for example, a private label credit card, which is one issued by a financial institution in the name ofa retailer. Such a card usually has the name of the retailer on the front of the card, but since the card is actually issued by a third-party lender, this information is usually on the back of the card. ‘These are not general-purpose credit cards, Rather they can be used to make purchases only from the retailer in whose name they are issued, or in some cases from retailers who are part of the same corporate family. On or before claiming a bad debt deduction or refund under AB 599, the election agreement between the retailer and the lender specifying which party has the right to claim the bad debt deduction for that account must be filed with the Board. This election agreement may be in any form, but must contain the following elements specified in subdivision G)GBYA) of Regulation 1642: 1. The name, address, and seller’s permit number of the retailer who reported or wilt report the tax and the name, address, and seller’s permit number, if any, or Certificate of Registration — Lender account number of the lender to whom the account(s) is assigned. 2, Anagreement that the retailer relinquishes to the lender all rights to the account. 3. A statement clearly specifying whether the retailer or the lender is entitled to claim any (and all) deductions or refunds as a result of any bad debt losses charged off by the lender for the account(s) covered by the election, the effective date of that election, and a statement that the other party relinquishes all rights to claiming such deductions or refunds. 4. A list of accounts to which the election pertains, If the election is a blanket election for all accounts assigned without recourse by the retailer to the lender or all : accounts held by the lender without recourse pursuant to the lender's contract | directly with the retailer, the election must so state.Operations Memo No. 1101 Page 3 August 20, 2002 5. The agreement of both the retailer and the lender to furnish any and all documentation requested by the Board to support the deductions or refunds claimed. 6. The acknowledgement by both the retailer and the Iender that the Board may disclose relevant confidential information to all parties involved in order to support and confirm any deductions or refunds claimed. 7. If the lender is the person entitled to claim any deduction or refund for bad debts on the account, list the Lender’s Certificate of Registration — Lender account number. If the lender does not yet hold such a registration, the agreement of the lender that it will apply for the Certificate of Registration - Lender no later than on the date the lender first claims a deduction or refund for bad debts charged off on the account. 8. A statement that the election may not be amended or revoked unless a new election signed by both the retailer and the lender is filed with the Board. 9, The date of the election and the signatures of the retailer and the lender, or their authorized representatives. Ifa copy of the signed election is filed with the Board rather than the original, the person with the right under the election to claim the bad debt deduction or refund must retain the election with the original signatures. An election may be signed in counterparts, and its filing would be regarded as perfected as of the filing of the second signed counterpart, provided each counterpart is identical except for the signature and date of the signature. If copies of the signed counterparts are filed with the Board, the person with the right under the election to the bad debt deduction or refund must retain all counterparts with the original signatures, A retailer with the right to the bad debt deduction pursuant to its election agreement with the lender may, in tum, assign that right to an affiliate pursuant to a separate election agreement between the retailer and its affiliate. A lender with the right to the bad debt deduction pursuant to its election agreement with the retailer may, in tum, assign that right to any other person (whether an affiliate or not) pursuant to a separate election agreement between the lender and its assignee. The right to the bad debt deduction or refund cannot be further assigned other than as described in this paragraph. Ifa retailer with the right to the bad debt deduction or refiind assigns that right to an affiliate, the election agreement between the retailer and its affiliate must also be filed with the Board (along with the election agreement between the retailer and the lender). The election agreement between a retailer and its affiliate must include all the elements specified in subdivision (h)(3)A) of Regulation 1642, While a retailer with the right to a bad debt deduction or refiind may assign that right only to an affiliate, a lender with the right to a bad debt deduction or refiind may assign that right toOperations Memo No. 1101 Page 4+ August 20, 2002 an affiliate or fo any other person. The election agreement between a lender and its assignee must include all the elements specified in subdivision (i)(4)(A) of Regulation 1642. A lender who has the right to take a bad debt deduction pursuant to an election agreement with a retailer (which includes an assignee of the lender) must register with the Board for a Certificate