Tax Type
Retail Sales and Use Tax
Description
Bad debts; Calculation of deductions
Topic
Basis of Tax
Returns/Payments/Records
Date Issued
02-22-1985
- February 22, 1985
Re: Request for Ruling/Sales and Use Tax
Dear ****
This will reply to your letters of March 6 and July 11, 1984 in which you request a ruling as to an alternative method for computing the sales tax deduction for bad debts.
I understand that problems exist for the ***** in determining how to compute the sales and use tax deduction for bad debts. Specifically, problems arise because a bad check which ***** determines to be a bad debt might include charges for taxable tangible personal property, gasoline exempt from-the retail sales tax, and/or cash (since a customer is allowed to write a check for $5 more than the purchase amount).
It has been suggested that ***** be permitted to apply the ratio of gasoline sales and cashed checks to taxable sales of tangible personal property in each month to the amount of bad debts for the month in order to compute the deduction. Such a computation, however, is not consistent with the sales and use tax law.
Section 58.1-621 of the Code of Virginia provides that the deduction for bad debts "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" (emphasis added). The above statute implies that the deduction is to be computed on each bad debt not on the aggregate of all bad debts for a period. Furthermore, a system whereby the ratio of taxable sales to other charges is applied to bad checks for a period might result in a deduction exceeding the amount of the uncollected sales price.
Section 630-10-11 of the Virginia Retail Sales and Use Tax Regulations (copy attached) sets forth the computation that should be used to compute the bad debt deduction for each bad check transaction when a portion of the debt has been paid. In cases where none of the debt has been paid, ***** would need to determine the amount of each bad check actually related to taxable sales price.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner