Tax Law

Washington Court of Appeals Finds Lowe’s Ineligible for Bad Debt Deduction

The Washington Court of Appeals upheld the denial of sales tax and B&O tax refund claims filed by Lowe’s Home Centers, LLC based on the bad debt deduction.  Lowe’s, a home improvement retail store with locations in Washington, entered into private label credit card (“PLCC”) agreements with two issuing banks.  Among the typical terms of the PLCC agreements, Lowe’s and the banks shared in profits and losses of the PLCC accounts.  Under those profit-sharing provisions, defaulted accounts reduced Lowe’s share of profits from the PLCC agreements and, therefore, were deductible under IRC § 166 for federal income tax purposes.  Due to the deductibility under IRC § 166, Lowe’s argued that it also qualified for the Washington bad debt deduction for sales and B&O tax purposes under R.C.W. § 82.08.37. The appeals court, however, found deductibility under federal tax law alone is not sufficient to qualify under the Washington bad debt statute.  Explaining that, per R.C.W. § 82.08.37, the bad debt must also be “on sales taxes previously paid” that are “written off as uncollectible” by the seller to qualify for a deduction under that provision.  Lowe’s relationship to the bad debts at issue in this case failed both of these requirements:  (1) the bad debts were not “directly attributable” to a retail sale on which sales tax was paid, but instead were attributable to Lowe’s separate, contractual profit sharing reductions with the banks; and (2) Lowe’s books and records did not reflect any written-off accounts that resulted in bad debt.  Accordingly, the appeals court concluded that Lowe’s was not entitled to a refund of sales or B&O taxes based on the bad debt deduction under R.C.W. § 82.08.37.


Lowe’s Home Center, LLC v. Dep’t Revenue, No. 50080-9-II (Wash. Ct. App. Sept. 5, 2018).