Can a cash-basis Illinois used motor vehicle dealer that prepays a customer's sales tax get a credit or refund when the customer defaults on the financing?

Plain-English summary

This ruling addresses a used motor vehicle dealer in Illinois that self-finances sales to customers with less-than-perfect credit. Because Illinois requires proof of tax payment before a vehicle can be titled or registered, the dealer must prepay the full Retailers' Occupation/Use Tax due on each sale out of its own funds at the time of the transaction, then collect that tax back from the customer over time as part of the financing payments. When a customer defaults on the loan before paying it all back, the dealer is left having paid tax to the state on money it never actually received from the customer.

The dealer asked for a Private Letter Ruling on two alternative theories. Under "Option 1," it argued that because it otherwise reports on a cash (gross receipts) basis, it should simply get a full refund of any prepaid tax tied to receipts it never collected, since a gross-receipts retailer is only supposed to remit tax as it actually collects money. The Department rejected this option. Under "Option 2," the dealer argued that, in this narrow prepayment situation, it should be treated like a gross-sales (accrual-basis) retailer, entitled to the "bad debt" claim for credit that Section 6d of the Retailers' Occupation Tax Act (35 ILCS 120/6d) allows once an account is charged off as worthless and deducted under Section 166 of the Internal Revenue Code on the dealer's federal return.

The Department agreed with a version of Option 2. Normally, a cash-basis retailer cannot claim a bad-debt deduction under IRC Section 166 because it typically never reported the receivable as income in the first place — and the Department's own bad-debt rule at 86 Ill. Adm. Code 130.1960(d)(5)(B) says cash-basis filers who can't claim a Section 166 deduction are not eligible for the credit. But this dealer's facts were different: it uses the "cash equivalent" doctrine and market-discount accounting for its retail installment notes, meaning it does record income (and later a Section 166 deduction) on defaulted accounts even while filing on a cash basis. Because of that, the Department ruled the dealer is entitled to file a claim for credit under 86 Ill. Adm. Code 130.1960 — but strictly limited to the portion of the debt actually allowed and deducted under IRC Section 166 on its federal return, not the full amount of tax it originally prepaid.

The ruling includes a detailed worked example showing that this bad-debt credit does not make the dealer whole. Using a $10,000 sale with a $7,000 tax basis and a 6.25% tax rate, the example shows the dealer initially prepays $625 in tax but, after a partial payment and repossession/resale of the vehicle, can only claim a credit tied to a $5,950 remaining basis — worth $372, not the full $625, because of how the market-discount rules require part of each payment to be treated as taxable discount income for federal purposes.

What this means for you

Motor vehicle dealers who self-finance sales

If you prepay a customer's sales/use tax out of your own funds so the customer can title and register the vehicle, and the customer later defaults, you are not automatically entitled to a full refund of that prepaid tax. Illinois motor vehicle dealers remit tax transaction-by-transaction rather than on periodic returns, so instead of taking a deduction on a monthly return, you must file a separate "claim for credit" with the Department under 86 Ill. Adm. Code 130.1960(d)(3)(B). That credit is capped at whatever portion of the debt you actually charged off as worthless in your books AND actually claimed as a bad-debt deduction under IRC Section 166 on your federal income tax return — even if you technically file on a cash basis for other purposes.

Accountants and tax professionals advising cash-basis dealers

The key technical point is that eligibility for the Illinois claim for credit rides entirely on federal eligibility for the Section 166 deduction. A dealer that uses "cash equivalent" or market-discount accounting for retail installment paper may, unlike an ordinary cash-basis retailer, actually record income on notes receivable and thus qualify for a federal bad-debt deduction when the customer defaults — which in turn opens the door to the Illinois claim for credit. You'll need to calculate the adjusted basis in the defaulted debt under IRC §1011/§1012, net of market discount income recognized under IRC §1276, to determine the allowed federal deduction, since the Illinois credit cannot exceed that amount. Keep the required documentation: books and records supporting the charge-off, and a copy of the federal return showing the Section 166 deduction.

