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Citibank, N.A. v. The Illinois Department of Revenue

Supreme Court of Illinois

November 30, 2017

CITIBANK, N.A., Appellee,

          Justices Freeman, Thomas, Kilbride, Garman, Burke, and Theis concurred in the judgment and opinion.



         ¶ 1 In this appeal, we review the determination of the Department of Revenue (Department) on a claim filed by Citibank, N.A. (Citibank), for tax refunds pursuant to the provisions of section 6 of the Retailers' Occupation Tax Act (ROTA) (35 ILCS 120/6 (West 2012)). Citibank sought refunds of ROTA taxes paid through affiliated retailers upon their sale of goods, transactions that were financed through Citibank, and that ultimately resulted in uncollectible debt, portions of which corresponded to the tax originally paid. The Department denied Citibank's claim. The circuit court of Cook County reversed the Department's decision. The appellate court affirmed the decision of the circuit court, concluding that Citibank had standing to pursue a refund of ROTA taxes, attributable to the uncollected debts, as a result of the assignments from the retailers. 2016 IL App (1st) 133650. We granted the Department's petition for leave to appeal (Ill. S.Ct. R. 315(a) (eff. Mar. 5, 2016)) and now reverse the judgment of the appellate court.

         ¶ 2 The ROTA imposes a tax " 'upon persons engaged in the business of selling at retail tangible personal property.' " Kean v. Wal-Mart Stores, Inc., 235 Ill.2d 351, 362 (2009) (quoting 35 ILCS 120/2 (West 2006)). The tax is computed as a percentage of "gross receipts" (35 ILCS 120/2-10 (West 2012)), defined as the "total selling price" (35 ILCS 120/1 (West 2012)). The retailer making the sale is responsible for remitting the tax to the Department. Kean, 235 Ill.2d at 363. We are concerned here with the refund provisions of the ROTA.


         ¶ 4 Section 6 of the ROTA, which governs issuance of credit memoranda or refunds of ROTA tax payments, provides in pertinent part:

"If it appears, after claim therefor filed with the Department, that an amount of tax or penalty or interest has been paid which was not due under this Act, whether as a result of a mistake of fact or an error of law, except as hereinafter provided, then the Department shall issue a credit memorandum or refund to the person who made the erroneous payment ***. *** If no tax or penalty or interest is due and no proceeding is pending to determine whether such person is indebted to the Department for tax or penalty or interest, the credit memorandum or refund shall be issued to the claimant; or (in the case of a credit memorandum) the credit memorandum may be assigned and set over by the lawful holder thereof, subject to reasonable rules of the Department, to any other person who is subject to this Act [or other specified tax acts].
No credit may be allowed or refund made for any amount paid by or collected from any claimant unless it appears (a) that the claimant bore the burden of such amount and has not been relieved thereof nor reimbursed therefor and has not shifted such burden directly or indirectly through inclusion of such amount in the price of the tangible personal property sold by him or her or in any manner whatsoever; and that no understanding or agreement, written or oral, exists whereby he or she or his or her legal representative may be relieved of the burden of such amount, be reimbursed therefor or may shift the burden thereof; or (b) that he or she or his or her legal representative has repaid unconditionally such amount to his or her vendee (1) who bore the burden thereof and has not shifted such burden directly or indirectly, in any manner whatsoever; (2) who, if he or she has shifted such burden, has repaid unconditionally such amount to his own vendee; and (3) who is not entitled to receive any reimbursement therefor from any other source than from his or her vendor, nor to be relieved of such burden in any manner whatsoever. No credit may be allowed or refund made for any amount paid by or collected from any claimant unless it appears that the claimant has unconditionally repaid, to the purchaser, any amount collected from the purchaser and retained by the claimant with respect to the same transaction under the Use Tax Act.
If a retailer who has failed to pay retailers' occupation tax on gross receipts from retail sales is required by the Department to pay such tax, such retailer, without filing any formal claim with the Department, shall be allowed to take credit against such retailers' occupation tax liability to the extent, if any, to which such retailer has paid an amount equivalent to retailers' occupation tax or has paid use tax in error to his or her vendor or vendors of the same tangible personal property which such retailer bought for resale and did not first use before selling it, and no penalty or interest shall be charged to such retailer on the amount of such credit. However, when such credit is allowed to the retailer by the Department, the vendor is precluded from refunding any of that tax to the retailer and filing a claim for credit or refund with respect thereto with the Department. The provisions of this amendatory Act shall be applied retroactively, regardless of the date of the transaction." 35 ILCS 120/6 (West 2012).

