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TITLE 34PUBLIC FINANCE
PART 1COMPTROLLER OF PUBLIC ACCOUNTS
CHAPTER 3TAX ADMINISTRATION
SUBCHAPTER OSTATE AND LOCAL SALES AND USE TAXES
RULE §3.302Accounting Methods, Credit Sales, Bad Debt Deductions, Repossessions, Interest on Sales Tax, and Trade-Ins

(a) Accounting methods.

  (1) For sales and use tax purposes, retailers may use a cash basis, an accrual basis, or any generally recognized accounting basis that correctly reflects the operation of their business. Retailers who wish to use an accounting system to report tax that is not on a pure cash or accrual basis or that is not a commonly recognized accounting system should obtain prior written approval from the comptroller.

  (2) Paragraph (1) of this subsection does not apply to the reporting of sales tax on rentals and leases of tangible personal property. See §3.294 of this title (relating to Rentals and Leases of Taxable Items) for the accounting of rentals and leases.

(b) Credit sales.

  (1) Credit sales include all sales in which the terms of the sale provide for deferred payments of the purchase price. Credit sales include installment sales, sales under conditional sales contracts and revolving credit accounts, and sales by a retailer for which another person extends credit to the purchaser under a retailer's private label credit agreement.

  (2) Sales tax is due on insurance, interest, finance charges, and all other service charges incurred as a part of a credit sale unless these charges are stated separately to the customer by such means as an invoice, billing, sales slip, ticket, or contract.

  (3) Tax is to be reported on a credit sale based upon the accounting method that the retailer uses.

    (A) If the retailer is on an accrual basis, the entire amount of tax is due and must be reported at the time the sale is made.

    (B) If the retailer is on a cash basis of accounting, the payment received from the customer includes a proportionate amount of tax, sales receipts, and may also include finance charges. Tax must be reported based upon the actual cash collected during the reporting period, excluding separately stated finance charges.

    (C) If the retailer uses an accounting basis that is not a pure cash or accrual basis, tax must be reported in a consistent manner that accurately reflects the realization of income from the credit sales on the retailer's books and records.

(c) Transfer or sale of sales contracts and accounts receivable. A retailer may sell, factor, or assign to a third party the retailer's right to receive all payments due under a credit sale. At the time the contract or receivable is sold, factored, or assigned, the tax becomes due on all remaining payments. The retailer is responsible for reporting all remaining tax due under the credit sale to the comptroller in the reporting period in which the contract or receivable is sold, factored, or assigned. No reduction in the amount of tax to be reported and paid by the retailer is allowed if the transfer to the third party is for a discounted amount. This section does not apply to a seller's assignment or pledge of contracts or accounts receivable to a third party as loan collateral.

(d) Bad debts.

  (1) Any portion of the sales price of a taxable item that the retailer or private label credit provider cannot collect is considered to be a bad debt.

    (A) A retailer is not required to report tax on any amount that has been entered in the retailer's books as a bad debt during the reporting period in which the sale was made, and that will be taken as a deduction on the federal income tax return during the same or subsequent reporting period.

    (B) A retailer is entitled to a credit for tax reported and paid on an account later determined to be a bad debt. A retailer may take a deduction on the retailer's report form, or obtain a refund from the comptroller, in the reporting period in which the retailer's books reflect the bad debt. Deductions and refunds due to bad debts are limited to four years from the date the account is entered in the retailer's books as a bad debt.

    (C) A retailer who extends credit to a purchaser on an account that is later determined to be a bad debt, a person who extends credit to a purchaser under a retailer's private label credit agreement on an account that is later determined to be a bad debt, or an assignee or affiliate of either who extends credit on an account that is later determined to be a bad debt, is entitled to a credit or refund for the tax paid to the comptroller on the bad debt.

  (2) The amount of the bad debt may include both the sales price of the taxable item and nontaxable charges, such as finance charges, late charges, or interest that were separately billed to the customer. A deduction may only be claimed on that portion of the bad debt that represents the amount reported as subject to tax. In determining that amount, all payments and credits to the account may be applied ratably against the various charges that comprise the bad debt, except as provided by paragraph (3) of this subsection.

