Tax Type
Retail Sales and Use Tax
Description
Bad debt deduction
Topic
Subtractions and Exclusions
Date Issued
05-12-1994
May 12, 1994
Re: Request for Ruling: Retail Sales and Use Tax
Dear*********
This will reply to your letter in which you seek a ruling on behalf of an unidentified Taxpayer regarding an alternative mechanism for computing the sales tax deduction for bad debts.
FACTS
The Taxpayer proposes to base its bad debt deduction using the amount of bad checks tendered by customers for merchandise. Under this method, the net amount of these bad checks, excluding checks tendered for cash, would be multiplied by the percentage of taxable sales to total sales to determine the amount of the sales tax deduction for bad debts on the sales and use tax return.
The Taxpayer also proposes to compute a sales tax deduction for bad credit card sales by multiplying the total amount of bad credit card charges by the percentage of taxable sales to total sales.
DETERMINATION
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).
The statute clearly suggests 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. Accordingly, the Taxpayer's computation is inconsistent with the sales and use tax laws, and I cannot approve of the proposed computation.
Furthermore, Virginia Regulation (VR) 630-10-11 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, the Taxpayer must determine the deduction amount with reference to the specific amount of each bad debt actually related to the taxable sales price.
I trust that this information addresses your concerns. If you need further information, please contact the department.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/7274I
Rulings of the Tax Commissioner