         ¶ 5 The applicable administrative regulation promulgated by the Department (86 Ill. Adm. Code 130.1960 (2000)) purports to govern ROTA tax liability and tax relief for "lending agencies, " "installment sales, " and "bad debts, " addressing each in separate subsections.[1] The issue in this appeal concerns eligibility for tax relief on account of bad debts. Hence, we consider here subsection (d), relating to "bad debts." Subsection (d), titled "Bad Debts, " provides:

"1) In case a retailer repossesses any tangible personal property and subsequently resells such property to a purchaser for use or consumption, his gross receipts from such sale of the repossessed tangible personal property are subject to Retailers' Occupation Tax. He is entitled to a bad debt credit with respect to the original sale in which the default has occurred to the extent to which he has paid Retailers' Occupation Tax on a portion of the price which he does not collect, or which he is not permitted to retain because of being required to make a repayment thereof to a lending agency under a 'with recourse' agreement. Retailers of tangible personal property other than motor vehicles, watercraft, trailers and aircraft that must be registered with an agency of this State may obtain this bad debt credit by taking a deduction on the returns they file with the Department for the month in which the federal income tax return or amended return on which the receivable is written off is filed, or by filing a claim for credit [as] provided in subsection (d)(3) of this Section. Because retailers of motor vehicles, watercraft, trailers and aircraft do not pay Retailers' Occupation Tax to the Department on retail sales of motor vehicles, watercraft, trailers, and aircraft with monthly returns, but remit the tax to the Department on a transaction by transaction basis, they are unable to take a deduction on the returns that they file with the Department, but may file a claim for credit with the Department, as provided in subsection (d)(3), on any transaction with respect to which they desire to receive the benefit of the repossession credit.
2) Retailers who incur bad debt on any tangible personal property that is not repossessed may also obtain bad debt credit as provided in subsections (d)(1) and (3).
3) In the case of tax paid on an account receivable that becomes a bad debt, the tax paid becomes a tax paid in error, for which a claim for credit may be filed in accordance with Section 6 of the Retailers' Occupation Tax Act, on the date that the Federal income tax return or amended return on which the receivable is written off is filed." 86 Ill. Adm. Code 130.1960(d) (2000).

         ¶ 6 BACKGROUND

         ¶ 7 Departmental Proceedings

         ¶ 8 Citibank's claim was submitted to the Department's administrative law judge (ALJ) on stipulated facts. In the parties' stipulations, Citibank's business relationship with the pertinent Illinois retailers was explained as follows.

         ¶ 9 Citibank provided sales financing programs to numerous retailers in Illinois. As part of their normal business practice, the retailers offered customers the option of financing their purchases, including the amount of Illinois tax due on the purchases. Citibank would originate or acquire consumer charge accounts and receivables from the retailers on a non-recourse basis.[2] When a customer financed a purchase using the consumer's account, Citibank remitted to the retailer the amount the customer financed. That amount included some or all of the purchase price, depending upon whether the customer financed the entire purchase or only a portion of the purchase, and the amount of the tax owed based on the selling price of the property purchased. "The retailers then remitted the complementary amount of the [ROTA] tax they owed to the State for each transaction."

         ¶ 10 Under the agreements between Citibank and the retailers, Citibank acquired "any and all applicable contractual rights relating thereto, including the right to any and all payments from the customers and the right to claim Retailer's Occupation Tax (ROT) refunds or credits."

         ¶ 11 Some of the customers subsequently defaulted on their accounts. Those defaults form the bases for Citibank's claim in this case. When the customers defaulted, they did not repay the full amount of the purchase price and the tax. After reasonable attempts to collect the balances that remained on the defaulted accounts, Citibank determined that they were worthless, i.e., that they were "uncollectable and legal action to enforce payment would not result in the satisfaction of execution on a judgment."

         ¶ 12 Consequently, Citibank wrote the remaining balances off as worthless on its books and records. The stipulation specifically provides that "Citi[bank], and not the retailers, bore the economic loss on these defaulted accounts." Citibank claimed the remaining, unpaid balances on those accounts as bad debts, pursuant to section 166 of the Internal Revenue Code (26 U.S.C. § 166 (2006)), on its corporate income tax returns. The bad debts were written off over the period of January 1, 2008, to December 31, 2009, and were claimed on Citibank's corporate income tax returns covering that period.