  (3) A retailer, private label credit provider, or assignee or affiliate may not deduct from the amount subject to tax to be reported the expense of collecting a bad debt, or the amount that a third party has retained or which has been paid to a third party for the service of collecting a bad debt.

  (4) To claim bad debt deductions, the records of the person who claims the bad debt deduction must show:

    (A) date of original sale and name and Texas sales tax permit number of the retailer;

    (B) name and address of purchaser;

    (C) amount that the purchaser contracted to pay;

    (D) taxable and nontaxable charges;

    (E) amount on which the retailer reported and paid Texas tax;

    (F) all payments or other credits applied to the account of the purchaser;

    (G) evidence that the uncollected amount has been designated as a bad debt in the books and records of the person who claims the bad debt deduction, and that the amount has been or will be claimed as a bad debt deduction for income tax purposes;

    (H) city, county, transit authority, or special purpose district to which local taxes were reported; and

    (I) the unpaid portion of the assigned sales price.

  (5) A person who is otherwise qualified to claim a bad debt deduction, and whose volume and character of uncollectible accounts warrants an alternative method of substantiating the reimbursement or credit, may:

    (A) maintain records other than the records specified in paragraph (4) of this subsection if:

      (i) the records fairly and equitably apportion taxable and nontaxable elements of a bad debt, and substantiate the amount of Texas sales tax imposed and remitted to the comptroller with respect to the taxable charges that remain unpaid on the debt; and

      (ii) the comptroller approves the procedures used; or

    (B) implement a system to report its future tax responsibilities based on a historical percentage calculated from a sample of transactions if:

      (i) the system utilizes records provided by the person claiming the credit or reimbursement and the person who reported and remitted such tax to the comptroller; and

      (ii) the comptroller approves the procedures used.

  (6) The comptroller may revoke the authorization to report under paragraph (5)(B) of this subsection if the comptroller determines that the percentage being used is no longer representative because of:

    (A) a change in law, including a change in the interpretation of an existing law or rule; or

    (B) a change in the taxpayer's business operations.

  (7) A person who is not a retailer may claim a credit or reimbursement authorized by paragraph (1)(C) of this subsection only for taxes imposed by Tax Code, §151.051 or §151.101.

  (8) For purposes of this section, "affiliate" means any entity or entities that would be classified as a member of an affiliated group under 26 U.S.C. §1504.

  (9) If a retailer or other person later collects all or part of an account for which a bad debt deduction or write-off was claimed, the amount collected must be reported as a taxable sale in the reporting period in which such collection was made.

  (10) Credit or installment sales may not be labeled as bad debts merely for the purpose of delaying the payment of the tax.

(e) Repossessions.

  (1) When taxable items upon which the retailer or other person has paid tax are repossessed, the retailer or other person is allowed a credit or deduction for that portion of the actual purchase price that remains unpaid. The deduction must not include any nontaxable charges that were a part of the original sales contract. Any payments that the purchaser made prior to repossession must be applied ratably against the various charges in the original sales contract.

  (2) A retailer or other person may not deduct from the tax to be reported the expense of collecting an account receivable, or the amount that a third party has retained or that has been paid to a third party for the service of collecting an account or repossessing or selling a repossessed item.

  (3) To claim a deduction or credit the person who claims the deduction or credit must be able to provide detailed records that show:

    (A) date of original sale and name and Texas sales tax permit number of retailer;

    (B) name and address of purchaser;

    (C) amount that the purchaser contracted to pay;

    (D) taxable and nontaxable charges;

    (E) amount on which retailer reported and paid Texas tax;

    (F) all payments or other credits applied to the account of the purchaser;

    (G) city, county, transit authority or special purpose district to which local taxes were reported; and

    (H) the unpaid portion of the sale price assigned.

