Menard, Inc.,

1
STATE OF MINNESOTA

IN SUPREME COURT

A20-0241

Tax Court Gildea, C.J.

Menard, Inc.,

Relator,

vs. Filed: February 24, 2021
Office of Appellate Courts
Commissioner of Revenue,

Respondent.

________________________

Lynn S. Linn é, Masha M. Yevzelman, Fredrickson & Byron, P.A., Minneapolis,
Minnesota; and

Brian R. Harris, Akerman LLP, Tampa, Florida, for relator.

Keith Ellison, Attorney General , Kristine K. Nogosek, Mawerdi Hamid , Assistant
Attorneys General, Saint Paul, Minnesota, for respondent.

________________________

S Y L L A B U S
Because there is no debt owed to relator , and relator’s revenue sharing agreement
with a credit card lender does not make relator a guarantor of cardholder debt, relator is not
entitled to an offset of sales tax liability under Minn. Stat. § 297A.81, subd. 1 (2020).
Affirmed.

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O P I N I O N
GILDEA, Chief Justice.
The question presented in this appeal is whether Menard, Inc., is entitled to an offset
on its sales tax liability under Minn. Stat. § 297A.81 (2020). This statute allows a taxpayer
to reduce current tax liabilities by the amount of sales taxes attributable to uncollectible
debts owed to the taxpayer. Menard claimed a sales tax offset based on uncollectible debts
that resulted from customer purchases made on Menard’s private label credit card offered
by Capital One, N.A. The Commissioner of Revenue audited Menard ’s sales tax returns
and determined that Menard was not entitled to claim an offset. Accordingly, the
Commissioner assessed additional sales tax. Menard appealed the assessment, and the tax
court concluded that Menard is not eligible for a sales tax offset because unpaid debts from
customer transactions made on Menard’s private label credit card were owed to Capital
One, not Menard. Menard, Inc. v. Comm’r of Revenue , Nos. 8922 -R & 8960 -R, 2019
WL 7426213, at *4 (Minn. T.C. Dec. 20, 2019). Because we conclude that these unpaid
customer transactions are not debts owed to Menard and that Menard is not a guarantor of
the cardholders’ debts, we affirm.
FACTS

The facts are undisputed. Menard operates home improvement retail store s at
locations in several midwestern states, including Minnesota. In 2013, Menard entered into
an agreement with Capital One , under which Capital One agreed to issue a private label
credit c ard branded with Menard’s name to Menard’s retail customers . Under this
agreement, Menard offered the private label credit cards to its customers, while Capital

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One established the criteria and procedures to process applications for credit. Capital One
retained the sole authority to reject or accept customer credit applications and had the
exclusive right to determine the amount of credit to extend to approved customers. Capital
One also owned the cardholders’ accounts (including each cardholder’s individual
indebtedness), was responsible for collecting all amounts due on cardholder accounts, and
was entitled to receive all payments made by cardholders. Menard and Capital One
acknowledged in their agreement that they were “independent contractors.”
Consistent with the Menard and Capit al One agreement, w hen a customer made
purchases from Menard using the private label credit card, the customer became indebted
to Capital One for the entire amount charged on the account, including Minnesota sales tax
imposed on the purchase price. On a daily basis, Menard provided Capital One with data
on sales made using th at card, including the purchase amount and associated sales tax.
Then, Capital One reimbursed Menard for the purchase price and applicable sales tax for
each transaction, less an agreed -upon discount fee .1 Menard then reported and paid the
sales tax to the Minnesota Department of Revenue.
In addition to the provisions governing daily settlement of individual customer
transactions made using the Capital One credit card s, Capital One agreed to pay
compensation to Menard. Specifically, Capital One agreed to share financing income with
Menard, composed of interest charges on account balances and late fee charges. Menard
agreed to accept a share of the net losses incurred in the program, i.e., a portion representing

1 In this daily settlement process, Menard could report credits issued to customers due
to returns, and Capital One could report chargebacks made on customer accounts.

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charged-off account balances and bankruptcy write -offs, net of certain recoveries that
Capital One made. Capital One calculated the compensation it owed to Menard by
reducing Menard’s share of the financing income by Menard’s share of the net program
losses.
Capital One deducted delinquent account receivable balances on its federal income
tax returns as bad debts under I.R.C. § 166(a)(1). Menard did not. Rather than claiming a
bad debt deduction under section 166, Menard claimed a deduction on its federal tax returns
for its share of the net program losses on the “other deductions” line.
When reporting its sales tax liability to the Minnesota Department of Revenue,
Menard claimed an offset against its current sales tax liability based on its share of the net
program losses that Capital One calculated under the agreement’s compensation formula.2
The Commissioner audited Menard and disallowed the sales tax offsets, concluding that
the net program losses did not represent bad debts owed to Menard, but instead were based
on bad debts owed to Capital One. This determination resulted in the Com missioner
assessing additional sales tax and interest for the period of January 1, 2014 to March 31,
2016.