Anyone tracking limitations periods for these claims

The limitations period for the claim for credit or deduction under Section 6d mirrors the general Section 6 limitations period for claims for credit, but it runs from the date the account was claimed as a bad debt deduction on the federal return under IRC Section 166 — not from the date the underlying vehicle sale actually occurred. See 86 Ill. Adm. Code 130.1960(d)(5).

Common questions

Q: Did the Department grant the dealer's request for a full refund of all prepaid tax on defaulted accounts (Option 1)?
A: No. The Department did not adopt the dealer's Option 1 theory that, as a gross-receipts retailer, it should get a full refund or credit for the total tax amount it prepaid on receipts it never collected. Instead, the Department's response addressed and granted relief only under the bad-debt/claim-for-credit framework described in Option 2.

Q: Why can this dealer claim a federal Section 166 bad debt deduction if it reports on a cash basis?
A: Ordinarily a cash-basis taxpayer cannot deduct a bad debt under IRC Section 166 because it never included the receivable in income to begin with (see Treas. Reg. §1.166-1(e)). But this dealer reports the fair market value of the notes it receives as income under the "cash equivalent" doctrine and accounts for the notes' basis using the market discount rules, so it does have tax basis in the receivable that can support a Section 166 deduction when the debt becomes worthless.

Q: Does the claim for credit reimburse the dealer for the full amount of tax it prepaid?
A: No. The ruling's own numerical example shows the credit is smaller than the tax originally prepaid. On a $10,000 sale taxed at 6.25% ($625 prepaid), after a partial payment and resale of a repossessed vehicle, the dealer's remaining federal tax basis in the debt was $5,950, producing a credit of $372 — not the full $625 — because part of each payment received is treated as taxable market-discount income rather than principal recovery.

Q: What records does a dealer need to support this claim for credit?
A: The retailer must maintain adequate books, records, or other documentation supporting the charge-off of the account as worthless, including a copy of the federal income tax return (or amended return) on which the IRC Section 166 deduction was claimed. Under 86 Ill. Adm. Code 130.1960(d)(5), if a retailer doesn't charge off the receivable in its books and claim the federal deduction, the tax paid on it is not considered tax paid in error and no deduction or claim for credit is allowed.

Q: Does this ruling apply to any motor vehicle dealer in Illinois?
A: No. This is a Private Letter Ruling binding on the Department only as to the specific taxpayer who requested it, and only to the extent the facts described (including its specific cash-equivalent/market-discount accounting treatment of retail installment notes) are correct and complete. It expires 10 years from the date of the letter, or sooner if there is a relevant change in the law or the underlying facts, under 2 Ill. Adm. Code 1200.110(e).

Citations and references

• 35 ILCS 120/6d (bad debt deduction/claim for credit provision of the Retailers' Occupation Tax Act, added by Public Act 99-217, effective July 31, 2015)
• 35 ILCS 120/3 (transaction returns and remittance of tax)
• 35 ILCS 120/1 (definition of "gross receipts")
• 35 ILCS 120/6 (limitations period for claims for credit)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposition)
• 86 Ill. Adm. Code 130.401(a) (gross receipts reporting method)
• 86 Ill. Adm. Code 130.1960(d) (bad debt deduction and claim for credit)
• 86 Ill. Adm. Code 130.1960(d)(3)(A) and (B) (deduction on periodic returns vs. claim for credit for motor vehicle/watercraft/trailer/aircraft retailers)
• 86 Ill. Adm. Code 130.1960(d)(5) and (d)(5)(B) (limitations period; cash-basis retailer eligibility)
• 86 Ill. Adm. Code 150.101 (Use Tax imposition)
• 86 Ill. Adm. Code 150.910(b) (changing to gross sales/accrual reporting method)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures, including the 10-year expiration rule)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)
• Section 166 of the Internal Revenue Code (federal bad debt deduction)
• Treas. Reg. §1.166-1(e); Treas. Reg. §1.166-1(d)(2)(i)(a)
• 26 U.S. Code §1011, §1012, §1016, §1276, §1278(b)(4)
• Illinois Dept. of Rev. General Information Letter No. ST 00-0091-GIL, 05/16/2000

