N.Y. Comp. Codes R. & Regs. tit. 20 § 534.7

Current through Register Vol. 46, No. 45, November 2, 2024

Section 534.7 - Refunds and credits attributable to bad debts

Tax Law, §§ 1132(e), 1139(e)

(a)Definitions.

The following definitions apply for the purpose of determining entitlement and computation of the refunds and credits authorized in this section only.

(1) The term uncollectible means worthless, as used for federal income tax purposes. Legal action to enforce payment when it would probably not result in satisfaction of a judgment upon a showing of the underlying facts is not a necessary prerequisite in determining worthlessness.

(2)The term retail-vendor means a vendor of tangible personal property or services, payment for which is made, in whole or in part, by the extension of credit to the purchaser by such vendor who is responsible for remitting applicable sales tax to the department and includes a lessor-vendor which meets the conditions of paragraph (b)(2) of this section.

(3) The term account-obligor means the purchaser of tangible personal property or services, the receipts of which are paid, in whole or in part, by the extension of credit by the retail-vendor.

(4) The term receivables of a retail-vendor means indebtedness to the retail-vendor incurred by an account-obligor upon his purchases whether or not subject to the sales and use taxes.

(5) The term captive finance company means a company that meets all of the following conditions:

(i) it is wholly owned by the retail-vendor or is wholly owned by a company which is related to such retail-vendor through an unbroken chain of wholly owned companies;

(ii) it does not finance receivables of any vendor other than its retail-vendor or any company related to such retail-vendor by an unbroken chain of wholly owned related companies;

(iii) it does not extend credit to anyone other than in the form of the purchase of receivables created as a result of extension of credit by the retail-vendor, except that the requirement of this subparagraph shall not be violated by the investment of excess cash funds in the shortor long-term financial markets or by advancing funds to its retail-vendor or a company which is related to such retail-vendor through an unbroken chain of wholly owned companies;

(iv) it does not sell receivables to a third party other than a transfer of a receivable to its retail-vendor; and

(v) it does not receive payments on the receivable directly from the account-obligors. Instead, the foregoing payments, including interest, on the receivable must be made by the account-obligors directly to the retail-vendor, and must be reported as income by the retail-vendor for income and franchise tax purposes.

(6) The term recourse means that all bad debts are transferred back to the retail-vendor or such bad debts are charged against the retail-vendor's reserve account established for that purpose.

(b) Allowance of refund or credit.

(1) Where a receipt, amusement charge, or hotel rent has been ascertained to be uncollectible, either in whole or in part, the vendor of the tangible personal property or services, the recipient of the amusement charges, or the operator of the hotel (as such terms are defined in section 1101 of the Tax Law) may apply for a refund or credit of the tax paid on such receipt, amusement charge, or hotel rent within three years from the date the tax was payable by such person to the Tax Department. However, no refund or credit shall be allowed based upon the fact that receipts are not actually paid on transactions described in section 527.15(e) of this Title.

(2) A vendor will be considered the vendor of the tangible personal property or services giving rise to the bad debt even though the property or services are sold by a leased department or concession (as described in section 526.10(f) of this Title), provided all the following conditions are met:

(i) the leased department or concession accounts for and pays over all of its receipts to the lessor-vendor;

(ii) the lessor-vendor reports and remits to the Department of Taxation and Finance the tax on all of the leased department or concession's receipts; and

(iii) the transfer of all receivables from the leased department or concession to the lessor-vendor is made without any discount for any credit transactions which involve the lessor-vendor's receivables and without recourse to the leased department or concession.

(3) A refund or credit is not available for a transaction which is financed by a third party or for a debt which has been assigned to a third party, whether or not such third party has recourse to the vendor on that debt.

(4) Receivables transferred to a captive finance company by its retail-vendor (as such terms are defined in subdivision [a] of this section) will not be treated as debts assigned to a third party provided the following conditions are met:

(i) such captive finance company has recourse (as defined in paragraph [a][6] of this section) on all bad debts to the transferor retail-vendor; and

(ii) annually (for a period determined from June 1st to May 31st of each year) not more than 10 percent of the receivables of the retail-vendor are incurred by account obligors upon purchases from any vendor other than the retail-vendor or a leased department or concession of the retail-vendor which meets the conditions of paragraph (2) of this subdivision.

