STATEMENT OF THE CASE

            This matter comes before the Administrative Law Court (ALC or Court) pursuant to S.C. Code Ann. §§ 12-60-460 (Supp. 2004) and 1-23-600 (2005) for contested case hearings.  The Department of Revenue (Department) determined that neither Corporation A nor Corporation B were entitled to a credit, refund, or deduction for sales tax paid on debts that subsequently become “bad debts,” pursuant to S.C. Code Ann. § 12-36-90(2)(h) (Supp. 2004).  Petitioners contested that determination.  The individual matters were consolidated for trial by agreement of the parties.  After notice to all the parties, a hearing was conducted on September 13, 2005 at the offices of the ALC in Columbia, South Carolina.  Further, at the hearing, Respondent requested additional time to submit written briefs on the question of whether Petitioners constitute a “person” under S.C. Code Ann. § 12-36-30 (2000), which defines “person” to include “any group or combination acting as a unit.”  Both parties thereafter submitted briefs addressing this issue.

FINDINGS OF FACT

            Having observed the witnesses and exhibits presented at the hearing and taking into consideration the burden of persuasion and the credibility of the witnesses, I make the following findings of fact by a preponderance of evidence:

            1.         On March 19, 2004, Petitioners submitted a claim for refund to the Department requesting a refund of sales taxes paid on the sales of automobiles sold pursuant to installment contracts on which the purchaser subsequently defaulted.  The claim was submitted on behalf of “Corporation B and its assignee, Corporation A.”  Corporation B is a used car dealership franchise doing business in Spartanburg, South Carolina.  Corporation A is a finance company that exists exclusively to purchase installment sales contracts from Corporation B for collection.

            2.         When Corporation B sells a car to a customer, it provides financing of the entire purchase amount, less any down payment, including some or all of the South Carolina sales tax.  The customer signs a retail installment contract containing a promissory note to Corporation B as the payee.  Corporation B then assigns the contract to Corporation A for collection.  The money Corporation A pays Corporation B for the contract includes the amount of any sales tax due on the transaction.  Corporation B then files a sales tax return and remits the sales tax to the Department.

            A certain percentage of Corporation B and Corporation A’s customers default on their loans.  These loans are then charged off by Corporation A as “bad debts.”  Because the sales tax was financed as part of the purchase price of the vehicle, when Corporation A writes a note off as uncollectible, part of that write-off represents South Carolina sales tax, which has already been remitted to the Department by Corporation B.  However, though Corporation A pays taxes in South Carolina, only Corporation B holds a South Carolina retail sales license and files sales tax returns.

            3.         Corporation B and Corporation A are closely held corporations wholly owned by the same individuals.  The sole reason for Corporation A’s existence is to purchase Corporation B’s installment sales contracts.  The reason Corporation B sells its contracts to Corporation A for collection, rather than collecting the amounts due under the contracts itself, is because federal tax laws allow Corporation B to control the timing of its income by selling the promissory notes for collection, at a discount determined by the historical default rate.[1]  By selling the notes to Corporation A, Corporation B only has to recognize income on the amount it receives from Corporation A for the contracts – an amount equal to the predicted actual receipts – rather than recognizing income on the full amount of the sales contract, which it knows, in aggregate, it will never actually collect.^[2]  Corporation B does not sell its installment sales contracts to any entity other than Corporation A and Corporation A does not purchase installment sales contracts or handle collections from any entity other than Corporation B.

             4.        The contract between Corporation B and Corporation A also provides that:

The parties agree that included within the meaning of “all right title and interest” in the automobile contracts purchased by Corporation A is the right to recover sales tax credits attributable to charged-off contracts.  Corporation B agrees to act as agent to Corporation A to facilitate that recovery and remit such recovery to Corporation A.

The contract specifically assigns to Corporation A, Corporation B’s rights to any refund, deduction, or credit for sales taxes on accounts that become uncollectible.

CONCLUSIONS OF LAW

            1.         This Court has jurisdiction to decide issues herein pursuant to S.C. Code Ann. § 12-60-460 (Supp. 2004) and S. C. Code Ann. §§ 1-23-600, et seq. (2005).

