How do accrual and cash basis accounting affect when a Kansas retailer owes sales tax, and can bad debts be deducted?

Plain-English summary

A retailer emailed the Department to ask how the choice between accrual and cash basis accounting affects Kansas sales tax. The Department answered — noting at the outset that the reply "is an informational letter only and not a private letter ruling pursuant to K.A.R. 92-19-59."

The Department drew the timing distinction:

• Accrual basis. A retailer on the accrual method "record[s] sales when the earnings process is complete and the amount due from the customer is measurable and legally collectable." At that point the sale is booked and "would be subject to sales tax at that time" — regardless of when the customer actually pays.
• Cash basis. A retailer on the cash method "report[s] sales of tangible personal property or services when the cash is collected from the customer," which "may occur on the same day that the property is transferred or the service is performed or it may occur several weeks later."

The Department then addressed bad debts for an accrual-basis retailer. Such a retailer "may deduct any bad debts or uncollectables actually written off the retailer's books from the gross receipts accrued if: 1) the amount was previously reported as taxable gross receipts; and 2) the debts are charged off the retailer's books for federal income tax purposes." And it added a recapture rule: "if any amount of the bad debts or uncollectables are subsequently recovered, the retailer shall include the recovery and tax in the next sales tax return."

What this means for you

Accrual-basis retailers

You owe sales tax when you book the sale — when the earnings process is complete and the amount is measurable and legally collectable — not when the customer pays. If a booked, tax-reported sale later goes bad, you can deduct the written-off amount, but only if you already reported it as taxable gross receipts and you charge it off for federal income tax purposes.

Cash-basis retailers

You report the sale and the tax when you actually collect the cash. That can be the same day or weeks later, depending on when the customer pays.

If you recover a written-off debt

A bad-debt deduction is not permanent. If you later collect on a debt you wrote off and deducted, you must put that recovery — and the tax on it — back on your next sales tax return.

Note on reliance

This was issued as an informational letter, not a private letter ruling. It explains the Department's general treatment rather than binding the Department to a specific taxpayer's facts.

Common questions

Q: When does an accrual-basis retailer owe Kansas sales tax on a sale?
A: When the sale is recorded — the earnings process is complete and the amount due is measurable and legally collectable — even if the customer has not yet paid.

Q: Can a retailer deduct bad debts from sales tax?
A: An accrual-basis retailer can deduct bad debts it writes off, if the amount was previously reported as taxable gross receipts and is charged off for federal income tax purposes.

Q: What if a written-off debt is later collected?
A: The retailer must include that recovery, and the tax on it, in its next sales tax return.

Citations and references

• The letter is informational and does not cite a substantive statute for its holding; it identifies itself as "an informational letter only and not a private letter ruling pursuant to K.A.R. 92-19-59." It describes the Department's treatment of accrual versus cash basis reporting and the conditions for an accrual-basis retailer's bad-debt deduction and the recapture of recovered amounts.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-1999-12

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

March 23, 1999

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Dear Mr. TTTTTT:

We wish to acknowledge receipt of your E-mail received on March 11, 1999, regarding the application of Kansas Retailers’ Sales tax.

This is an informational letter only and not a private letter ruling pursuant to K.A.R. 92-19-59.

Kansas retailers using accrual basis accounting record sales when the earnings process is complete and the amount due from the customer is measurable and legally collectable. At this time, the sale is recorded on the retailer’s books and would be subject to sales tax at that time.

Kansas retailers using cash basis accounting report sales of tangible personal property or services when the cash is collected from the customer. This may occur on the same day that the property is transferred or the service is performed or it may occur several weeks later.

In closing, if a retailer has adopted the accrual basis for reporting, the retailer may deduct any bad debts or uncollectables actually written off the retailer’s books from the gross receipts accrued if: 1) the amount was previously reported as taxable gross receipts; and 2) the debts are charged off the retailer’s books for federal income tax purposes. However, if any amount of the bad debts or uncollectables are subsequently recovered, the retailer shall include the recovery and tax in the next sales tax return.

If I may be of further assistance, please contact me at your earliest convenience at (785) 296-7776.

Sincerely yours,

Thomas P. Browne, Jr.
Tax Specialist

TPB

Date Composed: 04/29/1999 Date Modified: 10/10/2001

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