of Registration ~ Lender prior to claiming the deduction or refund. (See Regulation 1642(i)(5)(B).) A person registered as a Lender is required to file a return to report subsequent recoveries, and the return must be filed whether or not the lender makes any recoveries during that reporting period. The tender may claim its bad debt losses on fine 10(a)(2) and if that amount exceeds the reported amount of taxable recoveries, the completed retum will qualify as a claim for refund. For claims on accounts found worthless and written off prior to January t, 2002, lenders will need to file separate claims for refund for amounts due them. For accounts found worthless and written off after January 1, 2002, most lenders will use their returns to file their claims for refund. WFS Memorandum Opinion Prior to the passage of AB 599, the Board considered a claim by a financial institution, WES, for a refund for bad debts incurred from accounts purchased without recourse, and jssued a memorandum decision dated December 14, 2000, setting forth when such. transactions can qualify for bad debt deductions. Although the property financed in WFS were automobiles, financing of other types of property, such as vessels and aircraft, may qualify if all requirements of the opinion are satisfied. The Boatd’s decision in WFS provides that a financial institution can claim a bad debt deduction or refund for accounts purchased without recourse if each of the following conditions is met: “I, Claimant's representatives were either present on the dealers’ premises or immediately available by telephone, facsimile, or computer connection at the time the vehicles in question were sold, “2, Claimant paid full consideration to the dealers for the receivables in question, i.e. claimant did not purchase the receivables at a discount. “3, The dealers’ assignments to claimant of the receivables in question were substantially contemporaneous with the execution of the sales agreements between the dealers and the purchasers.” The Legislature’s adoption of AB 599 superseded and replaced the WFS decision. The WFS decision applies through December 31, 1999, but not after the provisions of AB 599 became operative on January 1, 2000. As discussed above, AB 599 generally applies to bad debts incurred in connection with transactions occurring during the 4th quarter 1999 since the taxes on those transactions were generally paid after the January 1, 2000 date specified in AB 599. However, the WES decision itself applied to a claim for refund that included the 4th quarter 1999. Accordingly, to ensure fair and uniform treatment of alt tenders and for administrative ease, a lender may rely on the provisions of either WFS or AB 599 for bad debts incurred in connection with transactions that occurred during the 4th quarter 1999, The provisions of WFS and AB 599 are otherwise mutually exclusive.Operations Memo No. 1101 Page 5 August 20, 2002 It is imperative to note that the determination of whether WFS or AB 599 applies is based on the date the taxes were remitted (usually ascertained based on the date at which the sale occurred), not the date the bad debts were incurred. For bad debts incurred in connection with sales of tangible personal property during the 3" quarter 1999 and earlier, only the provisions of WES apply and not the provisions of AB 599. Generally for bad debts incurred in connection with sales of tangible personal property during the Ist quarter 2000 and later, only the provisions of AB 599 apply and not the provisions of Wrs.! Since the determination of whether WFS or AB 599 applies is based on the date tax was paid but the timing of the bad debt deduction is based on the date the loss is written off, there will be claims submitted which include losses covered by both WFS and AB 599 which were written off in the same reporting period. To illustrate, in the 2nd quarter 2002, a lender writes off two accounts as worthless, one for a sale that occurred in the Ist quarter 1999 and the other for n sale that occurred in the Ist quarter 2000. Tax had been paid for the first transaction prior to January 1, 2000, and the provisions of WES apply to the loss from that account, Tax had been paid for the second transaction after Jenuary 1, 2000, therefore provisions of AB 599 apply to that loss. Since the lender's right to claim the losses from these two accounts was established during the 2nd quarter of 2002, the deduction for both accounts should be taken on the lender’s return for that reporting period. ‘This means the statute of limitations for filing the lender’s claim related to the losses on both accounts starts to run on July 31, 2002 (the due date of the return for the 2nd quarter 2002). Indirect Loans Ifa consumer wishes to make a purchase on credit without using an existing credit account, the consumer may apply for a Joan for that particuler purchase. This is the method used for most purchases of automobiles, aircraft, and vessels, as well as many other large purchases, such as jewelry” The retailer may coordinate the loan application process, with the consumer signing a credit contract with the retailer who thereafter assigns the account toa lender. This type of loan is commonly called an “indirect loan” because the consumer does not contract directly with the lender who will service the loan, b