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2020/st20-0008-plr.pdf

Original ruling text

ST 20-0008-PLR 12/17/2020 CLAIMS FOR CREDIT
A retailer is relieved from liability for any tax that becomes due and payable if the tax is
represented by amounts that are found to be worthless or uncollectible, have been charged off
as bad debt on the retailer's books and records in accordance with generally accepted
accounting principles, and have been claimed as a deduction pursuant to section 166 of the
Internal Revenue Code on the income tax return filed by the retailer. See 86 Ill. Adm. Code
130.1960(d) and 35 ILCS 120/6d. (This is a PLR.)
December 17, 2020
NAME
ADDRESS
Dear Xxxx:
This letter is in response to your letter dated September 11, 2019, in which you requested
information. The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are
issued by the Department in response to specific taxpayer inquiries concerning the application of a
tax statute or rule to a particular fact situation. A PLR is binding on the Department, but only as to the
taxpayer who is the subject of the request for ruling and only to the extent the facts recited in the PLR
are correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information
Letter (“GIL”) is to direct taxpayers to Department regulations or other sources of information
regarding the topic about which they have inquired. A GIL is not a statement of Department policy
and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website
at www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to
your inquiry.
Review of your request disclosed that all the information described in paragraphs 1 through 8
of Section 1200.110 appears to be contained in your request. This Private Letter Ruling will bind the
Department only with respect to COMPANY, for the issue or issues presented in this ruling, and is
subject to the provisions of subsection (e) of Section 1200.110 governing expiration of Private Letter
Rulings. Issuance of this ruling is conditioned upon the understanding that neither COMPANY, nor a
related taxpayer is currently under audit or involved in litigation concerning the issues that are the
subject of this ruling request. In your letter you have stated and made inquiry as follows:
COMPANY is a used motor vehicle dealer in Illinois. COMPANY self-finances sales of
motor vehicles to individual customers with less than perfect credit. In a typical
transaction, when a customer wishes to buy a vehicle, COMPANY enters into a sale
and financing agreement with the customer. In that agreement, the customer agrees to
pay the total cost of the vehicle including the Retail Occupation or Use Tax (sometimes
called sales or use tax and hereafter collectively referred to as “tax”), any additional fees
and interest for a specific number of payments over a specific period of time.
COMPANY completes the Illinois ST-556, Sales Tax Transaction Return, calculates the
tax due, and remits the amount of tax due to the state with the return.
Because most of COMPANY’s customers cannot afford to pay the all of the tax up front,
COMPANY prepays the tax for the customer out of COMPANY’s own funds. COMPANY
adds the prepaid tax amount to the financed total for the customer. COMPANY pays the

customer’s tax because Illinois vehicle registration law requires that the purchaser of a
motor vehicle in Illinois must have a receipt showing the payment of tax on the purchase
of the motor vehicle in order to title or register the vehicle, and presumably to obtain a
license plate. 1
However, COMPANY’s customers often default on the finance agreement without
making a payment or without making all of the required payments. When this happens,
COMPANY has prepaid tax of hundreds if not thousands of dollars of the customer’s tax
out of COMPANY’s own funds, and it has not received full, or in some cases any,
reimbursement from the customer.
Beginning with COMPANY’s 2019 tax year, for federal income tax purposes,
COMPANY reports using the cash basis of accounting. Utilizing a cash basis (or gross
receipts method) of accounting is the preferred method adopted for Illinois tax
purposes. 2
Relevant Law and Ruling Request
In order to register titled property (e.g. motor vehicles), the Illinois Secretary of State
requires a receipt showing the payment of tax to the Illinois Department of Revenue for
the titled property. Illinois requires the motor vehicle dealer to (1) file a transaction return
reporting the amount of tax due from the retailer and the amount of tax collected from
the purchaser or satisfactory evidence that the sale is exempt from tax and (2) remit
with the transaction return the proper amount of tax due. 3 Once the transaction return
and proper tax remittance is filed, the Department will issue the receipt in the
purchaser’s name so that the purchaser may register the vehicle. 4
In Illinois, the gross receipts, or cash basis accounting method, is the preferred method
for reporting receipts from sales for Retail Occupation Tax and retailer collected Use
Tax purposes. 5 Under this method, tax is reported and remitted to the Department when
it is collected by the retailer. This includes when a retailer receives multiple payments
that make up the total sales price. The retailer reports and remits the tax it receives with
each partial payment. If it did not receive all of the payments due, the retailer would
report only the tax it received from the customer. Thus, a gross receipts method retailer
would not need to claim a credit for overpayment of taxes (i.e. a bad debt deduction)
because it would remit only the tax it actually receives.
A taxpayer may change its reporting method to gross sales, or accrual basis
accounting, after notifying the Illinois Department of Revenue. 6 Under this method, the
retailer reports and remits the tax due at the time of the sale based on the total sale
price even if the tax or total sales price has not been collected from the customer at the
time of sale; rather, it will be collected in installments over time.