Though a retail-vendor is not denied eligibility for the refund or credit with respect to debts determined to be uncollectible with respect to its receivables financed by a captive finance company if no more than 10 percent of its receivables (whether or not financed by the captive finance company) are derived from sales of any vendor other than the retail-vendor or a leased department or concession of such retail-vendor which meets the conditions of paragraph (2) of this subdivision, there is no refund or credit allowable to such retail-vendor with respect to any receivables derived from sales of such other vendors.

(c)Computation of refund or credit.

(1) Only the amount attributable to the sales tax imposed and remitted to the Department of Taxation and Finance by the vendor remaining unpaid by the customer to the vendor is allowable as a refund or credit in respect of a debt determined to be uncollectible.

(2) Where the debt determined to be uncollectible and charged off by a vendor is comprised in part of nontaxable charges (such as interest, service and finance charges, charges for purchases delivered out-of-state by the vendor, or charges otherwise exempt or excluded from the State and local sales and use taxes) and in part of charges subject to the New York sales and use taxes, a refund or credit may be claimed only with respect to the proportionate amount of the New York sales and use taxes attributable to the amount of the unpaid taxable charges remaining in such debt and only to the extent that the tax was remitted to the Department of Taxation and Finance. Such proportionate amount may be computed by determining:

(i) the tax imposed and remitted upon the unpaid amount of taxable charges in an account, or

(ii) the unpaid amount of New York sales tax in an account.

(3) Payments upon an account shall be first applied to the oldest charges in the account. These payments must be divided proportionately between the taxable and the nontaxable components, if any, of such charges.

(4) Though interest, service and finance charges may be considered in the computation of the bad debt refund or credit, since payments are first applied to the oldest charges in an account, later accruing interest, service and finance charges upon inactive accounts generally do not affect the amount of such refund or credit.

Example 1:

The following is an analysis of an account that was written off as a bad debt.

Charges to account		Payments made
Feb. Sale price	$250	4 at $25 each (March - June)
Feb. Sales tax	20	Total $100
July - Dec. service charge for late payment	30
Total	$300

As of the date the account was charged off on the vendor's books as uncollectible, the balance due was $200. This balance was determined by adding together the sale price, sales tax and service charge for a total of $300 and deducting payments of $100. Only that portion of the $200 bad debt that represents amounts on which the vendor collected and remitted sales tax to the department is included in the computation of the bad debt credit or refund. Therefore the composition of this $200 must be ascertained.

However, since paragraph (3) of this subdivision requires that payments received on account be applied first to the oldest charges in the account, before the composition of the $200 bad debt can be determined, a computation must be made wherein the customer's payments are so applied. In this example, in applying the payments to the oldest charges in the account, the entire $100 is absorbed by the first charge to the account (i.e., the February sale of $250 and the sales tax on that amount of $20, or a total of $270). Subtracting the $100 in payments from the $270 in charges leaves a partial bad debt of $170. Since the $270 was composed of the sale price and the sales tax, the $170 partial bad debt consists of these items as well, and in the same proportion. The composition of this $170 may be computed as follows:

Sale price	250 × 170 = $157.41	Proportionate sale price
Total sales price and tax	270
Sales tax	20 × 170 = $ 12.59	Proportionate sales tax
Total sales price and tax	270

Once the payments on account have been applied to the oldest charges in the account and any proportionate amount of bad debt subject to refund or credit has been ascertained, the balance of the outstanding charges to the account are reviewed to determine their taxable or nontaxable status. In this example, only one charge to the account remains unaccounted for - the $30 service charge for December. Since sales tax is not imposed on this type of charge (and should not have been collected), no refund or credit is available with respect to it.

Proportionate sale price	$157.41
Proportionate sales tax	12.59
Service charges	30.00
Total	$200.00

Thus, the bad debt refund or credit for sales tax is $12.59.

