us-tx/regs
34 Tex. Admin. Code § 3.302 — Accounting Methods, Credit Sales, Bad Debt Deductions, Repossessions, Interest on Sales Tax, and Trade-Ins
(a)
Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.
(1) Affiliate--Any entity that would be classified as a member of an affiliated group under 26 U.S.C., §1504 (Definitions).
(2) Assignee--A person to whom either a retailer who made the sale or a private label credit provider transfers the right to claim a credit or refund of Texas sales or use tax paid on a bad debt via a written assignment with specific language transferring the right to claim a credit or refund under this section.
(3) Bad debt--Any portion of the sales price of a taxable item that a retailer or private label credit provider cannot collect, and that has been determined to be worthless and actually charged off for federal income tax purposes, provided that the bad debt amount for calculation of the refund or credit is limited to bad debts related to sales that were made by the retailer with whom the person that extended credit entered into the private label credit agreement.
(4) Credit sale--Any sale in which the terms of the sale provide for deferred payment of the sales price. Credit sales include installment sales, sales under conditional sales contracts and revolving credit accounts, and sales for which another person extends credit to the purchaser under a private label credit agreement.
(5) Private label credit agreement--An agreement by which a person agrees to extend credit to purchasers for credit sales with a retailer or the retailer's affiliates, or franchisees, often using a credit card or other instrument bearing the name or logo of the retailer or the retailer's affiliates or franchisees.
(6) Private label credit provider--A person who extends credit to a purchaser under a private label credit agreement.
(7) Trade-in--Tangible personal property taken by a seller as all or a part of the consideration for the sale of a taxable item when the property is of a type normally sold by the seller in the regular course of business, and the seller separately states the value of the property to the purchaser by means of an invoice, billing, sales slip, ticket, or contract.
(b)
Accounting methods.
(1) Reporting sales and use tax. For sales and use tax purposes, retailers may use a cash basis, an accrual basis, or any generally recognized accounting basis that accurately reflects the operation of their business. A retailer who wants to use an accounting method to report tax that is not on a pure cash or accrual basis or that is not a generally recognized accounting method must obtain prior written approval from the comptroller.
(2) Reporting sales and use tax on rentals and leases. Paragraph (1) of this subsection does not apply to the reporting of sales and use tax on rentals and leases of tangible personal property. See §3.294 of this title (relating to Rental and Lease of Tangible Personal Property) for the accounting of rentals and leases.
(c)
Credit sales.
(1) Service charges. Sales and use tax is due on insurance, interest, finance and carrying charges, and all other service charges incurred as a part of a credit sale unless these charges are stated separately to the purchaser by such means as an invoice, billing, sales slip or ticket, or contract.
(2) Accounting methods. Except as provided by paragraph (D), sales and use tax must be reported on a credit sale based upon the accounting method that the retailer uses for its regular books and records.
(A) Accrual basis. If a retailer uses an accrual basis of accounting for sales and use tax purposes, the entire amount of sales and use tax is due and must be reported in the reporting period in which the sale occurs.
(B) Cash basis. If a retailer uses a cash basis of accounting for sales and use tax purposes, the payment received from the purchaser includes a proportionate amount of sales and use tax, sales price, and may include finance charges. Sales and use tax is due and must be reported in the reporting period in which the payment is received based upon the cash collected, excluding separately stated insurance, interest, or finance and carrying charges.
(C) Modified basis. If a retailer uses an accounting method that is not a pure cash or accrual basis, sales and use 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. The retailer must obtain prior written approval from the comptroller to use an accounting method that is not a generally recognized method.
(D) Cash basis reporting option. A retailer who uses the accrual basis of accounting for its books and records may elect to use the cash basis of accounting for sales and use tax reporting purposes as long as the retailer reports the tax in a manner that accurately reflects the realization of income from cash and credit sales on the retailer's books and records. A change from the accrual basis to the cash basis for reporting sales and use tax is prospective only, and the retailer must establish a procedure to accurately account for sales and use tax received from purchasers during the transition period.
(3) Transfer or sale of sales contracts and accounts receivable. At the time a retailer sells, factors, or assigns to a third party the retailer's right to receive all payments due under a credit sale, the unpaid sales and use tax on all remaining payments becomes due immediately. The retailer is responsible for reporting all remaining sales and use tax due on a 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 sales and use tax to be reported and paid by the retailer is allowed if the transfer to the third party is for a discounted amount. This paragraph does not apply to a retailer's assignment or pledge of contracts or accounts receivable to a third party as loan collateral.
(d)
Bad debts and repossessions.
