Could a market claim a sales-tax bad-debt deduction when a customer's check for groceries proved worthless?

Plain-English summary

The letter considered four situations: a $10 grocery purchase paid with a $10 bad check; a $10 purchase paid with a $100 bad check plus $90 cash back; and two separate check-cashing-window transactions followed by cash grocery purchases.

No deduction was available for the $90 cash-back portion or for either check-cashing-window loss. Those amounts did not arise from a sale-connected debt; counsel characterized them as losses from the check presenter's misrepresentation and conversion of the retailer's money.

Even the amount corresponding to groceries was not automatically deductible. Counsel said the retailer would have to prove the portion on which tax had been paid and supply the information required by Sales and Use Tax Ruling 61(b)(3). If the retailer could support the claim with those records, that sale-connected amount could qualify.

Common questions

Could the full $100 bad check be deducted when only $10 bought groceries?

No. The $90 cash-back portion was not tied to a sale and did not create a sale-connected debt.

Was every bad check used directly at checkout deductible?

No. The retailer still had to identify the taxable merchandise and provide the records required by Ruling 61(b).

Citations and references

• Sales and Use Tax Ruling 61(b), including part (b)(3) (as cited; enclosure not reproduced)

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/130-0280.pdf

Original ruling text

130.0280
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

December 29, 1959
REDACTED TEXT
Attention: REDACTED TEXT
Gentlemen:
This is in reply to your inquiry of December 21 regarding the legality of one of your clients taking a bad debt deduction under the following sets of circumstances:

1. A customer buys $10 worth of groceries and pays with a $10 check which later
   proves to be uncollectible.
2. A customer buys $10 worth of groceries and pays with a check for $100, receiving
   cash back of $90. The check later proves to be uncollectible.
3. A market maintains a check cashing window. A customer cashes a check for $10
   at this window and then buys $10 worth of groceries, payment being made in cash. The check later proves to be uncollectible.
4. A market maintains a check cashing window. A customer cashes a check for $100
   at this window and then buys $10 worth of groceries, payment being made in cash. The check later proves to be uncollectible. It is our opinion that the deduction would not be proper in examples three and four above nor as regards the $90 given the customer in example two. We do not believe that any sale has occurred nor has a sale-connected debt been established in these situations. The person presenting the check has merely misrepresented that he has funds sufficient to cover the check presented and has by his action converted the retailer’s monies. We do not believe that the purchasing of $10 worth of groceries with a $10 check which later proves to be uncollectible nor the purchasing of $10 worth of groceries with a $100 check which later proves to be uncollectible enables a retailer to take a bad debt deduction. It appears to us that it would be virtually impossible for the retailer to meet the requirements of the law as expressed in Sales and Use Tax Ruling 61(b), copy enclosed.

REDACTED TEXT

-2-

December 29, 1959
130.0280

You will notice that the ruling specifically provides that the deduction can only be taken against amounts upon which tax has been paid. It does not seem probable that any retailer would keep track of the taxable and nontaxable items so that he would later be able to determine exactly what type of merchandise was given in return for the worthless check. If, however, the retailer could support his bad debt deduction claims by presenting the information required in part (b)(3) of the above-mentioned ruling, we believe that said deduction would be allowable. Very truly yours, J. J. Delaney Associate Tax Counsel JJD:otb Enc. cc:

Los Angeles -Administrator