Background

            2.         South Carolina law imposes a sales tax of 5% on the gross proceeds of sales upon every person engaged in the business of selling tangible personal property at retail, S.C. Code Ann. § 12-36-910(A) (2000), with a maximum tax of $300 on the sale of motor vehicles.  § 12-36-2110(A)(2) (2000).  A retailer may pass the sales tax on to the customer by adding it to the purchase price.  See S.C. Code Ann. § 12-36-940 (Supp. 2004).  Furthermore, although a retailer must initially pay sales tax on the gross proceeds of a sale, regardless of whether the purchase price is paid up front or over time, S.C. Code Ann. § 12-36-90(2)(h) (Supp. 2004) excludes from the definition of “gross proceeds” “the sales price, not including sales tax, of property on sales which are actually charged off as bad debts or uncollectible accounts for state income tax purposes” and allows a retailer who charges off an uncollectible account to take a deduction for the sales tax that was paid on the unpaid balance of such account.[3]

            The Department determined that Corporation B was not entitled to the benefits of the bad debt statute because, having sold its interest in the contracts to Corporation A, Corporation B had no bad debt to “charge off” for state income tax purposes.  The Department likewise determined that Corporation A was not able to claim the benefit of the bad debt statute because it was not the “taxpayer who [paid] the tax,” under Section 12-36-90(2)(h).  Further, the Department determined that Corporation A was not entitled to take the deduction as Corporation B’s assignee because Corporation B had no bad debt that it could assign to Corporation A, and because the assignment did not comply with S.C. Code Ann. § 12-60-470(C) (Supp. 2004).  Thus, although it is uncontested that Corporation B would be entitled to the benefits of the bad debt statute had it not assigned the contracts to Corporation A, because it did assign the contracts to Corporation A, the Department determined that neither entity is entitled to the deduction under the terms of the governing statute.

Assignment

            3.         An assignee can claim no higher rights than the assignor at the time of the assignment.  Singletary v. Aetna Cas. & Sur. Co., 316 S.C. 199, 201-202, 447 S.E.2d 869, 870 (Ct. App. 1994).  Nevertheless, “[i]n South Carolina, it is well established that an ‘assignee . . . stands in the shoes of its assignor’. . . and [w]hen a contract is assigned, the assignee has all the same rights and privileges, including the right to sue on the contract, as the assignor.”  Twelfth RMA Partners, L.P. v. National Safe Corp., 335 S.C. 635, 639-40, 518 S.E.2d 44, 46 (Ct. App. 1999) (quoting Singletary, 316 S.C. at 201, 447 S.E.2d at 870 and S.C. Code Ann. § 36-3-201); see also S.C. Code Ann. § 36-2-210 (2003) (recognizing the general rule that contracts for the sale and purchase of goods are assignable). 

            Additionally, the right to a tax refund is assignable in South Carolina.  Slater Corp. v. S.C. Tax Comm’n, 280 S.C. 584, 588, 314 S.E.2d 31, 33 (Ct. App. 1984).  In Slater, the plaintiff sought a refund of certain sales taxes it had paid as a buyer of food supplies from various sellers during the period 1969 through 1978.  The Tax Commission acknowledged that a refund was due, but took the position that only the sellers of the food supplies, not Slater, could recover it.  Slater then submitted assignments from the sellers, assigning to Slater their refund claims for the taxes paid.  The Commission again denied the refund to Slater, taking the further position that a claim for refund could not be assigned.  On appeal, the Court of Appeals reversed and held that Slater, as assignee of the various sellers from whom it purchased food supplies, acquired their rights to collect refunds of erroneously paid taxes.  Therefore, “Slater stands for the general proposition that claims against the government, absent express statutory language, are assignable and do not violate public policy.”  Puget Sound Nat’l Bank v. Wash. Dep’t of Revenue, 123 Wash.2d 284, 290, 868 P.2d 127, 131 (Wash. 1994).  Moreover, “Slater holds that statutory rights are coextensive with a contract and follow the assignment of that contract.”  Id.