ILCS 120/3.
ILCS 120/3 including only “receipts” in returns; ILCS 120/1 definition of gross receipts; 86 III. Admin. Code 130.401(a).
3
ILCS 120/3.
4
ILCS 120/3.
5
ILCS 120/3 including only “receipts”” in returns; ILCS 120/1 definition of gross receipts; 86 III. Admin. Code 130.401(a).
6
86 III. Admin. Code 150.910(b).
1
2

To put a gross sales (accrual basis) retailer on the same footing as a gross receipts
(cash basis) retailer, the gross sales retailer would need the ability to claim a credit for
overpayment of taxes (i.e., a bad debt deduction) because it would remit tax before it
collected the tax from the customer. Illinois grants gross sales method retailers this
ability by relieving them from liability for any tax that becomes due and payable if the tax
is represented by amounts that are charged off as bad debt. 7 The intent of affording the
bad debt deduction to a gross sales retailer is to attempt to put him on equal footing with
a gross receipts retailer with regard to the total amount of tax paid on the same
transaction.
Ruling Request:
Motor vehicle retailers must prepay the tax due regardless of the accounting method
they choose, in order for their customers to obtain the proper title. When a motor vehicle
retailer chooses the cash method, but is forced to prepay the tax on behalf of its
customer, how does that retailer obtain a refund of the prepaid tax when the customer
defaults on the loan?
Option 1:
Even though COMPANY is a gross receipts (i.e., cash basis) retailer in Illinois, it will
remit tax on more than the amount of the receipts the customer paid at the time of the
transaction because it sells motor vehicles.
Instead of paying the tax as it receives it, COMPANY is required to prepay the total tax
due out of COMPANY’s own funds on behalf of a customer at the time of the
transaction. When the customer fails to make some (or any) of the payments on the
customer’s finance agreement, COMPANY will have only received part (or none) of the
tax it prepaid on behalf of the customer. (Under GAAP, a portion of each payment the
customer makes goes to principal, interest, tax, etc.)
COMPANY paid a total amount of tax on behalf of a customer based on receipts it
never actually received. Therefore, as a gross receipt (cash basis) retailer, it is entitled
to a refund of or credit for the total tax amount it erroneously paid to the Department.
Additionally, Illinois treats gross receipts retailers of motor vehicles like COMPANY
differently than it treats ordinary gross receipts retailers – allowing other gross receipts
retailers to remit tax as they collect it and never be put in a situation where they are
required to prepay a customer’s tax out of their own funds. To restore COMPANY to
equal footing with other Illinois gross receipts retailers, a refund or credit of an amount
of tax it paid out of pocket for receipts it did not collect must be granted.
COMPANY respectfully requests a Private Letter Ruling stating that as a gross receipts
retailer, it is entitled to a refund of the amount of tax it prepaid to the Department that is
associated with receipts it never actually receives from the customer. COMPANY also
respectfully requests that the Private Letter Ruling outlines the procedure for requesting
and obtaining the credit or refund, including any documentation requirements to sustain
the credit or refund.

7

ILCS 120/6d; 86 III. Admin. Code 130.1960(3).

