Could a grocery business estimate the taxable portion of dishonored-check bad debts using statistical percentages?

Plain-English summary

The Comptroller accepted a grocery company's proposed statistical method for determining the taxable portion of dishonored-check bad debts, but required several corrections and controls.

The company had to multiply total bad debts by the complement of the percentage of checks written for cash—not by the cash percentage itself. Its taxable-sales percentage had to come from a recent period, either the prior calendar year or prior reporting period, and had to be calculated outlet by outlet because tax rates varied.

To remove tax included in a check, the company divided the taxable-merchandise amount by one plus the applicable outlet rate. Rate changes between the sale and write-off required adjustment. Cash received on a check that also bought merchandise had to be included in the cash-only calculation, and later recoveries of previously written-off checks had to be netted against deductions in the same manner.

The Comptroller warned that the procedure might not apply to earlier periods and that periods already under audit had to be handled with audit staff.

Common questions

Could the company use statistical percentages? Yes, subject to the letter's conditions.

How recent did the taxable-sales data need to be? The previous calendar year or previous reporting period.

Could one company-wide percentage cover every store? No. The calculation had to be made outlet by outlet because rates varied.

What happened if a written-off check was later collected? The recovery had to be netted against claimed amounts using the same method.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8908L0951F07

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

August 18, 1989

Dear ****:

Thank you for your letter concerning taking bad debt deduction on
dishonored checks.

Your proposal/example is as follows:

Total ** Bad Debt Deductions $500.00

Less percentage of checks (based on a
statistical sample) that were written
for cash 49.90%

Subtotal 249.50

Multiplied by the percentage of Total
Company taxable sales to total sales
(based off of historical returns) 32.20%

Total ** Bad Debt Deductions on Taxable Sales $ 87.82

Total * Bad Debt Deductions
on taxable items = $ 87.82 = 17.60% = % of Total Bad
Total * Bad Debt Deductions $500.00 Debts for
Taxable Items

With the qualifiers listed below your proposal is acceptable.

First, in subtracting the percentage of checks which were written
for cash you will want to multiply the total deductions ($500) by
the complement of the cash percentage rather than the case per-
centage (in your example 50.10% would be the complement).

Second, the percentage of taxable sales to total sales must be
computed on a recent time period. It is acceptable to use either
the previous calendar year or the previous report period.

It will also be necessary to determine the percentage of total
taxable sales to total sales on an outlet to outlet basis because
of the varying tax rates.

Next, determine the amount of tax included on the check by taking
the amount of taxable merchandise percentage and dividing it by 1
plus the tax rate for that outlet. This amount should be included
as a deduction on your return. If there has been a rate change
between the time of sale and the time of write-off, the appropri-
ate deductions figure will need to be adjusted.

In subtracting out the cash-only checks be sure to include the
dollar amount of any cash which was written on checks which was
also for the purchase of other items.

Be aware that any checks later recovered which were previously
written off must be netted against claimed amounts in the same
manner.

This procedure may not apply to previous periods. Periods cur-
rently under audit will need to be worked out with our audit
division staff.

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

If you have any questions or need more information please call
our toll-free number 1-800-531-5441. The regular number is
512/463-4684. You may write me at the Tax Correspondence Divi-
sion.

Sincerely,
Curt Swenson
Tax Correspondence Division