Could a retailer claim a Texas sales-tax bad-debt credit for an estimated loss when it sold installment receivables without recourse?

Plain-English summary

A retailer sold installment receivables to an affiliated servicer without recourse. The purchase price was reduced by an estimated amount for future bad debts, and the retailer remitted the sales tax included in the receivables when it sold them.

The Comptroller denied a sales-tax credit for the estimated bad-debt amount. At the time of the transfer, the retailer only assumed that some accounts would become bad debts and did not know which customers would default. The letter noted that the retailer's records had to show, among other things, the purchaser's name and address to support a bad-debt deduction.

The letter described a possible route for actual defaults: if receivables were factored with recourse and returned to the retailer after default, the retailer could write off the bad debt if it met Rule 3.302(d)'s requirements. A customer's refusal to pay the sales-tax portion alone was not itself a bad debt.

What this means for you

An actuarial or historical estimate of uncollectible installment accounts was not enough for a Texas sales-tax bad-debt credit under this letter. The Comptroller distinguished an estimated portfolio discount from an identifiable defaulted receivable returned to the retailer under a recourse arrangement.

Common questions

Could the retailer claim a credit when it sold the receivables? No.

Why was the estimated bad-debt amount insufficient? The retailer did not yet know which customers would default and could not tie the estimate to specific bad accounts.

Could a factored receivable ever support a bad-debt write-off? The letter said it could if the account was factored with recourse, returned to the retailer after default, and met Rule 3.302(d)'s requirements.

Was a customer's refusal to pay the sales-tax amount by itself a bad debt? No.

Did it matter that the estimate historically tracked actual bad debts accurately? No. The Comptroller still denied the credit at the time the receivables were sold.

Citations and references

• 34 Tex. Admin. Code § 3.302(d) (bad-debt requirements)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9102L1074C09

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNT
STATE OF TEXAS
AUSTIN, 78774

JOHN SHARP
Comptroller February 1, 1991

Dear ****:

Thank you for your recent letter which is restated in part with responses
below.

Facts: A retailer (hereinafter "Retailer") sells merchandise on the
installment plan. Retailer sells the receivables to its affiliate (hereinafter
"Servicer.")Retailer enters into a formal contract with Servicer to transfer
all rights to receivables and any related security interest.

Retailer only sells eligible receivables to Servicer without recourse,
effective as of the date of origination of the receivable. The selling price
is the face amount of the receivable less an amount calculated to reflect bad
debts and other related posts. The face value of the receivable includes all
charges (e.g., sales tax accrued and freight charges).

At the time Retailer sells the receivables to servicer, sales tax is
remitted to the State.

The amount calculated for bad debts is set out in the underlying
contract. The adjustment for bad debts related to the receivables sold
utilizes an annualized average of bad debts recognized for federal purposes.
Historically, the amount calculated for bad debts is very accurate and can be
verified on Retailer's books and records.

The bad debts that are actually written-off are reflected on the
affiliated group's consolidated federal income tax return. The reduction on
the sale of the receivable attributable to the bad debt is recorded on
Retailer's books. An offsetting account is recorded on Servicer's books.

Question: Is Retailer allowed a sales tax credit for the bad debt
calculated when it sells the receivables?

Answer: No. To claim a bad debt deduction a retailer's records must show
among other things the name and address of the purchaser. At the time your
Retailer client sells the receivables, they assume there will be a bad debt but
they do not know which customers will default in their obligations.

Question: If the sales tax credit for the bad debt is not allowed in the
above fact situation, what administrative remedies will allow Retailer a sales
tax credit when sales tax is remitted to the State but not collected.

Answer: The Retailer could not write off the bad debt unless it had been
factored with recourse and taken back from the Servicer after the default.
They would then need to meet the requirements in section (d) of the enclosed
rule 3.302. The refusal of a customer to pay sales tax to a retailer is not
itself a bad debt.

This opinion is based on the facts you presented. other facts, though
similar, may yield different results.

If you have questions or need more information, please call our toll-free
number
1-800-531-5441. My direct line number is 512463-4680 [FAX (512)
475-0900]. You may write to me in care of Tax Administration Division.

Sincerely,
Al Van Allen
Tax Administration Division