2 In reporting its sales tax liability to the Department of Revenue, Menard claimed an
offset for the full amount of the bad debt claimed by Capital One under section 166, rather
than the portion of the monthly compensation that represented Menard’s share of the net
program losses under the parties’ agreement . On appeal, Menard acknowledges that it
seeks to offset its Minnesota sales tax liability only by the portion of the net program losses
that Capital One used to calculate Menard’s monthly compensation under the terms of the
revenue sharing agreement.

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Menard appealed the Commissioner’s assessment to the tax court, and Menard and
the Commissioner each moved for summary judgment. The tax court granted the
Commissioner’s motion for summary judgment and denied Menard’s motion for summary
judgment. Menard, Inc. v. Comm’r of Revenue , Nos. 8922 -R & 896 0-R, 2019
WL 7426213, at *1 (Minn. T.C. Dec. 20, 2019) . The tax court concluded that no
uncollectible debt was owed to the taxpayer, Menard, and therefore Menard was not
entitled to offset its sales tax liability under Minn. Stat. § 297A.81, subd. 1. 2019
WL 7426213, at *4–5.3 Menard appeals from this decision.
ANALYSIS

This appeal comes to us from a final order of the tax court. We review a final
decision of the tax court to determine whether the court lacked jurisdiction, whether the
court’s order is not justified by the evidence or does not conform to the law, or whether
any other error of law was committed. Minn. Stat. § 271.10, subd. 1 (20 20). We review
conclusions of law, including statutory interpretation, de novo and review factual findings
for clear error. Antonello v. Comm’r of Revenue, 884 N.W.2d 640, 643–44 (Minn. 2016).

3 Menard asserted before the tax court that it was entitled to claim a sales tax offset
because Menard and Capital One collectively served as the taxpayer entitled to claim that
offset. Menard, 2019 WL 7426213, at *4–5. The tax court rejected this argument based
on the definition of “taxpayer” in Minn. Stat. § 289A.02, subd. 3 (2020). 2019
WL 7426213, at *4–5. Menard does not assert the collective taxpayer argument on appeal.
After concluding that Menard’s collective taxpayer theory failed, t he tax court did
not address the Commissioner’s argument that Menard was not eligible to write off the net
program losses as bad debt under section 166. 2019 WL 7426213, at *6 (“Because we
agree with the Commissioner that Menard is not entitled to a sales tax offset under the plain
meaning of Minn. Stat. § 297A.81, subd. 1, and because she offers the Section 166
argument in the alternative, we decline to address it.”).

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The Commissioner’s tax assessments are presumed to be valid and correct , and the
taxpayer bears the burden of demonstrating otherwise . YAM Special Holdings, Inc. v.
Comm’r of Revenue, 947 N.W.2d 438, 441 (Minn. 2020).
Menard argues that it is entitled to offset its Minnesota sales tax liability by the
amount of the net program losses Capital One used to calculate the program compensation
owed to Menard. Menard contends that by agreeing to reduce its share of the income
generated from the credit card program by a p ortion of the net program losses, Menard
acted as a guarantor of the bad debts of Capital One on cardholders’ accounts. Then,
Menard asserts that a “guarantor” can claim a bad debt deduction under federal law, see
Treas. Reg. § 1.166-9(a). Finally, Menard contends that because it is eligible to claim a
bad debt deduction under I.R.C. § 166 as a guarantor, it is entitled to claim an offset of its
Minnesota sales tax liability for that same debt.
The Commissioner disagrees, asserting that Capital One was the sole owner of the
cardholder accounts and the indebtedness associated with those accounts. Accordingly, no
debts on those ac counts are owed to Menard. The Commissioner also contends that the
formula used to calculate Menard’s compensation under its agreement with Capital One
did not transfer to Menard any of Capital One’s ownership rights in and responsibility for
cardholder d ebts, or impose a guaranty obligation on Menard. T hose terms simply
established payment obligations between the contracting parties that operated to reduce
Menard’s share of the profits from the card program. Thus, the Commissioner asserts,
Menard’s offset claim was properly denied.

