Ezel / Tax Rulings / CA

What happens for California sales tax when an installment buyer defaults and another customer takes over the remaining payments?

Short answer The seller could not deduct the unpaid amount because it had not fully credited or refunded the original sales price. The second customer's takeover of the contract was a new sale, but the letter could not decide whether the seller or the original buyer made that sale without more facts about who found the buyer and negotiated the terms.
State
CA
Ruling
Annotation 200.0120
Tax type
Sales and Use Tax
Issued
1953-06-26
Issued by
California State Board of Equalization
Requested by
Seller of an incubator (identity redacted)
Topics
sales tax installment sale default contract assumption bad debt deduction
Source
View Original PDF

Apply this to your situation

This page answers the general question as of 1953. Ask about yours and see what current California tax law says, with citations.

Currency note: this ruling is from 1953
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This June 26, 1953 California State Board of Equalization counsel letter responds to a March 24 letter whose year and separate copy are not supplied in the official PDF. The copies of former Rulings 61 and 64 listed as enclosed are also unpublished. It expressly leaves the seller-liability question unresolved pending complete facts about who found the second customer and negotiated the terms, and the former rulings may no longer reflect current law. CDTFA says statutory law controls if inconsistent with an annotation. Another taxpayer should not treat it as binding. This summary is informational only and is not legal or tax advice.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page as a PDF) is the authoritative source for any reliance.
View original ruling (PDF)

Plain-English summary

A seller sold an incubator on an installment plan. When the original customer could no longer make payments, a second California customer agreed to take over the remaining balance.

The Board's counsel reached two conclusions:

  • The seller could not claim a deduction merely because the first buyer stopped paying. The full sales price had not been credited or refunded to that buyer.
  • The second customer's takeover was a new sale.

But the letter did not decide who made the second sale. If the seller found the new customer and negotiated the terms, the seller made a taxable sale. If the original buyer arranged it, the seller would have no liability for that later transaction, although the original buyer's own tax treatment could still require analysis. Counsel asked for complete facts before giving a definite answer.

What this means for you

Sellers using installment contracts

A customer's payment default does not by itself produce a sales-tax deduction. This letter tied the deduction question to whether the full price was credited or refunded.

Credit managers arranging substitutions

Document who locates the replacement customer and who negotiates the takeover. Those facts can determine which party made the new sale.

Accountants and tax professionals

Preserve the unresolved part of the opinion. It establishes that the takeover is a sale, but it does not establish the seller's liability without facts showing who acted as seller.

Common questions

Q: Could the seller deduct the unpaid balance after the first buyer defaulted?
A: Not on the facts given. Counsel said no deduction was allowable because the full sales price had not been credited or refunded.

Q: Was the second customer's takeover a sale?
A: Yes. The letter expressly treated the contract takeover as a sale to the second customer.

Q: Did the original seller owe tax on that second sale?
A: The letter did not decide. Liability depended on who found the second buyer and negotiated the terms.

Q: Why can't this letter supply a definite modern answer?
A: It is a 1953 opinion, relies on former Rulings 61 and 64, and expressly requested more facts before issuing a definite ruling.

Citations and references

  • Former Sales and Use Tax Ruling 61 (cited; copy was enclosed with the original letter)
  • Former Sales and Use Tax Ruling 64 (cited; copy was enclosed with the original letter)
  • Requester's March 24 letter — year and separate letter not supplied in the official PDF

The published supporting PDF does not include the enclosed copies.

Source

Original ruling text

200.0120

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

June 26, 1953

REDACTED TEXT

Attention:

Your letter of March 24
Account No. REDACTED TEXT

REDACTED TEXT
Manager, Credit & Traffic

Gentlemen:
You state that you sold an incubator to a California customer on the installment payment plan. He was unable to keep up his payments and is letting the incubator go to another customer in California who will make the balance of the payments. Since the full sales price has not been credited or refunded to the original purchaser, no deduction is allowable based on his inability to make full payment. See Sales and Use Tax Rulings 61 and 64 (copies enclosed). The taking over of the contract by the second customer is regarded as a sale to that customer. The problem presented, however, is whether that sale was made by you or by the original purchaser. If the sale was made by you, it is subject to the tax. If the sale was made by the original purchaser, it may or may not be subject to the tax, but you would be under no liability as a result thereof. Ordinarily, a sale is made by the person who locates the purchaser and negotiates with him to arrive at the terms of the sale. If you wish to furnish us with complete details, we shall furnish you with a definite ruling. Yours very truly,

Bill Holden
Junior Counsel
BH:ja

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