Rulings of the Tax Commissioner

June 8, 2016

Re:    § 58.1-1821 Application: Communications Sales and Use Tax

Dear *****:

This is in response to your letter submitted on behalf of ***** (the “Taxpayer”), in which you seek correction of the communications sales and use tax assessment issued for the period October 2010 through July 2013.  I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a nationwide, direct-to-home satellite television service provider with subscribers both inside and outside Virginia.  In the audit at issue, the auditor determined that the manner in which the Taxpayer is reporting bad debt was not in keeping with the requirements of the Code of Virginia.  Accordingly, adjustments were made in the audit to the Taxpayer's bad debt write offs for the communications sales tax.  The Taxpayer requests that it be authorized by the Department to use the method that it used during the audit period to account for bad debt deductions on communications sales tax returns filed with the Department.

Based upon the information provided by the Taxpayer, unpaid balances immediately begin an internal process that includes automated calling, billing notice reminders, late payment fees, emails and texts informing the customer the account is delinquent and past due.  At approximately 90 days, the unpaid account balances are turned over to a third party collection agent.  The Taxpayer states that this is the identifiable event at which point the debt is deemed worthless for federal tax purposes, even though collection efforts continue.  The Taxpayer further states that third party collection efforts continue past the charge-off date and that these efforts result in some recovery of bad debt.  The Taxpayer states that since the best chances for third party recovery occurs within the first twelve months, the Taxpayer delays taking bad debt tax credits on returns filed with the Department for twelve months.  The Taxpayer states that this allows for any recoveries to be netted against bad debts.  The Taxpayer further provides that accounting for bad debt in this manner keeps the Taxpayer from the need to file amended returns in order to claim bad debt amounts as credit for tax paid.  The Taxpayer also states that not accounting for bad debt as it did during the audit period would cause an administrative burden for the Taxpayer.

DETERMINATION

Virginia Code § 58.1-655 provides:

In any return filed under the provisions of this chapter, the communications services provider 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 that are owed to the communications services provider and that have been found to be worthless within the period covered by the return.  The credit, however, shall not exceed the amount of the uncollected payment determined by treating prior payments on each debt as consisting of the same proportion of payment, sales tax, and other nontaxable charges as in the total debt originally owed to the communications services provider.  The amount of accounts for which a credit has been taken that are thereafter in whole or in part paid to the communications services provider shall be included in the first return filed after such collection.

The aforementioned authority very clearly sets forth that bad debt credits must be reported in accordance with the governing statute.  Virginia Code § 58.1-655 requires that the Taxpayer report the bad debt on its return in the period in which the account is determined to be worthless by the Taxpayer.  The statute further requires that any payments collected on these accounts be reported on the first return filed with the Department after the payment has been collected.  The statute does not require the Taxpayer to amend the return on which the bad debt was reported when payments on the worthless account are received.

Public Document (P.D.) 06-138 (11/1/06) sets forth guidelines for the communications sales tax and provides:

Every provider will be allowed a credit against the tax shown to be due on the return for the amount of tax previously paid on accounts that are owed to the provider and that have been found to be worthless within the period covered by the return. The credit, however, cannot exceed the amount of the uncollected payment determined by treating prior payments on each debt as consisting of the same proportion of payment, communications sales tax, and other nontaxable charges as in the total debt originally owed to the provider.  The amount of accounts for which a credit has been taken that are thereafter in whole or in part paid to the provider must be included in the first return filed after collection.

Virginia Code § 58.1-655 and P.D. 06-138 demonstrate the manner in which bad debt credits are to be reported by taxpayers.  While the Taxpayer cites Virginia Code § 58.1-621 in its appeal letter, that statute is not applicable in this instance. Virginia Code § 58.1-661 provides that certain sections of the Retail Sales and Use Tax Act apply to the communications sales tax.  Virginia Code § 58.1-621, however, is not included in those sections of the retail sales and use tax that apply to the communications sales tax.[1]  Virginia Code § 58.1-655 was enacted to address bad debt with respect to the communications sales tax.

Accordingly, I find no justification for granting the Taxpayer's request to continue using its method for reporting bad debt credits to the Department.  Based upon this determination, the assessment is correct.  The assessment has been paid in full.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.  If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5840996658P