Document Number
03-17
Tax Type
Retail Sales and Use Tax
Description
Bad Debt
Topic
Appropriateness of Audit Methodology
Date Issued
03-11-2003
March 11, 2003



Re: § 58.1-1821 Application: Retail Sales and Use Tax


Dear ****************:

This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit. I apologize for the delay in the Department's response.
FACTS

The Taxpayer is a national retailer of casual clothing with retail shops in Virginia. An audit for the period March 1999 through December 2001 resulted in the assessment of tax on bad debt deductions, unreported sales, and certain purchases of tangible personal property.

The Taxpayer contests the tax assessed on bad debt deductions taken in connection with worthless accounts using Taxpayer-issued credit cards. The Taxpayer maintains that its bad debt deductions for its Virginia stores are computed in accordance with Va. Code § 58.1-621. The Taxpayer states that "all bad debts are written-off in the state where the customer resides." For example, the Taxpayer computes the Virginia bad debts for its credit cards as follows:

· Its credit department produces a monthly spreadsheet showing the bad debts (the number of bad accounts and the dollar amount) to be written off for each state.
· Next, it determines the amount of bad debts for each state by the billing address of the credit card holder, not by the store for which the original sales were made.
· Once the total bad debts for Virginia are determined, it removes the finance charges (using an 8% factor) and the 4.5% sales tax. That result is divided by the number of stores in Virginia. Each store is allocated an equal amount of the bad debt write-off.

The Taxpayer maintains that the Department has no legal basis for disallowing these bad debt deductions. The Taxpayer further contends that "the bad debts generated by in-state residents making purchases at stores located outside the state are offset by the bad debts generated by out-of-state residents making purchases at in-state stores, plus or minus a very small percentage." To this end, the Taxpayer proposes a 5% settlement for this issue.
DETERMINATION

Virginia retail sales and use tax law does not allow dealers to estimate bad debt deductions. Va. Code § 58.1-621 provides that the deduction for bad debts:
    • shall not exceed the amount of the uncollected sales price determined by treating prior payments on each debt as consisting of the same proportion of sales price, sales tax and other nontaxable charges as in the total debt originally owed to the dealer. [Emphasis added.]

Based on the language of this statute and as interpreted by published regulations and other public documents, the deduction for bad debts is computed on each bad debt and not on the aggregate of all bad debts for a particular period. See Title 23 of the Virginia Administrative Code 10-210-160 and Public Documents 85-29 (2/22/85), 86--160 (7/31/86), and 01-34 (4/09/01). Accordingly, the Taxpayer's computation is inconsistent with the retail sales and use tax laws and regulations, and I cannot approve of the Taxpayer's computation.

I understand that the Department's auditor indicated that the Taxpayer's bad debt procedures did not satisfy the criteria for Virginia retail sales and use tax purposes. I further understand that the auditor suggested sampling procedures to verify the amount of bad debt write-offs for the Taxpayer's Virginia locations. Without a proper comparison made between the Taxpayer's procedure and Virginia's statutory requirement for computing bad debts, the Department cannot determine the degree to which the Taxpayer has complied with the tax laws of this state in computing its bad debt deductions.

In regard to your claim that the Department has no statutory authority to deny all of the bad debt deductions related to the Taxpayer's credit cards, Va. Code § 58.1-618 allows an estimated tax assessment to be issued when an inaccurate return has been filed. The statute deems the assessment to be prima facie correct. Furthermore, Va. Code § 58.1-205 deems any tax assessment issued by the Department to be prima facie correct. Accordingly, the burden is upon the Taxpayer to prove an erroneous assessment. The Taxpayer has failed to meet its burden of proof.

Based on the facts currently before me, the assessment is correct. Consequently, I find no basis to accept the Taxpayer's proposal to settle this matter.

In regard to the contested issue, an auditor will contact you shortly to arrange a time for the Department to complete the examination of the Taxpayer's bad debt records. If you consent to this final review, then payment of the outstanding balance can be postponed until the auditor's work is completed and the audit revised accordingly, as warranted. In the event the suitable records are not provided to the auditor, the current assessment will be deemed correct as issued.

The Code of Virginia sections, regulations and public documents cited are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
                • Sincerely,

                • Kenneth W. Thorson
                  Tax Commissioner


AR/40347R


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46