Section 35.01.02.063 - BAD DEBTS AND REPOSSESSIONSSections 63-3612, 63-3613, 63-3619, 63-3626, Idaho Code
01.In General. Sales tax is collected on an accrual basis. The tax is owed to the state at the time of sale, regardless of when the payment is made by the customer.02.Rules for Unsecured Credit Sales. The following rules apply to unsecured credit sales: a. When a seller cannot collect accounts receivable arising from an unsecured credit sale of tangible personal property subject to sales tax, he can make an adjustment on his sales tax return or apply for a refund of taxes according to this rule.b. The adjustment or refund may be claimed on the sales tax return for the month in which the bad debt adjustment is made on the books and records of the taxpayer. The tax for which the credit or refund is sought is included in the amount financed and charged off as a bad debt for income tax purposes.c. A written claim for the refund may also be filed with the Commission within three (3) years from the time the tax was paid to the Commission. The Commission will review all such refund claims. See Rule 117 of these rules, Refund Claims.03.Rules for Secured Credit Sales. The following rules apply to secured credit sales:a. If the collateral is not repossessed, the seller may treat a bad debt the same as an unsecured credit sale.b. If the collateral is repossessed and not seasonably resold at a public or private sale, its retention is considered to satisfy the debt and no bad debt adjustment is allowed.c. If the collateral is repossessed and seasonably resold at public or private sale, then the seller is entitled to a bad debt adjustment. However, before calculating the amount of tax that may be credited or refunded, the taxpayer must reduce the amount claimed as worthless by the amount realized from the sale of the collateral.d. If merchandise is repossessed and is subsequently resold at retail, sales tax is computed on the sales price and collected and remitted the same as on other retail sales.04.Application to Taxpayers. The following rules apply to taxpayers who remit sales tax on an accrual basis but report income tax on a cash basis or are not required to file income tax returns. a. Retailers are required to remit sales tax on an accrual basis, even though their accounting records and income tax returns may be prepared on the cash basis of accounting.b. For taxpayers who keep their records and file income tax returns on a cash basis, a worthless account cannot be written off as a bad debt because it has not been recognized as income in the taxpayer's books. These retailers may still claim a bad debt for sales tax purposes. The claim should be made at the same time and in the same way discussed in Subsections 063.02 and 063.03 of this rule, even though the bad debt does not appear on the retailer's income tax return.c. For taxpayers who are not required to file income tax returns, the claim should be made the same way discussed in Subsections 063.02 and 063.03 of this rule.d. As these claims cannot be verified against the income tax returns of these taxpayers, sufficient evidence must be attached to the sales tax return to prove that the account has become worthless, that the tax was remitted by the retailer, and that the retailer did not receive payment of the tax from the buyer.05.Amount of Credit Allowed. The amount of credit that can be claimed is the amount of sales tax that is uncollectible. If both nontaxable and taxable items are financed, credit may be taken only for that portion of the bad debt which represents unpaid sales tax. a. Example: Assume the tax rate is six percent (6%). A retailer sells a thirty thousand dollar ($30,000) forklift for thirty-one thousand eight hundred dollars ($31,800) including sales tax. The buyer pays a five thousand dollar ($5,000) down payment and finances the balance. The buyer later defaults and the retailer repossesses the forklift and sells it at a public auction for six thousand dollars ($6,000). At the time of repossession the buyer owes seventeen thousand five hundred forty-five dollars ($17,545) including the financed sales tax. After the sale the amount that the retailer writes off is eleven thousand five hundred forty-five dollars ($11,545). The sales tax bad debt write off is six hundred fifty-three dollars ($653). Total taxable sale | $30,000 |
6% sales tax | $1,800 |
Total sale | $31,800 |
Down payment | ($5,000) |
Total financed | $26,800 |
Payment to principal after sale | ($9,255) |
Amount realized at public sale | ($6,000) |
Total bad debt | $11,545 |
Sales tax portion of bad debt $11,545 - (11,545 / 1.06) = | $653 |
b. Example: A car dealer makes a taxable sale of an automobile for fourteen thousand nine hundred dollars ($14,900) along with an extended warranty for five hundred dollars ($500), a documentation fee of one hundred dollars ($100), a title fee of eight dollars ($8) and credit insurance for one hundred dollars ($100). The customer pays one thousand dollars ($1,000) cash and trades in a car worth ten thousand dollars ($10,000) which is pledged as security for an earlier outstanding loan of six thousand dollars ($6,000). The customer, therefore, has to borrow enough to pay off the old loan on the trade-in. The customer defaults on the new ten thousand nine hundred eight dollar ($10,908) loan after paying five hundred dollars ($500) towards the principal. The customer damages the automobile in an accident leaving the collateral worthless. The car dealer may take an adjustment for only that portion of the bad debt representing the taxable percentage of the total sales price of the car. Only five thousand dollars ($5,000) of the total fifteen thousand nine hundred eight dollar ($15,908) cost was taxable. Sales price of vehicle | $14,900 |
Documentation fee | $100 |
Extended warranty | $500 |
Credit insurance | $100 |
Title fee | $8 |
Trade-in | ($10,000) |
Sales tax | $300 |
Subtotal | $5,908 |
Down payment | ($1,000) |
Invoice total | $4,908 |
Amount financed | $10,908 |
Payment to principal after sale | ($500) |
Amount of bad debt | $10,408 |
Amount of down payment used to pay sales tax: ($300 / $5,908) .0508 x $1,000 | = 5.08% = $50.80 |
Amount of sales tax financed: $300 - $50.80 | = $249.20 |
Percentage of loan representing sales tax: $249.20 / $10,908 | = 2.28% |
Sales tax paid by payments to principal: $500 x 0228 | = $11.40 |
Amount of bad debt write-off: $249.20 - $11.40 | = $237.80 |
06.Bad Debt Collected at a Later Date. If a bad debt account is collected later, the retailer must pay tax on the amount collected.07.To Claim Credit for a Bad Debt. Credit for bad debts for sales tax purposes may be claimed by the retailer that made the original sale and paid the sales tax to the state. Financial institutions or other third parties who are the assignees of the retailer may claim a bad debt for sales tax on property for which they provided financing, if the amount financed includes the sales tax remitted on the sale of the property. The person claiming the credit must be the person who ultimately bears the loss if the buyer of the property defaults on the obligation to repay.08.Cross-Reference. Rescinded Sale. See Rule 045 of these rules.Idaho Admin. Code r. 35.01.02.063