Could a retailer claim a sales-tax bad-debt credit when it sold receivables without recourse and the buyer bore the uncollectible loss?

Plain-English summary

The retailer sold and assigned its accounts receivable for a percentage of book value without recourse. The buyer withheld part of the price as a reserve for uncollectible accounts, but the agreement placed losses exceeding that reserve on the buyer.

The audit found that no reserve remained to cover $53,043.49 of receivables the buyer wrote off. Tax counsel therefore concluded that the retailer should not receive a bad-debt credit: the buyer had suffered the actual loss, and the statute provided no deduction or credit for one taxpayer based on another party's worthless-account loss.

Common questions

Why did the no-recourse term matter?

It placed losses beyond the reserve on the receivables buyer rather than back on the retailer.

Did the memorandum allow the receivables buyer to claim the retailer's sales-tax credit?

No. It said the law did not authorize a deduction or credit for the retailer when another party suffered the loss.

Citations and references

• The parties' receivables-sale agreement (described but not reproduced in the source)
• Fourth quarter of 1960 sales-and-use-tax liability (the audit period identified in the source)

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/130-0040.pdf

Original ruling text

State of California

Board of Equalization

130.0040

Memorandum
To:

West Los Angeles – Auditing (WFW)

From:

Tax Counsel (WEB)

Subject:

[X]

Date:

January 8, 1965

This is in reply to your letter of December 4, 1964, which inquires about the allowance of a bad debt credit to reduce the above-named taxpayer's liability for unpaid sales and use tax for the fourth quarter of 1960. The accounts receivable which are the subject of this requested credit were sold and assigned by the taxpayer to “X”. You have attached a copy of the sales agreement. Our review of the agreement discloses that the parties contemplated the absolute sale of the accounts receivable for a stated percentage of the book value of the receivables without recourse. Provision was made in the agreement for the withholding of a stated percentage of the sales price as a reserve for uncollectibles. “X” was to collect unpaid accounts from this reserve periodically and pay over the excess of the reserve to the taxpayer. In the event the amount of uncollectible accounts exceeded the reserve, the loss was to be borne by “X” and not by the taxpayer. Your initial audit investigation discloses that no reserve was available for the recovery of
$53,043.49 of these accounts receivable written off by “X”. It is our opinion that the taxpayer should not be allowed a credit for worthless accounts written off. All information provided indicates that the actual loss on the uncollectible accounts was suffered by “X”. The statute contains no authorization for the allowance of a deduction or credit for losses on worthless accounts suffered by another.

WEB:spg [lb]