            The Department contends that even if Corporation B can assign its rights to charge off bad debts, Corporation A could not make use of that right within the existing statutory scheme because it can only give a deduction or a “charge off” from the gross proceeds of sale.  S.C. Code Ann. §12-36-90(2)(h) (Supp. 2004) provides that “[a] taxpayer . . . may take a deduction for the sales price charged off as a bad debt or uncollectible account on a return filed pursuant to this chapter. . . .”  That language makes it clear that the retailer may apply the bad-debt relief credit to future sales tax obligations. But the language of Section 12-36-90(2)(h) does not create a statutory structure prohibiting a retailer from demanding a refund of the bad-debt credit.  Therefore, the choice of whether to deduct or seek a refund belongs to the retailer.  Moreover, the Department’s Advisory Bulletin provides that in at least some instances a refund is appropriate, thereby implicitly supporting that conclusion.

            The Department further contends that even if Corporation A is entitled to seek either a deduction or a refund, S.C. Code Ann. § 12-60-470(C)(3) (Supp. 2004) changes the rule of assignment in tax cases.  There is a strong presumption that the Legislature does not intend by statute to change common law rules.  Wimberly v. Barr, 359 S.C. 414, 422, 597 S.E.2d 853, 857 (Ct. App. 2004).  Furthermore, a statute is not to be construed as in derogation of common law rights if another interpretation is reasonable.  Id.  On the other hand, a tax refund must nonetheless clearly comply with the tax provisions authorizing a refund.  See Guaranty Bank & Trust Co. v. S.C. Tax Comm’n, 254 S.C. 82, 90, 173 S.E.2d 367, 370 (1970) (“A refund of taxes is solely a matter of governmental or legislative grace and any person seeking such relief must bring himself clearly within the terms of the statute authorizing the same.”).  Section 12-60-470(C)(3) sets forth that a taxpayer legally liable for the tax “may only assign a refund to another person after the taxpayer's claim is allowed, the amount of the refund is finally decided, and the department has approved the refund.” (emphasis added).[4]  I find that Section 12-60-470(C)(3) clearly amends the common law rule of assignment in tax cases.  Therefore, if Corporation A is seeking a refund solely pursuant to its assignment and not as the taxpayer, it would not be entitled to the refund because the assignment occurred before the refund was finally decided and approved.

Taxpayers Acting In Concert

            4.         The cardinal rule of statutory interpretation is to ascertain and effectuate the intention of the Legislature.  Hodges v. Rainey, 341 S.C. 79, 85, 533 S.E.2d 578, 581 (2000).  The legislative intent of Section 12-36-90(2)(h) is unmistakable – to allow a retailer to recover taxes paid on sales that were never collected.  In other words, Section 12-36-90(2)(h) allows the retailer to recover sales tax that the State of South Carolina simply is not due.  In fact, if Corporation B had not assigned its installment contracts to the Corporation A, it clearly would have been entitled to a sales tax deduction.  Corporation A and Corporation B assert that irrespective of any assignment, Corporation B should be allowed to take a deduction pursuant to Section 12-36-90(2)(h) because they are acting in concert and are therefore statutorily the “taxpayer” for purposes or remitting the sales tax.

            S.C. Code Ann. § 12-36-40 (2000) defines “taxpayer” to mean “any person liable for taxes under this chapter.”  “Person,” in turn, is defined as: “any individual, firm, partnership, limited liability company, association, corporation, receiver, trustee, any group or combination acting as a unit, the State, any state agency, any instrumentality, authority, political subdivision, or municipality.”  S.C. Code Ann. § 12-36-30 (2000) (emphasis added).  South Carolina’s courts have not interpreted the phrase “any group or combination acting as a unit.”  While the Department acknowledges that South Carolina’s courts have not addressed the meaning of “any group or combination acting as a unit,” it asserts that the Supreme Court implicitly addressed the question in Edisto Fleets, Inc. v. S.C. Tax Comm’n, 256 S.C. 350, 182 S.E.2d 713 (1971).  The question presented in Edisto Fleets was whether rental transactions between a company and its wholly owned subsidiary were subject to sales tax.  Although the South Carolina Supreme Court found that they were, the question of whether the two entities were “acting as a unit,” was neither raised nor ruled upon, either implicitly or explicitly.  Therefore, the case cannot be said to speak to the question at all.  Furthermore, in Section 12-36-30, the language of “any group or combination acting as a unit” is not preceded by the word “other.”  To the contrary, the statute interpreted in Edisto Fleets defined “person” as a corporation or “any other group or combination acting as a unit.”  See 1962 Code § 65-1356.

