Could a cash-basis retailer claim a sales-tax bad-debt deduction, and when?

Plain-English summary

Sales-tax liability had to be reported on an accrual basis even when the retailer kept its financial and income-tax records on a cash basis. Cash-basis accounting alone did not disqualify the retailer from a bad-debt deduction.

The deduction could be taken after all collection activity stopped and the retailer treated the obligation as no longer collectible. The debt evidence had to be marked uncollectible or bad debt, or the transaction records otherwise segregated for audit. For a receivable transferred with recourse, the retailer could claim after reassignment and cessation of collection; later recoveries had to be reported on the next return.

Citations and references

• California Sales and Use Tax Regulation 1642(c) and related bad-debt provisions (as cited and described)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/130-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/130-0005.pdf

Original ruling text

130.0005

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

450 N STREET - SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE: (916) 445-3723
FAX: (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
KATHLEEN CONNELL
Controller, Sacramento
_______

November 10, 1997

JOHN CHIANG
Acting Member
Fourth District, Los Angeles
_______
E. L. SORENSEN, JR.
Executive Director

Mr. R--- G. R--Vice President & General Manager
D--- R. R--- Co.
P. O. Box XXXXXX
---, CA XXXXX
Dear Mr. R---:
This is in response to your request of October 28, 1997, made at the Culver City meeting of the State Board of Equalization, that we advise you as to how you should take a bad debt deduction for sales and use tax purposes, when you maintain your general financial records on a cash basis. First, as you know, for sales and use tax purposes, all retailers must report sales tax liability on an accrual basis. See Sales and Use Tax Regulation 1642, “Bad Debts,” paragraph (c), copy enclosed for your reference. Second, the regulation provides that a bad debt deduction will not be disallowed retailers solely for the reason that they are on a cash reporting basis for income tax purposes. A bad debt deduction with respect to tax previously paid may be taken when all collection activities have ceased and the obligation is treated by the retailer as no longer subject to collection. Evidence of the indebtedness should be marked as “uncollectible” or “bad debt” or the records of the sale transaction should otherwise be segregated and identified for audit verification. In the case where a receivable is sold without recourse, neither the retailer nor the assignee is entitled to a bad debt deduction where collection does occur. In the case where a receivable is sold with recourse, the retailer may take a bad debt deduction when the obligation is reassigned to the retailer and all collection activities cease.

Mr. R--- G. R---

-2-

November 10, 1997
130.0005

If any accounts found worthless and charged off are thereafter in whole or in part collected by the retailer, the amount so collected must be included in the first return filed after such collection and the amount of the tax thereon paid with the return. Sincerely,

Gary J. Jugum
Assistant Chief Counsel
GJJ:sr

cc:

Ms. Jennifer Willis
Taxpayers’ Rights Advocate Office