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A.
Before turning to Menard’s specific arguments, we review the tax laws that are
relevant to this appeal.
Minnesota imposes a tax “on the gross receipts from retail sales.” Minn. Stat.
§ 297A.62, subd. 1 (2020). Retailers collect the sales tax from the purchaser at the time of
the sale, and remit the taxes to the Minnesota Department of Revenue. Minn. Stat.
§ 297A.66, subd. 2 (2020); Minn. Stat. § 297A.77, subds. 1, 3 (20 20); see Minn. Stat.
§ 289A.11 (2020) (stating the filing requirements for sales tax returns). A refund may be
claimed for an “overpayment” of a tax. Minn. Stat. § 289A.50, subd. 1 (2020). In the case
of sales tax paid to the State for a purchase made on credit that is later not paid and becomes
uncollectible, the retailer may offset the uncollectible debt against a current tax liability.
Specifically, a taxpayer is allowed to:
offset against the [sales and use] taxes payable . . . the amount of taxes
imposed by this chapter previously paid as a result of any transaction the
consideration for which became a debt owed to the taxpayer that became
uncollectible during the reporting period, but only in proportion to the
portion of the d ebt that became uncollectible. Section 289A.40,
subdivision 2, applies to an offset under this section.

Minn. Stat. § 297A.81, subd. 1.
Minnesota Statutes section 289A.40, subdivision 2 (2020), referred to in
section 297A.81, provides in relevant part:
A claim relating to an overpayment of taxes under chapter 297A must be
filed within 3-1/2 years from the date when the bad debt was (1) written off
as uncollectible in the taxpayer ’s books and records, and (2) either eligible
to be deducted for federal income tax purposes or would have been eligible
for a bad debt deduction for federal income tax purposes if the taxpayer were
required to file a federal income tax return, or within one year from the date

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the taxpayer’s federal income tax return is timely filed claiming the bad debt
deduction, whichever period is later. The refund or credit is limited to the
amount of overpayment attributable to the loss. “Bad debt” for purposes of
this subdivision, has the same meaning as that term is u sed in United States
Code, title 26, section 166 . . . .

Thus, under section 289A.40, subdivision 2, the party claiming an offset against a current
sales tax liability based on a claimed debt must write off the debt as uncollectible, and the
debt must be eligible for deduction under I.R.C. § 166 as a bad debt.
Section 166 of the Internal Revenue Code allows a deduction for “any debt which
becomes worthless within the taxable year.” I.R.C. § 166(a)(1). The debt must be “owed
to the taxpayer.” Treas. Reg. § 1.166-1(a). Only a bona fide debt , which is a debt that
“arises from a debtor-creditor relationship based upon a valid and enforceable obligation
to pay a fixed or determinable sum of money ,” qualifies as a bad debt under section 166.
Treas. Reg. § 1.166-1(c). A guarantor that makes a payment in discharge of a debt
obligation can treat that payment “as a business debt becoming worthless in the taxable
year in which the payment was made,” making the payment deductible under section 166.
Treas. Reg. § 1.166-9(a); see also id. § 1.166-9(d) (identifying three criteria required for a
payment discharging all or part of a guaranty agreement to qualify as a “worthless debt”).
With this overview in mind, we turn to Menard’s argument that it is eligible to claim
an offset of its Minnesota sales tax liability under section 297A.81.
B.
We begin with the language of Minnesota’s statute . Under section 297A.81, a
current sales tax liability can be offset against a sales tax liability “previously paid as a
result of any transaction the consideration for which became a debt owed to the taxpayer

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that became uncollectible.” The parties agree that the language of this provision is plain
and unambiguous as applied here. We also agree and so apply the plain mean ing of this
statute to the transactions at issue. See Walgreens Specialty Pharmacy, LLC v. Comm’r of
Revenue, 916 N.W.2d 529, 533 (Minn. 2018) (applying “the statute according to its plain
meaning”).
Menard previously paid the sales tax owed from transactions with customers who
made purchases using a Capital One card, and the consideration for each transaction was
the price Menard charged. See Minn. Stat. § 297A.61, subd. 7 (20 20) (defining “sales
price” as “the total amount of consideration , including . . . credit” for which goods are
sold); U.S. Sprint Commc’ns Co. v. Comm’r of Revenue , 578 N.W.2d 752, 754 (Minn.
1998) (defining “consideration” in the context of sales tax liability). Under the terms of its
agreement with Capital One, Menard was made whole by Capital One within a matter of
days after each transaction, including for the sales tax liability imposed on each transaction.
Accordingly, there was no debt owed to Menard at that point; Capital One owned the
customer accounts including the customer indebtedness, had the sole right to all sums paid
by customers on those accounts, and was solely responsible for collection on those
accounts. See, e.g. , Circuit City Stores, Inc. v. Dir. of Revenue , 438 S.W.3d 397, 403
(Mo. 2014) (noting that the retailer received payments “immediately from the banks” and
thus “sustained no losses in remitting the sales taxes to the state”); Sears, Roebuck & Co.
v. Roberts , No. M2014-02567-COA-R3-CV, 2016 WL 2866141 , at *6 (Tenn. Ct. App.
May 11, 2016) ( noting that the bank paid the retailer the sales price and tax, and stating

