Can a retailer take a credit or refund for sales tax already remitted on a financing lease that later becomes a bad debt?

Subject

Bad Debts — Financing Leases

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9403L1295B05

Plain-English Summary

The Comptroller confirmed that a retailer can take a credit or obtain a refund for the portion of sales tax it already remitted to the state on a sale that later becomes a bad debt — and this rule applies just as much to financing leases as to any other sale. The letter points the taxpayer to Subsection (d) of Comptroller Rule 3.302, which governs bad debt deductions, and notes that the fact that the bad debt arose from a financing lease "will make no difference" to the outcome. The only condition is that the retailer's records must contain the specific information required under Subsections (d)(4)(A) through (G) of that rule.

What This Means For You

If you are a retailer or lessor who wrote off a financing lease as a bad debt: You are not barred from claiming a credit or refund of the sales tax you already remitted on that lease just because the underlying transaction was a lease rather than an outright sale. The same bad debt rules apply.

Recordkeeping is the key requirement: The ruling conditions the credit/refund on the retailer's records showing the information called for in Rule 3.302(d)(4)(A)–(G). Without that documentation, the credit or refund claim may not be supportable.

This is a fact-specific opinion: The letter explicitly states it is based on the facts submitted by the taxpayer, and that other facts, though similar, may yield different results.

Q&A

Q: Does it matter that the bad debt came from a financing lease rather than a regular sale?
A: No. The Comptroller stated that "the fact that the bad debt occurs as a result of a financing lease will make no difference" — the standard bad debt credit/refund rule under Rule 3.302(d) still applies.

Q: What does a retailer need to do to claim the credit or refund?
A: The retailer's records must show the information required in Subsections (d)(4)(A) through (G) of Rule 3.302.

Q: Can a retailer get money back for sales tax already paid to the state on an amount that became uncollectible?
A: Yes. A retailer may take a credit or obtain a refund of the portion of accrued sales tax remitted to the state that subsequently becomes a bad debt.

Original ruling text

March 4, 1994

Dear *****:

Thank you for your letter concerning bad debt deductions on
financing leases.

A retailer may take a credit or obtain a refund of that
portion of accrued sales tax remitted to the state that
subsequenlly becomes a bad debt. Please review Subsection
(d) of enclosed Rule 3.302 concerning bad debts. The fact
that the bad debt occurs as a result of a financing lease
will make no difference as long as the retailer's records
can show the information required in Subsections (d)(4)(A - G).

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

You may call me toll free at 1-800-531-5441, ext. 5-0030.
The direct line is 512/475-0030. You may also write to Tax
Administration, Comptroller of Public Accounts.

Sincerely,

David Somerville
Tax Administration Division

NOTE: Previous Accession Number 9403224L