Example 2:

Assume the same facts as in Example 1, except that the bad debt write-off occurred after $250 had been paid on account. The uncollected balance of the account is $50 ($300 minus $250). As in Example 1, the $250 in payments is applied to the oldest charges in the account (i.e., $270) leaving a partial bad debt of $20. The composition of this $20 would be computed as follows:

Sale price	250 × 20 = $18.52	Proportionate sale price
Total sale price and tax	270
Sales tax	20 × 20 = $ 1.48	Proportionate sales tax
Total sale price and tax	270

The account's remaining unpaid balance of $50 due is composed of:

Proportionate sale price	$18.52
Proportionate sales tax	1.48
Service charges	30.00
Total	$50.00

Thus, the bad debt refund or credit for sales tax would be $1.48. Again, no refund or credit is available with respect to the $30 in service charges, since late payment service charges are not subject to sales or use tax. If the customer had paid at least $270, no bad debt refund or credit for sales tax would be allowed the vendor.

Example 3:

The following is an analysis of an account that became a bad debt:

Charges to account		Payments made
Jan. Sale price (exempt)	$200	4 at $60 each
Jan.-June: Finance charges	15	Total $240
July: Sale price	100
Sales tax at 8%	8
July-Sept.: Finance charges	5
Total	$328

As of the date the account was written off on the vendor's books as uncollectible, the balance due was $88 ($328 minus $240). The $240 paid is applied first to the oldest charges in the account. This $240 is sufficient to cover the entire $200 exempt sale in January and the finance charges of $15 for the period January through June. Since the total of these two amounts is $215, there remains $25 ($240 minus $215) to be applied to the next oldest account charges, which is the July sales price of $100 and the related $8 in sales tax ($108). Subtracting the remaining $25 in payments from the $108 leaves a partial bad debt for sales tax computation purposes of $83. Since the $108 was composed of the sale price of $100 and the sales tax of $8, the $83 partial bad debt consists of these items, in the same proportion. The composition of this $83 may be computed as follows:

Sale price	100 × 83 = $76.85	Proportionate sales price
Total sale price and tax	108
Sales tax	8 × 83 = $ 6.15	Proportionate sales tax
Total sale price and tax	108

The composition of the unpaid balance due is:
Proportionate sale price	$76.85
Proportionate sales tax	6.15
Finance charges (July-Sept.)	5.00
Total	$88.00

Thus, the bad debt refund or credit for sales tax would be $6.15.

Example 4:

Between January and October a building supply company delivered materials to a contractor at several construction sites in different localities and billed the contractor's account. The contractor's account with the vendor is later determined to be uncollectible and charged off on the vendor's books.

Month	Amount of sale	Delivery charges	Tax amount	Juris	Tax rate	(Payments)	Balance
Jan.	$10,000	$ 250	$ 615	City X	6%	$	$10,865
Feb.						5,000	5,865
March	15,000	300	612	County A	4%	2,500	19,277
April						7,000	12,277
May	25,000	100		County B	Exempt	5,000	32,377
June						25,000	7,377
July	10,000	200	714	County B	7%	5,000	13,291
Aug.	10,000	300	618	City X	6%	5,000	19,209
Sept.	5,000		200	County C	4%	10,000	14,409
Oct.	10,000			County A	Exempt	5,000	19,409
	$85,000	$1,150	$2,759			$69,500

Summary of Charges

Month	Total charges	Cumulative charges
Jan.	$10,865	$10,865
March	15,912	26,777
May	25,100	51,877
July	10,914	62,791
Aug.	10,918	73,709
Sept.	5,200	78,909
Oct.	10,000	88,909

The $69,500 paid is applied first to the oldest charges in the account. This $69,500 is sufficient to cover the charges to the account through July, of $62,791. Consequently, there are $6,709 in payments to be applied to the charges to the account for August of $10,918 ($10,000 + $300 + $618).

