Tax Type
Retail Sales and Use Tax
Description
Bad debt credit; Assignees
Topic
Basis of Tax
Date Issued
03-30-1999
March 30, 1999
Re: Request for Ruling: Retail Sales and Use Tax
Dear******************
This will reply to your letter in which you request a ruling on the application of the bad debt credit on the assignment of installment sales contracts. I apologize for the delay in responding to your letter.
FACTS
The assignment of installment sales contracts by a creditor is a common business practice. The Taxpayer is requesting a ruling as to the availability of the bad debt credit to the assignee in the event of default resulting in an unrecoverable loss of the original debt.
RULING
Code of Virginia § 58.1-621, copy enclosed, addresses bad debt as it applies to the retail sales and use tax and states, in part, "the dealer may credit, against the tax shown to be due on the return, 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 within the period covered by the return.' Virginia Administrative Code (VAC) 10-210-160 sets forth the department's interpretation of this code section and provides that "any dealer may obtain a credit for the amount of any sales or use tax previously reported and paid on a return for accounts found to be worthless. Such credit must be claimed on the return filed for the period in which the account is determined to be worthless.' Under VAC 10-210-460, the definition of "dealer' includes "every person who . . . leases or rents tangible personal property for a consideration, permitting the use or possession of such property without transfer of title.'
As provided above, in order to claim a retail sales and use tax credit on a bad debt resulting from a Virginia transaction, the person claiming the debt must be a registered Virginia dealer and the credit must be taken on the return following the period in which the debt was declared uncollectible. If the assignee is a registered Virginia dealer, the assignee would be able to claim a credit for any bad debt incurred by them in acquiring such debt from the original Virginia dealer.
I would like to point out, however, that the assignee is only entitled to a credit proportionately equal to the actual amount paid for the account receivable. For example, if the assignee purchased the account receivable for 100% of the value of the account receivable, the assignee would be entitled to a credit of all of the sales tax associated with the uncollectible portion of the debt. Likewise, if the assignee purchased the account receivable at a rate of fifty cents on the dollar, the assignee would only be entitled to a credit of 50% of the sales tax deemed uncollectible. The assignee must also maintain records to substantiate any credit of sales tax taken on their monthly return.
If you should have any questions, please contact * * * * *, Office of Tax Policy, at * * * * *.
Sincerely,
Danny Payne
Tax Commissioner
Rulings of the Tax Commissioner