If a customer's credit card payment turns out to be unauthorized or fraudulent and the credit card company charges the sale back to the business, can the business claim a bad debt deduction for sales/use tax purposes?

Plain-English summary

This is a short internal Comptroller memo answering a question from another Comptroller employee (Revenue Accounting) about how to treat "charge-backs" — cases where a business accepts a credit card payment that turns out to be unauthorized or fraudulent, and the credit card company reverses ("charges back") the payment, leaving the business to absorb the loss.

The memo confirms two things: (1) for federal income tax purposes, this kind of loss is treated as a bad debt no differently than a write-off for a bounced check, and (2) because of that, the same sales also qualify for a bad debt deduction for Texas sales/use tax purposes. The catch is that the deduction is not unconditional — it is subject to the same documentation and reporting requirements as any other bad debt, and if the business (or the credit card company) later recovers any part of the money from the customer, that recovered amount must be reported again.

What this means for you

Business owners who accept credit cards

If a customer's card payment is later reversed because it was unauthorized or fraudulent, you can treat the resulting loss as a bad debt and claim a bad debt deduction on your Texas sales/use tax, just as you would for a bad check. Keep the same documentation you'd keep for any other bad debt claim, and remember that if you (or the card company) ever recover any of that money later, you have to report it again at that point.

Accountants and tax professionals

The memo draws a direct analogy between credit card charge-backs and bad checks — both are bad debts with no special treatment differentiating them. There's no statute or rule cited in the memo itself; it is a short internal Q&A confirming existing bad debt treatment applies to this fact pattern, not a new rule.

Common questions

Q: Is a credit card charge-back for a fraudulent or unauthorized charge treated differently than a bad check?
A: No. The memo states there is no differentiation between this type of write-off and a write-off taken for bad checks.

Q: Does this loss qualify for a sales/use tax bad debt deduction?
A: Yes, but it is subject to the same documentation and requirements as any other bad debt deduction.

Q: What if the business or the credit card company later collects some or all of the money?
A: Any amount recovered later, in whole or in part, from the credit card company or the customer must be reported.

Q: Is this an official ruling I can rely on?
A: No. This is an internal staff memo answering an internal question, not a letter ruling issued to a specific taxpayer, so it does not carry the reliance protections of a formal letter ruling.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9212713L

Original ruling text

DATE: December 17, 1992

TO: SANDI SKAGGS, CREDITS VERIFICATION, REVENUE ACCOUNTING

FROM: KEVIN KOLLER, TAX ADMINISTRATION

SUBJECT: *****

I am writing in response to your memo of December 8, 1992, concerning
allowances for bad debt write-offs when a taxpayer accepts unauthorized
payments by credit card. The credit card company will "charge back" the
taxpayer for unauthorized payments essentially making the taxpayer take a loss
for these sales.

a) Is this type of loss considered to be a bad debt for federal income tax
purposes?

Yes, there is no differentiation between this write-off and a write-off taken
for bad checks.

b) If so, do these sales qualify for a bad debt deduction for sales/use tax
purposes?

Yes, however; they are subject to the same documentation and requirements as a
bad debt and must be reported if the amount or any partial amounts are later
collected from the credit card company or the customer.