§ 68-1366. Deduction from taxable sales for bad debts.

A.  There is herein provided a deduction to the vendor from taxable sales for bad debts.  Any deduction taken that is attributed to bad debts shall not include interest.

B.  The federal definition of “bad debt” in 26 U.S.C., Section 166 shall be the basis for calculating bad debt recovery.  However, the amount calculated pursuant to 26 U.S.C., Section 166, shall be adjusted to exclude:

1.  Financing charges or interest;

2.  Sales or use taxes charged on the purchase price;

3.  Uncollectible amounts on property that remain in the possession of the seller until the full purchase price is paid; and

4.  Expenses incurred in attempting to collect any debt and repossessed property.

C.  Bad debts may be deducted on the return for the period during which the bad debt is written off as uncollectible in the claimant’s books and records and is eligible to be deducted for federal income tax purposes if the taxpayer kept accounts on a cash basis or could be eligible to be claimed if the taxpayer kept accounts on an accrual basis.  For purposes of this subsection, a claimant who is not required to file federal income tax returns may deduct a bad debt on a return filed for the period in which the bad debt is written off as uncollectible in the claimant’s books and records and would be eligible for a bad debt deduction for federal income tax purposes if the claimant was required to file a federal income tax return.

D.  If a deduction is taken for a bad debt and the debt is subsequently collected in whole or in part, the tax on the amount so collected must be paid and reported on the return filed for the period in which the collection is made.

E.  When the amount of bad debt exceeds the amount of taxable sales for the period during which the bad debt is written off, a refund claim may be filed within the statute of limitations for refund claims provided in Section 227 of this title; however, the statute of limitations shall be measured from the due date of the return on which the bad debt could first be claimed.

F.  Where filing responsibilities have been assumed by a certified service provider, the certified service provider may claim, on behalf of the seller, any bad debt allowance provided by this section.  The certified service provider must credit or refund the full amount of any bad debt allowance or refund received to the seller.

G.  For the purposes of reporting a payment received on a previously claimed bad debt, any payments made on a debt or account are applied first proportionally to the taxable price of the property or service and the sales tax thereon, and secondly to interest, service charges, and any other charges.

H.  In situations where the books and records of the party claiming the bad debt allowance support an allocation of the bad debts among the states which are members of the Streamlined Sales and Use Tax Agreement, the allocation will be permitted.

Added by Laws 1981, c. 313, § 2, emerg. eff. June 29, 1981.  Amended by Laws 1990, c. 339, § 18, emerg. eff. May 31, 1990; Laws 2003, c. 413, § 15, eff. Nov. 1, 2003.