This deduction should be taken on the return filed for the period in which the amount was found worthless and charged off for income tax purposes or, if the retailer is not required to file income tax returns, charged off in accordance with generally accepted accounting principles.
Failure to take the deduction on the proper return will not in itself prevent the allowance of a refund measured by an amount for which a retailer could have taken a timely deduction provided a claim for refund is filed with the Board within the limitation periods specified in section 6902 of the Revenue Taxation Code.
Only that portion of a bad debt loss attributable to the amount on which the retailer paid tax may be used to claim a bad debt deduction or refund for sales and use tax purposes. Even an account with all sales subject to tax may include some amounts on which tax was not paid, such as the tax or tax reimbursement charged to the consumer which is included in the account balance. The percentage of loss on which tax was paid for an account which is secured by the merchandise purchased, or which represents a single purchase of a significant amount, should be calculated on an actual basis. The percentage of loss on which tax was paid for accounts involving a large volume of small transactions may be calculated based on an analysis of the composition of the accounts receivable. All accounts of the retailer for which this calculation is made should use the same method of applying payments for the calculation (e.g., use FIFO for all accounts or use LIFO for all accounts). Examples using the pro rata method are attached as Appendices 1 and 2.
Establishing the wholesale value of other types of repossessed merchandise such as jewelry, furniture, appliances, etc., presents a more difficult problem if the retailer does not sell the merchandise to a reseller in an arm's length transaction. Each case must be considered on its own merits. Generally, if the retailer places the repossessed property into resale inventory, the retailer should use the amount at which the merchandise is recorded in resale inventory as its wholesale value. This amount should not, however, include any costs of repossessing, reconditioning, or other expense to put the merchandise in saleable condition.
Only those repossessions on which a loss is incurred should be scheduled. The retailer may quickly determine whether a particular transaction should be scheduled by comparing the net payoff with the wholesale value of the merchandise. If the net payoff is greater, a loss has been suffered and the transaction should be scheduled.
A construction contractor who is a consumer of materials or fixtures, or both, under Sales and Use Tax Regulation 1521 cannot claim a bad debt deduction or refund with respect to such materials or fixtures. A United States construction contractor as defined in subdivision (a)(3) of Regulation 1521 is always the consumer of both materials and fixtures, and thus can never claim a bad debt deduction or refund with respect to such materials or fixtures. A construction contractor, other than a United States construction contractor, is generally the consumer of materials, and thus may claim a bad debt deduction with respect to materials only when the contractor is regarded as selling those materials under subdivision (b)(2)(A)2. of Regulation 1521. A construction contractor, other than a United States construction contractor, is the retailer of fixtures and thus may claim a bad debt deduction or refund with respect to its retail sales of such fixtures. A construction contractor incurring a bad debt loss for which it is entitled to a bad debt deduction or refund as just explained must claim the deduction or refund in the same manner as those resulting from other types of taxable retail sales of tangible personal property.
Cal. Code Regs. Tit. 18, § 1642
2. Amendment of subsection (h)(2) filed 8-20-76; effective thirtieth day thereafter (Register 76, No. 34).
3. Amendment of Appendix 1 and 2 filed 5-20-80; effective thirtieth day thereafter (Register 80, No. 21). For technical reasons, printed in Register 80, No. 23.
4. Change without regulatory effect of subsection (e)(6) and Appendix 1 (Register 86, No. 28).
5. Amendment filed 1-17-89; operative 2-16-89 (Register 89, No. 3).
6. Amendment of subsection (a) filed 9-12-95; operative 10-12-95 (Register 95, No. 37).
7. Amendment of section and repealer and new appendices 1 and 2 filed 12-17-2001; operative 1-16-2002 (Register 2001, No. 51).
8. Change without regulatory effect amending section filed 12-9-2013 pursuant to section 100, title 1, California Code of Regulations (Register 2013, No. 50).
Note: Authority cited: 7051, Revenue and Taxation Code. Reference: Sections 6055 and 6203.5, Revenue and Taxation Code.
2. Amendment of subsection (h)(2) filed 8-20-76; effective thirtieth day thereafter (Register 76, No. 34).
3. Amendment of Appendix 1 and 2 filed 5-20-80; effective thirtieth day thereafter (Register 80, No. 21). For technical reasons, printed in Register 80, No. 23.
4. Change without regulatory effect of subsection (e)(6) and Appendix 1 (Register 86, No. 28).
5. Amendment filed 1-17-89; operative 2-16-89 (Register 89, No. 3).
6. Amendment of subsection (a) filed 9-12-95; operative 10-12-95 (Register 95, No. 37).
7. Amendment of section and repealer and new appendices 1 and 2 filed 12-17-2001; operative 1-16-2002 (Register 2001, No. 51).
8. Change without regulatory effect amending section filed 12-9-2013 pursuant to section 100, title 1, California Code of Regulations (Register 2013, No. 50).