Tax Type
Retail Sales and Use Tax
Description
Bad debt deduction; Third-party guarantor
Topic
Basis of Tax
Date Issued
12-19-1994
December 19, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear****************
This will reply to your letter of September 8, 1994 in which you seek correction of sales and use tax assessed to the ******* (the "Taxpayer") for the period July, 1991 through December, 1994.
FACTS
The Taxpayer is a retailer which specializes in financing customer merchandise sales. Each financed sale includes a $10.00 premium for the purchase of non-filing insurance through a third-party guarantor. The Taxpayer collects the applicable sales tax on the transaction, excluding the non-filing fee, which is subsequently remitted to the department.
In the event an account goes into default and the Taxpayer is unable to secure the merchandise back from the customer, the account is charged-off. The Taxpayer will apply credit towards sales tax remitted to the department for the charged-off balance. In addition, the Taxpayer files a claim with the third-party guarantor and receives compensation for the balance of the uncollectible account. As a result of the department's audit, the Taxpayer was assessed tax on the proceeds received from the third-party guarantor.
The Taxpayer contends that insurance proceeds collected from charged off accounts are exempt based on information received in a September 6, 1994, letter from the department.
DETERMINATION
Code of Virginia §58.1-621 (copy enclosed) provides, in part, 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 provides 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)
As set forth in P.D. 94-358 (11/28/94), copy enclosed, a customer's account is no longer worthless after the Taxpayer receives compensation from the guarantor when a claim is filed. Accordingly, all amounts received by the taxpayer on a bad debt must be reported back as proceeds from sales to customers.
I regret that misinformation was provided to you, however, it is my understanding that the information was provided subsequent to the conclusion of the audit. Furthermore, it is my understanding the department's ******* District Office clarified the correct tax status of funds received from insurance claims regarding bad debts by letter dated September 12, 1994. ( six days after the earlier correspondence from the department).
Based on the above, there is no basis to revise the assessment. A copy of the assessment, with interest accrued to date, will be mailed to the Taxpayer shortly. If you have any questions regarding this determination, you may contact*****************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8664T
Rulings of the Tax Commissioner