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that the retailer was “fully compensated” even though some customers did not pay the
bank).
Based on the terms of its agreement with Capital One, and in light of the plain
language of section 297A.81, we cannot conclude that Menard paid sales tax on a
“transaction the consideration for which became a debt owed to” Menard. Rather, Menard
paid sales tax on transaction s for which it was made who le and for which any resulting
debt was thereafter owned by Capital One.
But, Menard contends, Capital One’s ownership of the account indebtedness and
collection responsibilities are not the relevant focus. Rather, Menard argues that the focus
must be on Menard’s portion of the net program losses. Specifically, Menard argues, by
agreeing to share with Capital One a portion of the net program losses that are attributable
to cardholders’ accounts, Menard essentially guaranteed a portion of car dholders’ debts.
As a guarantor, Menard reasons, it was “eligible” to take a bad debt deduction under section
166 for its share of the net program losses, see Minn. Stat. § 289A.40, subd. 2 (stating that
a bad debt must be “eligible” to be deducted), and in turn, it is entitled to claim a offset on
its Minnesota sales tax liability in that the same amount, under Minn . Stat. § 297A.81,
subd. 1.4

4 Menard asks us to determine its eligibility for a section 166 deduction while
acknowledging that it did not, in fact, take a deduction under section 166. Menard admits
that Capital One deducted the full amount of cardholder account debt under section 166 on
its income tax returns and that Capital One did not reduce the amount of the claimed
deduction by the amount Menard claims it is eligible to deduct under section 166.

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If a taxpayer agrees to act as a guarantor of a debt obligation , or in a manner
essentially equivalent to a guarantor, the guarantor’s payment is deductible under
section 166. Treas. Reg. § 1.166-9(a). We have said that a guaranty is “an undertaking or
promise to pay on the part of one person that is collateral to a primary obligation and that
binds the guarantor to performance in the case of the default of the one primarily bound.”
Baker v. Citizens State Bank of St. Louis Park , 349 N.W.2d 552, 557 (Minn. 1984). The
guarantor agrees to perform the debtor’s obligation, not to create a new obligation between
the guarantor and the creditor. See Schmidt v. McKenzie, 9 N.W.2d 1, 3–4 (Minn. 1943).
We construe a guaranty in the same way as any other contract, look ing to the intent of the
parties as evidenced by the words used in the contract and the parties’ conduct. See Am.
Tobacco Co. v. Chalfen, 108 N.W.2d 702, 704 (Minn. 1961).
Menard argues that it is “essentially equivalent to a guarantor,” Treas. Reg.
§ 1.166-9(a), because it agreed to accept a portion of the net program losses. We disagree.
The parties’ agre ement does not state that Menard guaranteed any portion of the
cardholders’ debt, and the record makes clear that the intent of the parties was not to create
a guaranty agreement.
The agreement allowed Menard to share in the profitability of the credit card
program using a formula that took into account both net profits and net losses . Using a
formula to calculate the share of the economic benefits and risks of the credit card program
does not evidence an intent for Menard to guarantee cardholders’ debts. To the contrary,
the plain terms of the agreement required “Capital One [ to] provide revolving credit
financing” to Menard’s customers, stated that the account agreement was “between the

