Could a retailer use store-level sales ratios to estimate the sales tax embedded in uncollectible hot checks covering cash, gasoline, taxable goods, and exempt goods?

Plain-English summary

A retailer's uncollectible hot checks could cover merchandise, gasoline, and a limited amount of cash, but the checks did not separately state those components or the sales tax.

The Comptroller accepted the retailer's proposed store-level estimation method. It subtracted a fixed cash amount per check, allocated the remaining amount between gasoline and merchandise using the store's monthly or quarterly sales ratio, applied the ratio of taxable sales plus tax to total merchandise sales, and backed the included tax out using the applicable tax rate.

Recovered checks previously written off would be netted against the claimed amounts. The approval was limited to the facts presented.

The operative text concerns hot-check bad debts; it does not decide theft or spoilage despite those topics appearing in STAR's caption.

Common questions

Did Texas accept the proposed estimation method? Yes.

Why was estimation needed? The checks did not break out cash, gasoline, merchandise categories, or tax.

What happened if a written-off check was later recovered? The recovery was netted against claimed amounts.

Did the body decide theft or spoilage write-offs? No.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8606L0739E13

Original ruling text

June 11, 1986

Dear ***:

We have reviewed your proposal for accounting for write-offs of
bad debts in the form of hot checks. Your methodology is acceptable.

This response is based on the facts as presented. Other facts though
similar may yield different results.

If you have any questions or if we may be of further service, please do
not hesitate to call us toll-free 1-800-252-5555.

Sincerely,

Director Tax Administration

May 16, 1986

Dear ***:

Thank you for taking the time to visit with us on Tuesday. It
is really nice to know the answers ahead of time and, more
important, be able to work closely with the State personnel who
are in a position to answer the questions.

During the course of the meeting, we discussed the handling of
the write-offs of bad debts in the form of hot checks cashed in
our stores.

As explained, these checks are taken in our stores for the
purchase of merchandise (both taxable and exempt), gasoline,
and cash. The maximum cash allowed is $***. There is no
breakdown of these items, or tax, on the check. Therefore, I
would propose on a by store basis, based upon the write-offs,
credit for taxes should be allowed based upon the following
formula:

Gross amount of checks written off

Subtract $*** per check for cash

Calculate ratio of merchandise sales to gasoline
sales for the month or quarter and apply this ratio
to the amount of the check adjusted for the cash to
determine the total merchandise sales and tax.

Calculate the ratio of taxable sales and tax to total
merchandise sales (including tax) for the month or
quarter and apply this ratio to the total merchandise
sales (including tax) determined above to identify
the amount of taxable merchandise purchased on the
check plus tax.

Calculate the amount of tax included by taking the
above figure, dividing by 1 plus tax rate, and
multiplying by the tax rate.

An example would be as follows:

Store A sells 50% merchandise and 50% gasoline, 60% of the
merchandise sales are taxable during the quarter, $***
in bad checks were taken during the quarter as represented
by 10 checks, store is in 5% taxing jurisdiction.

Gross amount of checks written off $***

Less $*** per check (10 @ $**) $****

Subtotal $***

Gasoline sales (50% x $***) $*****

Subtotal (merchandise and tax) $***

60% taxable merchandise (60% x $***) $*****

Amount of tax ($*** 1.05 x .05) $*****

Please advise if this would be an acceptable methodology to use
in determining the amount of tax to be recovered. Of course,
if we were to recover any checks which had previously been
written off, they would be netted against claimed amounts.

Thank you for your consideration in this matter.

Sincerely,