(1) Bad debts during a reporting period. A retailer is not required to report sales and use tax on any amount that has been entered in the retailer's books as a bad debt during the same reporting period in which the sale occurred, and that will be taken as a deduction for federal income tax purposes on the retailer's federal income tax return during the same or subsequent reporting period.
(2) Persons who may claim a credit or refund.
(A) Only a retailer, private label credit provider, or assignee or affiliate of either may claim a credit or refund for sales and use tax paid on the bad debt or the unpaid portion of the sales price of a taxable item repossessed under a conditional sales contract.
(B) Only one person is entitled to a credit or refund for sales and use tax paid to the comptroller on each bad debt or repossession.
(3) Determining the amount of a bad debt or the unpaid portion of the sales price of a taxable item repossessed under a conditional sales contract.
(A) The amount is the sales price of the taxable item less all payments and recoveries, including payments applied to interest, fees, and other expenses relating to the sales price of the taxable item under the credit agreement and the proceeds from the sale of an account to a third party.
(B) The sales price does not include nontaxable separately stated charges such as finance, carrying, insurance or service charges; or interest from credit extended on sales of taxable items under a conditional sales contract or other contract providing for the deferred payment of the sales price.
(C) For a worthless account that includes charges for taxable and nontaxable items, payments on the account are applied to the charges occurring first in time and prorated between taxable and nontaxable charges occurring at the same time.
(D) Expenses to collect a bad debt or repossess an item. A person claiming a credit or refund under this subsection cannot add to the credit or refund amount:
(i) the expense of collecting a bad debt;
(ii) the expense of repossessing or selling a repossessed item; or
(iii) 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 or the service of repossessing or selling a repossessed item.
(E) Any person claiming a bad debt refund or credit must also account for all recoveries on an account. If the retailer or private label credit provider claims a refund or credit that includes accounts sold to a third party, the retailer or private label credit provider must provide the detailed collection amounts for sold accounts. If the person claiming the refund or credit does not have the actual collection information, the comptroller will estimate the post-sale collections in calculating the amount eligible for a refund or credit. The comptroller will estimate the post-sale collections at a rate of 2.5 times the proceeds from the sale of the account.
(4) Local sales and use tax. Only the retailer who made the sale, or an affiliate or assignee of the retailer, is entitled to a credit or refund for local sales and use tax paid on a bad debt or the unpaid portion of the sales price of a taxable item repossessed under a conditional sales contract. A person who is not the retailer who made the sale is entitled to a credit or refund under this subsection only for state sales and use tax imposed by Tax Code, §151.051 (Sales Tax Imposed), or §151.101 (Use Tax Imposed), unless the retailer who made the sale expressly assigned its rights to a credit or refund under this subsection.
(5) Statute of limitations. A claim for a credit or a refund under this subsection must be submitted within four years from the date a bad debt is actually charged off for federal income tax purposes or the date the taxable item is repossessed, whichever is applicable.
(6) Post refund collection on a bad debt or sale of a repossessed item. A person who later collects any payment on a bad debt or sells a repossessed item for which a credit or refund was claimed must report the total amount collected or received from the sale as a taxable sale in the reporting period in which the collection or sale occurs, except when the previous credit or refund amount was calculated by estimating post-sale collections for sold accounts in accordance with subsection (d)(3)(E) of this section.
(7) Claiming a credit or refund.
(A) Permitted persons. A person who holds, or held at the time of the sale, a valid Texas sales and use tax permit and who is otherwise entitled to claim a credit or refund authorized under this subsection may:
(i) claim a credit on the person's sales and use tax report for tax paid on a bad debt only if the person files the tax report electronically and claims the credit in the reporting period in which the person's books reflect the bad debt or subsequent reporting periods; or
(ii) request a refund in writing from the comptroller for sales and use tax paid on a bad debt.
(B) Non-permitted persons. A person who does not hold a valid Texas sales and use tax permit but is otherwise entitled to a credit or refund under this subsection can only request a refund in writing from the comptroller for sales and use tax paid to the comptroller on the bad debt or the unpaid portion of the sales price of a taxable item repossessed.
(C) Records required. A person claiming a credit or requesting a refund for sales and use taxes paid on a bad debt or the unpaid portion of the sales price of a taxable item repossessed must maintain and make available to the comptroller:
(i) date of original credit sale and name and Texas sales and use tax permit number of the retailer who collected and remitted the sales and use tax to the comptroller;
(ii) amount that the purchaser contracted to pay;
(iii) taxable and nontaxable charges;
(iv) all other payments or other credits applied to the account of the purchaser;
(v) 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 claimed as a bad debt deduction for federal income tax purposes;
(vi) identification of each city, county, transit authority, or special purpose district to which local taxes were reported if the claimant is claiming a refund or credit of local taxes;
(vii) the sales and use tax collected and remitted to the comptroller; and
(viii) any additional records requested by the comptroller to verify a credit or refund claim.