  (4) Sales tax is due on the sale of a repossessed item, irrespective of whether a vendor, mortgagee, secured party, assignee, trustee, sheriff, or an officer of the court has sold the item, unless the sale is otherwise exempt. If the vendor, mortgagee, secured party, assignee, trustee, sheriff, or officer of the court does not collect the tax, the purchaser must remit the tax directly to the comptroller.

(f) Interest on sales tax. This section will refer to the terms "interest" and "time price differential" as interest. The term "credit" includes all deferred payment agreements.

  (1) Sellers on a cash basis of accounting who sell taxable items on credit and charge interest on the amount of credit extended, including sales tax, are required to remit to the comptroller a portion of the interest that has been collected on the state and local taxes.

  (2) If the amount of interest charged on the tax is 18% or less, the seller must remit to the comptroller one-half of the interest charged on the tax.

  (3) If the amount of interest charged on the tax is greater than 18%, the seller must remit the amount of interest charged less 9%. For example, 21% charged less 9% deduction equals 12% interest remitted. A seller will not be allowed the 9% deduction if the interest rate charged on sales tax differs from the interest rate charged on the sales price of the taxable item.

  (4) In determining the amount of interest to be remitted to the comptroller, a seller does not need to calculate the interest on each individual account. A formula for the calculation may be used if the formula correctly reflects the amount of interest collected. The formula will be subject to verification upon audit of the taxpayer's records.

  (5) Except for the provisions of Texas Tax Code, §151.423 and §151.424, all reporting, collection, refund, and penalty provisions of Texas Tax Code, Chapter 151, including assessment of penalty and interest, apply to interest due.

(g) Trade-ins. In this subsection, a trade-in is considered as a taxable item that is being used to reduce the purchase price of another taxable item.

  (1) The sales price of a taxable item does not include the value of a trade-in that a seller takes as all or part of the consideration for a sale of a taxable item of the same type that is normally sold in the regular course of business. For example, sales tax will be due only on the difference between the amount allowed on an old piano taken in trade and the sales price of a new piano.

  (2) The sales price of a taxable item does include the value of a trade-in that a seller takes as all or part of the consideration for the sale of a taxable item, if the trade-in is a different type from the type normally sold in the regular course of business. For example, a seller of pianos who takes a desk in trade as part of the sales price of a piano would collect sales tax on the retail sales price of the piano without any deduction for the value of the desk. In this situation, the seller and buyer are considered to be bartering. However, if a seller of pianos is also a seller of desks, the value of the desk would be allowed as a trade-in.

  (3) Persons who remove items from a tax-free inventory for use as a trade-in owe sales tax on the cost price of the items. If both parties to a transaction remove items from a tax-free inventory to trade for other items that each party will use, the transaction will be regarded as barters by both parties. Each party to the barter will be required to collect sales tax on the retail sales price of the item being transferred. For example, a retailer of drill pipe trades pipe to a retailer of aircraft in exchange for an aircraft. Both retailers are trading the respective items for use, not resale. The pipe retailer must collect sales tax on the retail sales price of the pipe. The aircraft retailer must collect sales tax on the retail sales price of the aircraft.

  (4) See §3.336 of this title (relating to Sales of Gold, Silver, Coins, and Currency) for information on persons who barter for taxable items with gold, silver, diamonds, or precious metals.

(h) Tax Code, §111.064, provides that interest will be paid on tax amounts found to be erroneously paid and claimed on a request for refund or in an audit. See also §3.325 of this title (relating to Refunds, Interest, and Payments Under Protest).

  (1) Tax paid on an account that is later determined to be uncollectible and written off as a bad debt for federal tax purposes is not tax paid in error and does not accrue interest.

  (2) A request for refund, or an overpayment of tax in an audit, for a report period due before January 1, 2000, does not accrue interest.


Source Note: The provisions of this §3.302 adopted to be effective January 1, 1976; amended to be effective November 14, 1984, 9 TexReg 5583; amended to be effective September 16, 1985, 10 TexReg 3323; amended to be effective December 4, 2000, 25 TexReg 11963; amended to be effective November 21, 2002, 27 TexReg 10744

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