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Cardholder and Capital One, ” and stated that the cardholders’ indebtedness was “ow[ed]
to Capital One by Cardholders.”5 These terms show that Menard intended for Capital One
to “deal with [Menard’s] customers as debtors.” Home Depot USA, Inc. v. Levin ,
905 N.E.2d 630, 633 (Ohio 2009) (explaining that the “essence of the transaction” between
the retailer and the bank was for the bank to “act as lender to Home Depot’s customers”
and concluding that the retailer “no more bears the economic burden of customer default”
under a private label credit card agreement “than it does on an ordinary credit card deal”);
see also Sears, Roebuck & Co., 2016 WL 2866141, at * 6 (“The risk that [a] private label
credit card program will be less profitable than anticipated does not qualify as a bad debt.”).
The conduct of the parties also demonstrates that they did not intend for Menard to
act essentially as a guarantor for cardholders’ debt . If Menard were a guarantor for
cardholder debt and if Menard’s share of the net program losses paid that debt, then Capital
One had no debt to deduct. See, e.g., Baker Hughes, Inc. v. United States , 943 F.3d 255,
260 (5th Cir. 2019) (explaining that “a guarantor can claim a bad -debt deduction only if
the creditor could have claimed such a deduction were it not for the guarantor’ s payment
of the underlying debt ” (emphasis added)). In other words, Capital One could no longer

5 Under the revenue sharing agreement, Menard’s net loss share is adjusted to reflect
any recoveries after an account was originally written off. Thus, if Capital One received
payment from a cardholder after Menard paid its share of the net losses, Capital One would
reimburse Menard accordingly. Menard argues that this evidences an intent to create a
guaranty because, it contends, the cardholders’ indebtedness is now owed to Menard and
the fact that Capital One is collecting that debt from the cardholders instead of Menard is
inconsequential. We disagree. T hese adjustments are necessary for the pur pose of
accurately reporting and measuring the overall performance of the program and do not
evidence an inten t to create a guaranty agreement or transfer cardholder indebtedness
between Menard and Capital One.

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claim a bad debt deduction becau se Menard’s payment of that debt —in the form of a net
payment calculated under the agreed -upon formula —would have satisfied the debtors’
obligation. But Capital One continued efforts to collect all defaulted payments from
account holders and did not deduc t from the amount it attempted to collect any amount
covered by Menard. Instead, Capital One deducted the total amount of the defaulted
accounts as bad debts under section 166 on its income tax returns, without any indication
that it reduced that amount by Menard’s share of the net program losses.
Finally, in arguing that we should reverse the tax court, Menard relies on Lowe’s
Home Centers, LLC v. Dep artment of Revenue, 455 P.3d 659 (Wash. 2020). The Lowe’s
court considered an argument similar to that presented here: whether Lowe’s was entitled
to a refund of sales tax based on losses attributable to a private label credit card program.
Id. at 661. The terms of Lowe’s agreement with the banks that offered the private label
credit cards made Lowe’s “responsible for Net Write -Offs,” which were defined as “bad
debt guarantees.” Id. Additionally, the contract required the banks to subtract amounts
received from Lowe’s from the amounts the banks could collect from the cardholders. Id.
Lowe’s also claimed bad debt deductions, under section 166, on its federal income returns
for the repayments made to the banks; the banks did not. 455 P.3d at 661. Based on these
facts, the Washington Supreme Court found that Lowe’s guaranteed a portion of the
cardholders’ defaults. Id. at 667.
The agreement between Menard and Capital One is materially different from the
agreement at issue in Lowe’s. See also id. at 665, 667 (distinguishing a case in which the
retailer “was promptly paid in full, including sales tax, and was not the party who wrote

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off the” debt as uncollectible and noting the lender was “completely responsible for all its
bad debt”). Unlike Low e’s, the formula used to calculate Menard’s share of program
income and losses is not a “bad debt guaranty”; that formula simply establishes “Menards
Compensation and Reporting.”6 Also in contrast to Lowe’s, Capital One still continued its
efforts to collect amounts owed by delinquent account holders and did not deduct from the
amount it attempted to collect any amount received from Menard per the revenue sharing
agreement. Capital One, at all times, held the right to seek repayment of the debt.
We concl ude that Menard was not a guarantor and did not essentially act as a
guarantor of the account holders’ debts. Menard was, therefore, not owed an uncollectible
debt that could be used to offset sales taxes owed to the State of Minnesota under Minn.
Stat. § 297A.81, subd. 1.
CONCLUSION

For the foregoing reasons, we affirm the decision of the tax court.

Affirmed.

6 Nor is there any concern that the State retains sales taxes to which it is not entitled.
See Sears, Roebuck & Co., 2016 WL 2866141, at *6 (rejecting the argument that the state
was unjustly enriched because “Sears was fully compensated” by the lender and “was not
required to reimburse” the lender for cardholders’ debts ; although the program was less
profitable than anticipated, allowing the retailer to claim a refund for an “indirect economic
loss” would unjustly enrich the retailer, not the state).