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Business Taxes Law Guide—Revision 2024

Sales and Use Tax Annotations


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B


130.0000 Bad Debts—Regulation 1642

Annotation 130.0269


130.0269 Third Party Credit Card Sales. Company A enters into contracts with a retailer, whereby Company A issues credit cards to the retailer's customers. Under the terms of the credit card agreement, the cardholders remit their payments to Company A. Pursuant to the contract with the retailer, Company A remits to the retailer, at a discounted rate, the purchase price including sales tax, on purchases made by the credit card holder. Company A takes full responsibility for collection and, if the account becomes uncollectable, Company A takes the federal income tax "write-off" for bad debts.

The discount rate paid to the retailer is negotiated annually by balancing anticipated revenues against expenses. An important factor in calculating the discount rate is the magnitude of accounts that have become uncollectable.

The retailer is liable for sales tax on its sales. Under section 6055 and Regulation 1642(h)(1), the retailer is not entitled to the worthless account deduction for accounts found to be worthless since it is not claiming the bad debt loss for federal income tax purposes. Company A is not entitled to a bad debt deduction because it was not the retailer of the property and owed no sales tax against which to take the bad debt deduction. 12/4/95.