         ¶ 13 On September 28, 2010, Citibank filed a claim for a refund or credit. In its claim, Citibank sought a refund of $1, 600, 853.32, which the parties in this case stipulated "is the portion of Account balances that were written off [by Citibank] as bad debts that is attributable to the ROT." It was further stipulated, however, that the tax claimed to have been overpaid by Citibank was "approximately 8% of the amount of the additional deductions reported *** while the Illinois ROT rate was (and remains) 6.25%." Moreover, it was undisputed that Citibank's claim did not contain some of the detailed information required to be reported within different parts of the form used by the Department. Apparently, that was at least in part because Citibank "did not engage in the occupation of retailing."

         ¶ 14 On January 31, 2011, the Department denied Citibank's claim. In response, Citibank requested an administrative hearing. In his recommendation for disposition, which was based on the foregoing stipulated facts, the presiding ALJ recommended that Citibank's claim be denied on the bases that (1) Citibank did not include all of the required information or sufficient detail on its application for a refund, (2) Citibank did not bear the burden of the ROTA tax, (3) the ROTA tax was not paid in error, (4) there was no evidence that any erroneously paid taxes were refunded to the consumer, (5) Citibank was not the remitter of the taxes to the State, and (6) the assignments from the retailers to Citibank did not give Citibank a right to a refund of the ROTA taxes. On December 13, 2012, the Director of the Department adopted the ALJ's recommendation. Citibank sought review in the circuit court.

         ¶ 15 Circuit Court Decision

         ¶ 16 The circuit court identified the issue before it as "whether Plaintiff [Citibank] is entitled to a refund of tax that is equal to a portion of the ROT remitted to the Department by retailers for whom certain of Plaintiff's credit account customers made retail purchases of tangible personal property, and which accounts were later written off by Plaintiff as bad debts."

         ¶ 17 In enunciating preliminary principles of administrative review, the circuit court acknowledged potentially countervailing considerations as expressed in this court's opinions. The court noted the general principles that courts give "substantial weight and deference to an interpretation of an ambiguous statute by the agency charged with the administration and enforcement of the statute" and that "administrative regulations have the force of law and are construed under the same standards governing statutory construction." However, the circuit court also emphasized the limitations upon an administrative agency's authority to promulgate regulations, observing that an administrative agency interpreting a statute "cannot expand statutory language by implication beyond its clear import" and that "a regulation cannot create requirements, exceptions, limitations or conditions that conflict with the express legislative intent as reflected in the statutory language."

         ¶ 18 The court also acknowledged-quoting this court's decision in Peoples Store of Roseland v. McKibbin, 379 Ill. 148, 152 (1942)-"that in the absence of statute, taxes voluntarily paid cannot be recovered no matter how meritorious the claim" and that section 6 of the ROTA "is a special remedial statute" (id.) limited to persons-"normally retailers, " the circuit court conceded-who have paid the tax pursuant to the ROTA "by reason of mistake, " what the circuit court characterized as "a tax that was not actually due."

         ¶ 19 Following a recitation of section 6 of the ROTA and subsection (d) of section 130.1960, the court first observed that it was "undisputed" that "had the retailers provided finance arrangements to their customers for purchases of tangible personal property, and the customers then defaulted on those, *** the retailers would be entitled to a refund of the tax." The court then focused on the applicable administrative regulation, commenting that subsection (d)(3) is controlling, "not sections (d)(1) or (2) as the ALJ stated."[3] The court went on to assert, however, "even if the issue was whether plaintiff was a retailer, the retailers properly assigned all their rights to plaintiff, who therefore stepped into the shoes of the retailer and is entitled to the refund."

         ¶ 20 The court stated that subsection (d)(3) is "not limited to accounts receivable held only by retailers." The court believed it could not be so limited, as to do so would be to "impose a limitation on a statute that the legislature did not prescribe." "Because the legislature did not limit section 6 of ROTA to retailers, the Department's regulation, 86 Ill. Adm. Code § 130.1960, cannot limit section 6 to retailers." The circuit court observed that section 6 references the right of a "claimant"-not a "retailer"-to a credit or refund for-in the words of the ...

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