            The Department also relied upon the holding in Pemco, Inc. v. Kansas Dep’t of Revenue, 258 Kan. 717, 907 P.2d 863 (Kan. 1995).  In Pemco, the corporation engaged in the construction business through two wholly owned subsidiary corporations so as to gain the advantage of being able to enter into union and nonunion construction contracts.  It, nonetheless, sought to be treated as one corporation for tax purposes by claiming that it was a group or combination acting as a unit.  The Kansas Retailers' Sales Tax Act similarly defined “person” as “any individual, firm …, corporation . . . , or any group or combination acting as a unit, and the plural as well as the singular number. . . .”  The court determined that a logical interpretation of the phrase “or any group or combination acting as a unit” was that “it was intended to extend ‘person’ status to groups or combinations acting as a unit even though the group or unit does not fit within the legal definition of any of the specifically designated entities.”  Id. at 721, 907 P.2d at 866.  Nevertheless, in Pemco the corporation was seeking, in essence, “to pierce its own corporate veil to avoid the payment of sales tax.”  Id. at 723, 907 P.2d at 867.  The Court concluded that:

We find no reason why [Pemco] should be able to deny the corporate structure it has chosen in order to gain a tax advantage. There is nothing in the statute defining persons which authorizes a corporation to deny its legal status in a transaction between it and an affiliated Corporation and claim to be a group or combination acting as a unit.

Id. at 724, 907 P.2d at 867 (emphasis added).

            Here, Corporation B and Corporation A are not seeking to pierce their own corporate veil to avoid the payment of sales tax.  Rather, they are seeking limited recognition as joint taxpayers of sales tax in order to receive tax treatment in keeping with the operation of their business.  Moreover, though a person seeking a refund must bring himself clearly within the terms of the statute, Section 12-36-30 is not a refund provision.  The issue is not whether the taxpayers have brought themselves within the terms of the statute authorizing the refund but the interpretation of the meaning of Section 12-36-30.  In other words, the issue, at this juncture, is whether under Section 12-36-30 Corporation B and Corporation A are a “group or combination acting as a unit” and thus entitled to be treated as a “taxpayer” under the sales and use tax provisions.  Unlike refund statutes, taxing statutes must be construed most favorably to the taxpayer, and any doubts should be resolved against the taxing authority.  Ryder Truck Lines, Inc.v. S.C. Tax Comm’n, 248 S.C. 148, 152, 149 S.E.2d 435, 437 (1966); Hertz Corp. v. S.C. Tax Comm’n, 246 S.C. 92, 96, 142 S.E.2d 445, 447 (1965).[5]  Additionally, when a statute's terms are clear and unambiguous on their face, there is no room for statutory construction and a court must apply the statute according to its literal meaning.  Carolina Power & Light Co. v. City of Bennettsville, 314 S.C. 137, 139, 442 S.E.2d 177, 179 (1994).

            Under the plain language of the statute, two entities acting in concert constitute a “person.”  Had the legislature intended to limit “any group or combination acting as a unit” to only non-incorporated entities, as suggested by the Department, it could have kept the word “other” in the statute, as in the former version, which defined “person” to include “any other group or combination acting as a unit.”  See 1962 Code § 65-1356 (emphasis added).  For this reason, the Alabama and West Virginia decisions relied upon heavily by the Department should carry little weight, as those states’ statutes specifically refer to “any other group.”  See Ala. Code § 40-23-1(a)(1); W. Va. Code § 11-13-1.  As argued by the dissenting Justices in the Pemco decision, the plain and ordinary meaning of the language used encompasses closely related entities operating together:

If the legislature intended that the phrase in question was meant to merely embrace unincorporated corporations . . . it could have easily made such a distinction.  It did not.  Instead, by writing the phrase in a broad sweep, and by failing to address elsewhere in the Act’s penumbra the status of related or affiliated companies or corporations, I would conclude that the phrase in question includes a Corporation And its wholly owned subsidiary.

