How could a grocery store estimate a sales-tax bad-debt deduction for returned checks covering mixed purchases?

Plain-English summary

The grocery store's returned checks often covered both taxable and nontaxable goods and sometimes included cash above the purchase price. It lacked item-level records for each check but had accurate period-wide sales ratios and cash-advance records.

The Comptroller approved a method that started with gross checks written off, subtracted cash amounts, and applied the month-or-quarter ratio of taxable sales plus tax to total sales including tax. The store could then estimate the tax included in that portion and claim it as a return deduction.

Rate changes between the sale and write-off required adjustment. Amounts later recovered on previously deducted checks had to be netted against claimed amounts, and the store had to keep the records supporting its computation under Rule 3.302.

Common questions

Did the store need exact taxable items for every returned check? No, under the approved facts and ratio method.

Were cash advances included in the bad-debt tax calculation? No. They were subtracted first.

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

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8907L0952G10

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TX 78774

BOB BULLOCK
Comptroller July 5, 1989

Dear *:

Thank you for your recent letter regarding a proposal for write-offs of
bad
debts in the form of hot checks for one of your clients.

Per your letter, your client has a grocery store operation which receives
a
number of bad checks. The checks are written to cover the amount of the
sale, which usually includes both taxable and nontaxable items, and in
some
cases an amount in excess of the purchase price of the items involved.
There are no exact records as to the amount of taxable and nontaxable
items
on each particular check. However, there are very Accurate records as to
the amount of taxable and nontaxable items as they occur throughout the
store on an average basis is available, but not on each particular check.
Accurate records as to how much the check was written over the purchase
price of the items purchased are also available.

The following method for accounting for write-offs of bad debts in the
form
of hot checks is acceptable:

1) determine the gross amount of the checks written off per
month/quarter.

2) Subtract any amounts per check for cash.

3) Subtotal and determine the net amount of the checks written-off.

4) Calculate the ratio of taxable sales and tax to total sales (including
tax) for the month/quarter. Multiply this percentage by the net amount
of the check to determine the amount of taxable merchandise purchased on
the check plus tax.

5) Estimate the amount of tax included on the check by taking the figure
obtained in Step ($) and dividing it by 1 plus the tax rate. This amount
should be included as a deduction on your client's return. However, if
there has been any rate change between the time of sale and the time of
write-off, the appropriate tax type's deductions figure will need to be
adjusted. If your client has this situation, he can call our office and
we'll be glad to help him calculate it.

Please be advised that if your client recovers any checks which were
previously written off, they must be netted against claimed amounts in
the
manner described above, again allowing for any rate changes.

I have enclosed Rule 3.302 for your client's reference. Your client must
retain all records which show how the bad debt figures are computed.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call our
toll-free
number 1-800-252-5555. The regular number is 512/463-4600. You may
write me
at Tax Correspondence, Comptroller of Public Accounts.

Sincerely,
Sandi Skaggs
Tax Correspondence