Tax Type
Retail Sales and Use Tax
Description
Receipt of funds from litigation of leasing contracts and funds from third party guarantors.
Topic
Collection of Tax
Credits
Records/Returns/Payments
Taxable Transactions
Date Issued
12-13-2012
December 13, 2012
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in reply to your letter submitted on behalf of ***** (the "Taxpayer"), in which you request a ruling regarding the application of the retail sales and use tax to funds received after a bad debt has been charged off. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer entered into leasing contracts with customers. Customers defaulted on the leasing contracts and the balance was charged off or in some instances the property was sold to a third party for a price on which sales taxes were collected leaving a balance due that was charged off to bad debts. In each scenario the Taxpayer questions the application of the sales tax to the receipt of funds from the litigation of the leasing contracts or the subsequent receipt of funds from third party guarantors.
RULING
Virginia Code § 58.1-621 that sets out the following provisions:
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- In any return filed under the provisions of this chapter, the dealer may credit, against the tax shown to be due on the return, the amount of sales or use tax previously returned and paid on accounts which are owed to the dealer and which have been found to be worthless within the period covered by the return. The credit, however, shall not exceed the amount of the uncollected sales price determined by treating prior payments on each debt as consisting of the same proportion of sales price, sales tax and other nontaxable charges as in the total debt originally owed to the dealer. The amount of accounts for which a credit has been taken that are thereafter in whole or in part paid to the dealer shall be included in the first return filed after such collection. (Emphasis added.)
Scenario 1
A lessee has defaulted on a 60 month lease leaving a deficiency balance of $55,000.00, which has been charged off to bad debts. Sales tax had been remitted on each monthly lease payment. Subsequently, the Taxpayer receives a settlement from litigation or a settlement amount from a third party guarantor. Based on the wording of the statute, the Taxpayer must report the amount received on its first return after such collection and compute the tax on such amount included in its return.
Scenario 2
A lessee has defaulted on its 60 month lease agreement with an option to purchase at the end of the lease for $1.00. Sales tax had been remitted on each monthly lease payment. After the Taxpayer has sold the equipment to an unrelated third party, a net deficiency of $25,000.00 remains unpaid. The Taxpayer charges this amount off to bad debts. Subsequently, through litigation, the Taxpayer receives a settlement for $8,000.00 as a final judgment, or receives $2,000.00 from another guarantor. Again, based on the wording of the statute, the Taxpayer must report the amount received on its first return after such collection and compute the tax on such amount included in the return,
I trust that the foregoing responds to your ruling request. This response is based on the facts provided as summarized above. Any change in the facts or the introduction of new facts may lead to a different result.
The Code of Virginia section cited is available on-line in the Laws, Rules and Decisions section of the Department's website located at www.tax.virginia.gov. If you have any questions regarding this matter, please contact ***** of the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-4862343904.Q
Rulings of the Tax Commissioner