Pemco, 258 Kan. at 725, 907 P.2d at 868 (Abbott, J., dissenting).  I find this reasoning persuasive, particularly in light of the distinct facts of this case and the rule that any doubts about the construction of the statute should be resolved in favor of the taxpayer.

            In the present case, Corporation B and Corporation A are a “group or combination acting as a unit,” and therefore a “person” and a “taxpayer” under the South Carolina sales and use tax provisions.  I base this finding on several facts.  Corporation B and Corporation A are closely held corporations, which are wholly owned by the same individuals.  Corporation A’s sole reason for existence is to purchase Corporation B’s installment sales contracts.  Corporation B does not sell its installment sales contracts to any entity other than Corporation A and Corporation A does not purchase installment sales contracts from any entity other than Corporation B.  Although Corporation B remits the sales tax to the Department, Corporation A provides some or all of the money for Corporation B to pay the tax.[6]  Therefore, there is continuity of ownership and their relationship is symbiotic.

            Furthermore, Corporation B does not sell the contracts to Corporation A at a discount to avoid waiting on the future income streams, as the Department argues, but so that it will have to pay income taxes only on the limited amount of money it will ultimately collect.  The IRS allows Corporation B to sell the contracts and pay income taxes only on the amount it knows it will likely collect.  In contrast, South Carolina sale tax law requires the money up front based upon the full contract price.  Although the reason why Corporation A was established by the owners of Corporation B is not grounds to allow a refund if prohibited by law, it is, nevertheless, a consideration in the analysis of whether the two corporations are acting as a distinct group.

            Inasmuch as Corporation B and Corporation A are a group or combination acting as a unit for the sales and financing of used cars, they are, collectively, a “person” within the meaning of Section 12-36-30 and, thus, a “taxpayer” within the meaning of Section 12-36-90(2)(h).  Moreover, nothing in Section 12-36-90(2)(h) specifies which member of the “taxpayer unit” must have charged off the bad debt.  The statute merely requires that the sales tax have been paid “on the unpaid balance of an account which is found to be worthless and is actually charged off.”  Furthermore, nothing in this section requires that the same member within the taxpayer unit have paid the tax and charged off the debt.

            I therefore conclude that the taxpayer unit consisting of Corporation B and Corporation A is entitled to take a bad debt deduction under Section 12-36-90(2)(h).  Corporation B, as a member of this unit, may take a deduction on its sales tax returns for debts which are actually charged off by Corporation A, the second member of the taxpayer unit.  How Corporation B thereafter handles the accounting of these funds between itself and Corporation A is governed by the contract between Corporation B and Corporation A, which provides that “Corporation B agrees to act as agent to Corporation A to facilitate that recovery and remit such recovery to Corporation A.”

            5.         Finally, Corporation B asserts that it should be entitled to the bad debt deduction for the additional reason that, contrary to the Department’s determination, it does have bad debt in a very real sense because it sells its contracts to Corporation A for an amount determined by the historical default rate of its customers.  Since the sales price of the contracts is based entirely on what Corporation A can expect to actually collect, and is adjusted from time to time based upon any changes in collection rates, Corporation B asserts that it is not, as the Department claims, “fully paid” for the contracts.  In light of my prior rulings, I decline to reach this argument and express no opinion thereon.  Furthermore, the decision reached herein does not address the amount of the deduction that the taxpayer unit is entitled to claim under Section 12-36-90(2)(h) or how the deduction is to be calculated.

ORDER

Based upon the foregoing Findings of Fact and Conclusions of Law:

IT IS HEREBY ORDERED that the Taxpayers’ claim for a refund be granted and that this case be remanded to the Department to determine the amount of the deduction that the Taxpayers are entitled to claim under Section 12-36-90(2)(h) and/or how the deduction is to be calculated.

AND IT IS SO ORDERED.

                                                                           ______________________________

                                                                                     Ralph King Anderson, III

                                                                                    Administrative Law Judge

February 1, 2006

Columbia, South Carolina