Tax Rules: Final: 5703-9
5703-9-44 Bad debts
(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 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.
Effective: 12-16-05
Promulgated under: 5703.14
Authorized by: 5703.05
Amplifies: 5739.01(I), 5739.121, 5741.17
Prior effective dates: 9-26-80, 4-26-05