Subtracting the $6,709 from the $10,918 leaves a partial bad debt of $4,209 for the August charges. Since the August charges of $10,918 were composed of the sale price ($10,000), the delivery charges ($300) and sales tax ($618), the partial bad debt of $4,209 for august is composed of these items, in the same proportion. The composition of this $4,209 may be computed as follows:

Sale price and delivery	10,300 × 4,209 = $3,970.75
Total sale price, delivery and tax	10,918
Sales tax	618 × 4,209 = 238.25
Total sale price, delivery and tax	10,918

The account's total unpaid balance due of $19,409 is composed of:

Proportionate amount of sale (including delivery) for August	$3,970.75
Proportionate amount of sales tax on sale for August	238.25
Amount of sale for September	5,000.00
Sales tax on September sale	200.00
Amount of exempt sale for October	10,000.00
Total	$19,409.00

Thus, the bad debt refund or credit is the total of the uncollected portion of the tax on the August sale of $238.25 and the uncollected tax on the September sale of $200.00, or $438.25.

Example 5:

Assume the same facts as in Example 4, except that instead of the August sale of $10,000 to City X at the six percent tax rate, the supplier delivered materials to four jobs sites in August, as follows:

	State and Local Tax
Delivery
Jurisdiction	Rate	Materials	Charges	Tax	Total
County A	5%	$ 832	$ 40	$ 43.60	$ 915.60
County B	7%	5,000	120	358.40	5,478.40
City X	6%	3,500	100	216.00	3,816.00
County B	7%	668	40	Exempt	708.00
Total		$10,000	$300	$618.00	$10,918.00

In Example 4 it was determined that there was a partial bad debt for August of $4,209. The portion of this bad debt attributable to uncollected sales tax in August for each of the jurisdictions for which tax was remitted to the department may be determined as follows:

	Partial Bad Debt	Uncollected Sales Tax
County A tax	43.60 × 4,209 =	$ 16.81
Total sale price, delivery and tax	10,918
County B tax	358.40 × 4,209 =	138.17
Total sale price, delivery and tax	10,918
City X tax	216 × 4,209 =	83.27
Total sale price, delivery and tax	10,918
		238.25

(5) Other methods of calculation of the refund or credit, not inconsistent with the principles herein expressed, fairly and equitably apportioning taxable and nontaxable elements of a bad debt and computing the amount of sales tax imposed and remitted in respect of such taxable charges remaining unpaid on such debt, may, subject to the approval of the Department of Taxation and Finance, be used to compute such refund or credit where the volume and character of the uncollectible accounts is of such a magnitude as to warrant use of alternative computations.

(d) Procedures.

(1) No credit or refund may be sought until an account has been found to be uncollectible and has been actually charged off for federal income tax purposes.

(2) An application for refund or credit, in respect of the sales taxes collected and remitted upon a debt which has been found to be uncollectible and charged off, shall be filed with the Department of Taxation and Finance within three years from the date the tax was payable by the applicant to the Department of Taxation and Finance. The applicant may, as part of the application for credit, take such credit on the return which is due coincident with or immediately subsequent to the time such debt is charged off and the application filed.

(3) The application for refund or credit shall be subject to the provisions of subdivisions (a), (b) and (c) of section 1139 of the Tax Law and section 534.2 of this Part.

(4) A schedule of the computation of the State and local taxes for which refund or credit is sought must be attached to the return upon which such credit is taken, or the application for refund.

(e)Subsequent collection.

(1) If a vendor later collects, in whole or in part, any amounts attributable to a debt determined to be uncollectible which was charged off and in respect of which a refund was granted or a credit taken, the tax on the amount so collected must be reported to the Department of Taxation and Finance on, and remitted with, the next return due after such collection.

(2) In determining the amount of subsequent collections upon a debt determined to be uncollectible, for which refund or credit of sales tax was previously allowed attributable to tax, such collection should be allocated to taxable charges, nontaxable charges and taxes in the same manner as regular payments to such account.

(f)Interest.

Credits or refunds of tax attributable to bad debts will be made without interest.

N.Y. Comp. Codes R. & Regs. Tit. 20 § 534.7