86-160 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Bad Debt Computation; Alternative method denied

Topic

Returns/Payments/Records

Date Issued

07-31-1986

July 31, 1986

Re: Ruling Request/Sales and Use Tax

Dear *********************

This will reply to your letter of July 15, 1986 requesting a ruling as to an alternative method for computing the sales tax deduction for bad debts by ************* (taxpayer).

According to your letter, taxpayer has not previously taken a bad debt deduction since its records do not distinguish between the taxable and non-taxable portions of its bad debts. Accordingly, taxpayer now-requests that it be permitted to compute its bad debt deduction based on a ratio of its total taxable sales to total sales. Such a proposed computation however, is not permissible under the sales and use tax law.

§58.1-621 of the Virginia Code provides in pertinent part 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)

This statutory language clearly implies that the deduction for bad debts is to be computed on each bad debt and not on the aggregate of all bad debts for a particular period. Furthermore, the bad debt deduction computation proposed by taxpayer in this case might result in a deduction exceeding the amount of the uncollected sales price.

Furthermore, §630-10-11 of the Virginia Retail Sales and Use Tax Regulations, (see copy enclosed), sets forth the computation that should be used to determine the correct bad debt deduction for those transactions where a portion of the debt has been paid. In cases where none of the debt has been paid, taxpayer must determine the deduction amount with reference to the specific amount of each bad debt actually related to taxable sales price.

I hope this has answered your question, but please let me know if we may be of further assistance.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner