James Susa analyzes the state tax statutory structures and major court decisions on bad debt deductions and concludes that in practice, the availability of such a deduction is limited in scope.
Each state that imposes some form of sales tax utilizes the gross receipts from sales as the tax base. The term “gross receipts” is broadly defined to include the “total amount of the sale, lease or rental price, as the case may be, of the retail sales of retailers.” All works well so long as the purchaser pays the full purchase price at the time of purchase. Today, however, it is more common to have the purchaser buy on credit, extended from a credit card company, a charge card company, or a retaileraffiliated lender. The law generally treats these credit sales as normal retail sales with “gross receipts” as the sales price of the item. But what happens when the purchaser defaults on the credit obligation? The courts have generally held that the lender may not receive the sales tax refund because the lender is not a “retailer” who remitted the sales tax. The courts have also held that the retailer who remitted the sales tax does not receive a refund because the retailer was paid in full by the lender. Thus, the answer appears to be that the state keeps the sales tax collected on the full sales price even though that amount was never fully paid by the purchaser.
Originally published in the Journal of State Taxation - November/December 2013.
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