Option 2, to the extent Option 1 is denied:
In the alternative, COMPANY can be treated as a gross sales retailer entitled to a credit
for or refund of tax prepaid on a sale of a motor vehicle based on uncollectible amounts
reported as bad debt under Internal Revenue Code (IRC) § 166.
The Department has recognized that, even without going through a formal process,
retailers who report and pay Retailer’s Occupation or Use Tax before all gross receipts
have been received from purchasers, may be filling on a “gross sales” basis. 8 Because
COMPANY prepays tax on behalf of COMPANY’s customers for each motor vehicle
transaction, COMPANY may be treated as a gross sales retailer in Illinois.
If treated as a gross sales retailer, COMPANY may claim a credit or refund of tax it
prepaid on transactions in which it did not receive full payment from the customer –
transactions which resulted in a worthless debt owed to COMPANY.
In fact, “a retailer is relieved from liability for any tax that becomes due and payable if
the tax is represented by amounts that are found to be worthless or uncollectible, have
been charged off as bad debt on the retailer’s books and records in accordance with
generally accepted accounting principles, and have been claimed as a deduction
pursuant to IRC § 166 on the income tax return filed by the retailer.” 9
A worthless debt is allowed as a deduction under Internal Revenue Code §166 only if
the income arising from the creation of the receivable was previously included in
income. 10 For cash-basis taxpayers, like COMPANY, this typically means that a bad
debt deduction is not allowed because usually no income is recorded until payments on
the debt are received. However, when making a sale on credit, COMPANY reports
gross income equal to the cash and fair market value of the notes received. This is
required under the “cash equivalent” doctrine. 11 The Treasury Regulations provide that
for taxpayers who include in income the fair market value of accounts receivable when
received the amount deductible under IRC §166 is limited to such fair market value. 12
For federal tax purposes in the year when debts become uncollectible or worthless,
COMPANY takes a deduction under IRC §166. 13 This deduction is in the amount of
COMPANY’s adjusted basis in the debt (provided in IRC §1011). 14 Internal Revenue
Code §1011 generally requires the use of cost as the basis under IRC §1012 unless an
alternative basis rule under subchapter O, C, K, or P applies. The market discount rules
are contained in subchapter P. COMPANY accounts for the basis in the debt using the
market discount rules.
Internal Revenue Code §1016 provides that proper adjustment in respect of the
property shall be made for expenditures, receipts, losses or other items properly
Illinois Dept. of Rev. General Information Letter No. ST 00-0091-GIL, 05/16/2000.
ILCS 120/6d.
10
Treas. Reg. §1.166-1(e).
11
Cowden v. Commissioner, 289 F2d. 20, 23; Estate of Scharf v. Commissioner, 38 T.C. 15, 32; Barnsley v. Commissioner, 31 T.C.
1260, 1261.
12
Treas. Reg. §1.166-1(d)(2)(i)(a).
13
26 U.S. Code §1.166-1(a)(1),
14
26 U.S. Code §1.166-1(b).
8
9

