(A) In reporting gross sales and net taxable
sales a vendor may exclude an amount equal to the sum of the vendor's bad debts
arising from sales occurring on or after July 1, 1980 and charged off as
uncollectible on
his
the vendor's books during the sales tax reporting
period. The tax collected for the current period may be adjusted by deducting
therefrom the amount of tax previously reported and paid as tax collected on
the sale giving rise to the bad debt.
"Bad debt" means any debt or account receivable arising from
the sale of tangible personal property or a taxable service by the vendor upon
which sales or use tax has been reported and paid in a prior reporting period
which has become worthless or uncollectible during the period between the
vendor's preceding tax return and the present return and which has been
uncollected for at least six months. The bad debt must be of a type that is
properly deductible pursuant to the "Internal Revenue Code of 1954" 68a Stat.
50, 26
U.S.C. 166, as amended, and the regulations
adopted pursuant thereto, or would be so deductible if the vendor kept his
accounts on an accrual basis.
The amount of the bad debt is equal to the price, or portion
thereof, of the tangible personal property that is uncollectible. No amount can
be excluded as a bad debt that represents:
(1) Interest or finance charges on the debt
or account;
(2) Sales tax charged
on the purchase price;
(3)
Uncollectible amounts on property that remains in the possession of the vendor
until the full purchase price is paid;
(4) Expenses incurred in attempting to
collect the debt or account;
(5)
Any portion of the debt or account that is, in fact, collected; or
(6) Any debt or account that is sold to a
third party for collection; or
(7)
Any uncollectible amount on property repossessed by or on behalf of the
vendor.
(B) The burden
of establishing the right to, and the validity of, a bad debt deduction is on
the vendor claiming such deduction. For each bad debt excluded from gross
sales, the vendor must maintain a record of:
(1) The name of the
purchaser/debtor;
(2) The date of
the sale or sales giving rise to the bad debt;
(3) The price of the property and the amount
of sales tax charged thereon;
(4)
The amount of interest, finance and service charges charged to the debt or
account;
(5) Whether or not the
property was retained by the vendor or repossessed;
(6) Any amounts charged to the debt or
account representing costs of collection;
(7) The dates and amounts of any payments
made on the debt or account; and
(8) Any portion of the debt or account which
represents a charge that was not subjected to tax in the original transaction.
All records must be preserved for four years after the filing
of the return upon which the bad debt deduction is taken, unless the
commissioner consents in writing to a shorter period or requires by order a
longer period.
(C) In the event that the commissioner
determines that a vendor has not maintained adequate records, the commissioner
may test check the vendor's business in order to verify the amounts deducted as
bad debts.
In the absence of adequate records showing the contrary, it is
presumed that any payments made on a debt or account are applied first to the
price of the property and sales tax thereon and secondly to interest, service
charges and any other charges. The amount of interest charged to the account is
presumed to be computed at the maximum rate of interest charged by the vendor
on that type of account that gives rise to the bad debt.
If the vendor maintains a reserve for bad debts, only actual
charges against the reserve representing uncollectible debts or accounts may be
deducted for sales tax bad debt purposes. Contributions to the reserve are not
deductible as a sales tax bad debt.
(D) The tax due on any bad debt found to have
been improperly or illegally deducted may be recovered by assessment in the
manner provided in section
5739.13 of the Revised
Code.
(E) A bad debt may only be
deducted on the return for the sales tax reporting period during which the
uncollectible debt was written off on the books of the vendor. In the event
that the bad debt deduction exceeds the net taxable sales of the vendor for
that period, the tax attributable to the excess amount can only be recovered by
refund claim pursuant to sections
5739.07 and
5741.10 of the Revised Code. If
all or a portion of a bad debt is subsequently paid by the consumer or any
other person, the vendor must include the amount paid in gross sales and net
taxable sales on the return for the period during which the payment was made
and he must remit the tax thereon.
(F) If the vendor's business consists of
taxable and nontaxable sales of tangible personal property, and if the vendor
is unable to document whether the sale of the property that gives rise to the
bad debt was a taxable or nontaxable sale, the amount of the bad debt deduction
shall not exceed the amount of the bad debt multiplied by the quotient obtained
by dividing the vendor's taxable sales for the preceding calendar year by his
gross sales for the preceding calendar year. In the event that the vendor was
not engaged in business during at least six months of the preceding calendar
year, the amounts of his taxable sales and gross sales for the preceding twelve
months, or the amounts for each of the months that he has been engaged in
business, whichever period is shorter, shall be the amounts used in computing
the bad debt deduction pursuant to this paragraph.
In order to ensure that a bad debt deduction accurately
reflects the tax imposed on the sale which gave rise to the bad debt, whenever
the sales tax rate applicable to the vendor's place of business changes, such
as by statutory change or the enactment of county or transit authority sales
and use tax, the amount of the bad debt deduction must be adjusted before it is
excluded from gross sales and net taxable sales. The amount to be excluded
shall be the amount of the bad debt multiplied by the quotient obtained by
dividing the tax rate applicable at the time of the sale by the tax rate
applicable at the time of the deduction.
In case the vendor receives payment after the bad debt
deduction has been excluded, the amount that must be included in gross sales
and net taxable sales is the amount of the payment multiplied by the quotient
of the tax rate applicable at the time of sale divided by the tax rate
applicable at the time of the payment. This will assure that the vendor only
remits the amount of tax that he previously recovered by excluding the bad
debt.
In addition to all other records required to be kept by this
rule, the vendor must maintain a record of any computation and adjustments made
pursuant to this paragraph.
(G) The provisions of this rule also apply to
sellers registered with the tax commissioner pursuant to section
5741.17 of the Revised
Code.
(H) In situations where the
books and records of the vendor or seller claiming the bad debt allowance
support an allocation of the bad debt allowance among multiple states, the
vendor or seller may make the allocation and claim the appropriate share of the
bad debt with this state.
(I)
In situations where the vendor has assigned the account
receivables to a third party or where the vendor uses a third party to
facilitate the financing of the taxable sale, to qualify for the bad debt
deduction, the claimant must be the vendor and the bad debt deduction must
appear on the books and records of the vendor.
