Tax Type
Retail Sales and Use Tax
Description
Bad debt deduction; Insured checks
Topic
Basis of Tax
Date Issued
11-28-1994
November 28, 1994
Re: Request for Ruling: Retail Sales and Use Tax
Dear *************
This will reply to your letter of July 25, 1994 regarding the application of thetax to bad debts.
FACTS
************ (the Taxpayer) operates as a retailer of automotive products and services. In the normal course of business the Taxpayer accepts checks from customers for the sale of products. The checks include applicable sales tax which is subsequently remitted to the department.
The Taxpayer insures the face value of the checks (including the tax) through a third party guarantor who reimburses the Taxpayer when a check is returned from the bank for insufficient funds or other reasons. The Taxpayer incurs the cost of insuring all checks, whether subsequently returned or not, with premiums that are nonrefundable.
You indicate that when a check has been returned the Taxpayer has no rights to pursue collection from the customer, and thus has incurred an uncollectable account. Therefore, the Taxpayer suggests that it is entitled to a bad debt credit on the tax remitted to the department on those sales paid for with checks subsequently returned.
The Taxpayer contends that two separate and distinct transactions have occurred: i) the acceptance of the customer's check and the remittance of the tax, and ii) the purchase of insurance and the collection of the claim it submits from the third-party guarantor. The Taxpayer further contends that the Commonwealth has no rights to the insurance proceeds which were the direct result of the Taxpayer's expending a premium to insure its assets.
RULING
Va. Code § 58.1-621 (copy enclosed) provides that a dealer may claim a credit for"the amount of sales or use tax previously returned and paid on accounts which are owed to the dealer and which have been found to be worthless...." This section further indicates that amounts "for which a credit has been taken that are thereafter in whole or in part paid to the dealer shall be included in the first return filed after such collection." (emphasis added).
Va. Code § 58.1-621 (copy enclosed) provides that a dealer may claim a credit for"the amount of sales or use tax previously returned and paid on accounts which are owed to the dealer and which have been found to be worthless...." This section further indicates that amounts "for which a credit has been taken that are thereafter in whole or in part paid to the dealer shall be included in the first return filed after such collection." (emphasis added).
When a customer's check is returned, and a claim filed with the guarantor, the account is no longer owed to the Taxpayer. Nor, in the instant case, is the account worthless since the Taxpayer will receive full compensation from the guarantor when a claim is filed.
Also, while the two transactions are separate and distinct, they are certainly related. In this regard the Taxpayer is receiving payment from the guarantor for a sale made to a customer. That the amount is "paid to the dealer" from a third party does not negate the provisions of the statute. It is established under department policy as addressed in the enclosed Public Document 91-43 (3/19/91) that a taxable sale does not depend on the source of reimbursement.
The Taxpayer's situation is comparable to that of other businesses which seek reimbursement for bad debts through in-house or contract collection agencies. The expenditures made for these collection activities are a cost of doing business analogous to the Taxpayer's insurance premiums. Nevertheless, all amounts recovered through these efforts must be reported back without any deduction for collection costs incurred.
I would also point out that Virginia Regulation (VR) 630-10-11 provides that payments made on a bad debt must be allocated to the "sales price, sales tax, and other nontaxable charges based on the percentage that those charges represent to the total debt originally owed." Accordingly, if the Taxpayer chose to insure only the value of the sale, less any tax charges, it would need to allocate that amount to any taxable property which was part of that sale before claiming a credit. In this instance a partial credit, but not a full credit, would be available.
I trust that this will answer your inquiry. However, you may contact *************should you have further questions.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8313I
Rulings of the Tax Commissioner