California Code of Regulations › Title 18 - Public Revenues › Division 2 - California Department of Tax and Fee Administration- Business Taxes (State Board of Equalization- Business Taxes, See Ch. 6 and 9.9) › Chapter 4 - Sales and Use Tax › Article 13 - Credit Transactions › Section 1642 - Bad Debts

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a) In
				  General. A retailer is relieved from liability for sales tax (section
				  6055
				  of the Revenue and Taxation Code) or from liability to collect use tax (section
				  6203.5
				  of the Revenue and Taxation Code) insofar as the measure of the tax is
				  represented by accounts found worthless and charged off for income tax purposes
				  (which include circumstances where the retailer's income is reported on a
				  related person's income tax return and the bad debt is charged off on that
				  return) or, if the retailer is not required to file income tax returns and the
				  retailer's income is not reported on another person's return, charged off in
				  accordance with generally accepted accounting principles. A retailer may claim
				  a bad debt deduction provided that the sales tax, or amount of use tax, was
				  actually paid to the state.
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.
(b) Amount Subject to
				  Deduction.
(1) Taxable Receipts. If the
				  amount of an account found to be worthless and charged off is comprised in part
				  of nontaxable receipts such as interest, insurance, repair, or installation
				  labor and in part of taxable receipts upon which tax has been paid, a bad debt
				  deduction may be claimed only with respect to the unpaid amount upon which tax
				  has been paid. In determining that amount, all payments and credits to the
				  account may be applied ratably against the various elements comprising the
				  amount the purchaser contracted to pay (pro rata method), may be applied as
				  provided in the contract of sale (contract method), or may be applied by
				  another method which reasonably determines the amount of the taxable receipts
				  (alternative method). When claiming a bad debt deduction or refund using an
				  alternative method, the retailer must include a clear explanation of that
				  method along with the claiming of the deduction or refund. After having applied
				  payments and credits using one method and claiming a deduction or refund based
				  on such method, a retailer shall not thereafter reapply the payments or credits
				  using another method with respect to such losses previously claimed.
(2) Expenses of Collection. No deduction is
				  allowable for expenses incurred by the retailer in attempting to enforce
				  collection of any account receivable, or for that portion of a debt recovered
				  that is retained by or paid to a third party as compensation for services
				  rendered in collecting the account.