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‘Second haircut’ nixed by tax court

December 29, 2014

A finance company that purchased car loans at a discounted price is entitled to recoup all the sales tax on the loans which have since gone into default.

SAC Finance bought installment sale contracts from Superior Auto Inc. at a 30 percent market discount. After some customers subsequently defaulted on their contracts, SAC filed three claims with the Indiana Department of State Revenue for a refund of the Indiana sales tax that Superior had paid.

However, the department of revenue denied SAC 30 percent of each refund claim. In part, the state argued it properly removed market discount income from SAC’s Indiana bad debt deduction because Indiana Code 6-2.5-6-9(d) must treat market discount income as interest which is the same way it is treated for federal income tax purposes.

The Indiana Tax Court rejected this argument and found the department erred in denying the 30 percent of the three refund claims. The ruling was issued in SAC Finance, Inc. v. Indiana Department of State Revenue, 49T10-1007-TA-34, 49T10-1102-TA-11.
 
The Tax Court held that excluding market discount income from the Indiana bad debt calculation under I.C. 6-2.5-6-9(d) is incompatible with the purpose of the state exclusions from the federal bad debt deduction.

 “If (I.C. 6-2.5-6-9(d)) were to exclude market discount income as if it were interest, the Indiana bad debt deduction for an assignee using the Market Discount Rules would not equal the debt that was unable to be collected due to the default,” Judge Martha Blood Wentworth wrote. “Indeed SAC is already limited by the federal starting place to recoup no more sales tax than the amount paid to the Department. Thus, to allow a second haircut by treating market discount income as excludable interest would result in a windfall to the Department.”  

 

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