chargeable to the capital account of the property. Internal Revenue Code §1276
requires that a taxpayer that has a market discount bond must report the collected
market discount as ordinary income. According to the law 15, when a principal payment
is made, a portion of the payment that is made reduces the taxpayer’s basis in the note
receivable, and a portion is recorded as earned discount income.
To help explain the calculation of the federal bad debt deduction under IRC §166, we
have provided the following simplified example to more easily demonstrate the
application of the rules outlined in the IRC code sections described above:
COMPANY sells a vehicle to a customer on credit for $10,000 with $0 down at
0% interest (for simplification purposes). COMPANY calculates that the fair
market value of this receivable is $7,000. COMPANY debits accounts receivable
for $10,000, credits sales revenue (income) for $7,000, and credits fair market
value discount (a contra asset account) for $3,000. COMPANY has $7,000 of
federal tax basis in the debt as this is the amount COMPANY reported as
income.
When the customer makes a $1,000 principal payment, COMPANY debits cash
for $1,000 and credits accounts receivable for $1,000. COMPANY also credits
discount income for $300 (30% of $1,000 payment per the original 30% discount
on the debt) and debits fair market value discount for $300. COMPANY’s basis in
the debt decreased by $700 for federal income tax purposes and is now $6,300.
At this point the customer defaults on the debt and COMPANY repossesses the
vehicle and sells it for $500 at auction. COMPANY debits cash and credits
accounts receivable for $500. COMPANY also debits fair market value discount
and credits discount income for $150 (30% of $500 reflecting the original 30%
discount on the note). COMPANY’s basis in the debt decreases by $350 to
$5,950.
COMPANY now makes the determination that the debt is worthless or
uncollectible. Taxpayer credits accounts receivable or $8,500 (the amount
remaining on the note), debits fair market value discount for $2,550 (the amount
remaining of the discount). This leaves COMPANY with a debit to bad debt
deduction for $5,950, equal to COMPANY’s remaining federal income tax basis
in the debt.
As previously stated, under Illinois law, a retailer may claim a refund for any tax
represented by amounts that are found to be worthless or uncollectible, have been
charged off as bad debt on the retailer’s books and records in accordance with
accepted accounting principles, and have been claimed as a deduction pursuant to IRC
§166 on the income tax return filed by the retailer. 16
As described above COMPANY meets all three requirements. COMPANY has found
amounts to be worthless or uncollectible. COMPANY has charged off such amounts as
bad debt on COMPANY’s books and records, as described above. COMPANY will claim
15
16

26 U.S. Code §§1276 and 1278(b)(4).
ILCS 120/6d(a)

such amounts as a deduction pursuant to IRC §166 on COMPANY’s federal income tax
return. Consequently, COMPANY is eligible for a refund of sales tax associated with
COMPANY’s bad debt deduction calculated pursuant to accepted accounting principles
and IRC §166.
Note that Option 2 does not make COMPANY whole for the full amount of tax
COMPANY paid on behalf of COMPANY’s customer. Using the same example as
above and assuming a 6.25% tax rate, under a gross receipts method, COMPANY
would pay $93.75 in tax to the Department. (COMPANY would have collected 1,500 in
receipts x .0625 = 93.75.) Under a gross sales method and allowing for a bad debt
deduction tied to IRC 166, COMPANY would have netted a total tax liability of 253.
(COMPANY would have initially paid $625 (10,000*.0625) but would have only received
a bad debt deduction of 372 (5,950 x .0625).) The difference is a function of the fair
market discount income calculation required for federal income tax purposes as
discussed above (2550 x .0625 = 159.3 which is the difference in the two calculations).
Only to the extent that Option 1 is denied, COMPANY respectfully requests a Private
Letter Ruling stating that COMPANY is entitled to a refund of tax paid on behalf of
customers associated with uncollectable or worthless amounts that it claims as a bad
debt deduction pursuant to IRC §166 on COMPANY’s federal income tax return.
Thank you for your consideration of this matter. Should you have questions or need
additional information, please contact me directly at NUMBER or E-MAIL.
DEPARTMENT’S RESPONSE:
The Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in the
business of selling tangible personal property at retail to purchasers for use or consumption. See 86
Ill. Adm. Code 130.101. Use Tax is imposed on the privilege of using, in this State, any kind of
tangible personal property that is purchased anywhere at retail from a retailer. See 86 Ill. Adm. Code
150.101. These taxes comprise what is commonly known as “sales tax” in Illinois.
Public Act 99-217, effective July 31, 2015, codified the bad debt deduction provisions in newly
created Section 6d of the Retailers’ Occupation Tax Act. (35 ILCS 120/6d) The Department’s bad
debt deduction rules have been updated to reflect the provisions of Section 6d. These rules provide
that, on and after July 31, 2015, a retailer is relieved from liability for any tax that becomes due and
payable if the tax is represented by amounts that are found to be worthless or uncollectible, have
been charged off as bad debt on the retailer's books and records in accordance with generally
accepted accounting principles, and have been claimed as a deduction pursuant to section 166 of the
Internal Revenue Code on the income tax return filed by the retailer. A retailer that has previously
paid such a tax may take as a deduction the amount charged off by the retailer. If these accounts are
thereafter, in whole or in part, collected by the retailer, the amount collected shall be included in the
first return filed after the collection, and the tax shall be paid with the return. See 86 Ill. Adm. Code
130.1960(d)(3)(A) and 35 ILCS 120/6d(a).
The rules go on to provide that because retailers of motor vehicles, watercraft, trailers and
aircraft do not pay Retailers’ Occupation Tax to the Department on retail sales of motor vehicles,
watercraft, trailers and aircraft with monthly returns, but remit the tax to the Department on a
transaction-by-transaction basis, they are unable to take a deduction on the returns that they file with

the Department, but may file a claim for credit with the Department on any eligible transaction. See 86
Ill. Adm. Code 130.1960(d)(3)(B).
Prior to this point, it was the Department’s understanding that a cash-basis taxpayer is not
eligible under Internal Revenue Code section 166 to take a deduction for a worthless debt. The
Department’s bad debt rules include the statement that “Retailers or lenders that file federal returns
on a cash basis and cannot claim a deduction pursuant to section 166 of the Internal Revenue Code
are not eligible for the bad debt deduction.” (86 Ill. Adm. 130.1960(d)(5)(B)) Based, however, on the
assertions in your letter that, although you file federal returns on a cash basis, you are, nonetheless,
eligible to claim a deduction pursuant to section 166 of the Internal Revenue Code, it is the
Department’s opinion that you are entitled to file a claim for credit under 86 Ill. Adm. Code 130.1960.
It is important to point out, however, that the claim for credit must be limited to only that portion of the
bad debt that was allowed and was taken as a deduction on your federal income tax return under
section 166 of the Internal Revenue Code. Amounts not allowed to be deducted under that provision
are not allowed to be used to claim a credit or refund against the Retailers’ Occupation Tax paid on
the transaction.
It is important also that you meet the other conditions of the rule. Retailers are required to
maintain adequate books, records or other documentation supporting the charge off of the accounts
or receivables for which a deduction was taken or a refund was claimed under Sections 6 or 6d of the
Retailers' Occupation Tax Act, including, but not limited to, a copy of the federal return on which the
deduction was claimed. If a retailer does not charge off an account receivable that is found to be
worthless or uncollectible as a bad debt in its books and records and claim a deduction pursuant to
section 166 of the Internal Revenue Code on its federal income tax return or amended return, the tax
paid on that bad debt or receivable will not be considered a tax paid in error and, thus, the retailer will
not be able to file a deduction or claim for credit in accordance with Sections 6 or 6d of the Retailers'
Occupation Tax Act. For purposes of the deduction or refund allowable under Section 6d of the
Retailers' Occupation Tax Act, the limitations period for claiming the deduction or refund shall be the
same as the limitations period set forth in Section 6 of the Retailers' Occupation Tax Act for filing a
claim for credit, and shall commence on the date that the accounts or receivables have been claimed
as a bad debt deduction pursuant to section 166 of the Internal Revenue Code on the federal income
tax return, regardless of the date on which the sale of the tangible personal property actually
occurred. 86 Ill. Adm. Code 130.1960(d)(5)
The factual representations upon which this ruling is based are subject to review by the
Department during the course of any audit, investigation, or heCOMPANYng and this ruling shall bind
the Department only if the factual representations recited in this ruling are correct and complete. This
Private Letter Ruling is revoked and will cease to bind the Department 10 years after the date of this
letter under the provisions of 2 Ill. Adm. Code 1200.110(e) or earlier if there is a pertinent change in
statutory law, case law, rules or in the factual representations recited in this ruling.
I hope this information is helpful. If you have further questions concerning this Private Letter
Ruling, you may contact me at (217) 782-2844. If you have further questions related to the Illinois
sales tax laws, please visit our website at www.tax.illinois.gov or contact the Department’s Taxpayer
Information Division at (217) 782-3336.
Very truly yours,

Richard S. Wolters
Chairman, Private Letter Ruling Committee
RSW:ter