(D) Records required for bad debts acquired by assignment or purchase. In addition to the requirements in subparagraph (C) of this paragraph, an assignee claiming a credit or requesting a refund for sales and use tax paid on a bad debt must maintain and make available to the comptroller the following additional information:
(i) amount of bad debt acquired;
(ii) name and taxpayer number of the original retailer who collected and remitted the sales or use tax;
(iii) name and taxpayer number of the person from whom the assignee acquired the bad debt; and
(iv) a written assignment with specific language transferring the right to a credit or refund of Texas sales or use tax paid on a bad debt executed by the person from whom the assignee acquired the bad debt.
(8) Alternative recordkeeping and tax calculation methods. A person who is otherwise qualified to claim a credit or request a refund under this subsection, and whose volume and character of uncollectible accounts warrants an alternative method of substantiating the refund or credit, may request approval from the comptroller to use an alternative method of maintaining records, or an alternative method of calculating a credit or refund, by submitting a written request to the Audit Division, P.O. Box 13528, Austin, Texas 78711-3528.
(A) The comptroller may approve a request to maintain records other than the records specified in paragraph (7)(C) and (D) of this subsection if the records fairly and equitably apportion taxable and nontaxable elements of an uncollectible account or conditional sales contract, and substantiate the amount of Texas sales tax imposed and remitted to the comptroller with respect to the bad debt or unpaid sales price of a taxable item under a conditional sales contract.
(B) The comptroller may approve a request to implement a system to report future sales and use tax responsibilities based on a historical percentage calculated from a sample of transactions if the system utilizes records provided by the person claiming the credit or refund and the person who reported and remitted such tax to the comptroller.
(C) The comptroller may revoke the authorization to report under paragraph (8)(A) or (B) of this subsection if the comptroller determines that the percentage being used is not representative of the taxpayer's business operations or because of a change in law, including a change in the interpretation of an existing law or rule.
(D) A person may submit a new request meeting the requirements of this paragraph after a revocation. The new request should use a method that differs from the alternative method that the comptroller revoked.
(E) Approval of an alternative method is prospective only and may not be used to satisfy the requirements of paragraph (7)(C) and (D) of this subsection, concerning records required, for periods prior to the date specified in the written approval.
(F) The approval of an alternative method applies to only the person who submitted the written request. The approval does not extend to any other person, regardless of whether the requesting person and the other person are affiliates or file a consolidated federal income tax return.
(G) Approval of an alternative recordkeeping method does not apply to any other recordkeeping requirements for any other purpose.
(e)
Interest on sales and use tax.
(1) Cash basis of accounting. Sellers who use a cash basis of accounting and who sell taxable items by means of a credit sale and charge interest on the amount of credit extended, including sales and use tax, are required to remit to the comptroller a portion of the interest that has been collected on the state and local sales and use taxes.
(A) If the amount of interest charged on the sales and use tax is 18% or less, the seller must remit to the comptroller one-half of the interest charged on the sales and use tax.
(B) If the amount of interest charged on the sales and use tax is greater than 18%, the seller must remit the amount of interest charged less 9.0%. For example, 21% charged less 9.0% deduction equals 12% interest remitted. A seller will not be allowed the 9.0% deduction if the interest rate charged on sales and use tax differs from the interest rate charged on the sales price of the taxable item.
(2) Determining the amount of interest. 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 is subject to verification upon audit of the seller's records.
(3) Penalty and interest. Except for the provisions of Tax Code, §151.423 (Reimbursement to Taxpayer for Tax Collections) and §151.424 (Discount for Prepayments), all reporting, collection, refund, and penalty provisions of Tax Code, Chapter 151, including assessment of penalty and interest, apply to interest due.
(f)
Trade-ins.
(1) Acceptable trade-in. 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 seller's regular course of business. For example, sales and use 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) Unacceptable trade-in. 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 by the seller in the regular course of business. For example, a seller who sells only pianos who takes a desk in trade as part of the sales price of a piano collects sales and use 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 the seller of pianos is also a seller of desks, the value of the desk is allowed as a trade-in.
(3) Tax free items traded-in. Sellers who remove items from a tax-free inventory for use as a trade-in owe sales and use tax on their purchase 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 is regarded as bartering by both parties. Each party to the barter is required to collect sales and use tax on the retail sales price of the item being transferred. For example, a seller of drill pipe trades pipe to a seller of appliances in exchange for a refrigerator. Both sellers are trading the respective items for use, not resale. The pipe seller must collect sales tax on the retail sales price of the pipe. The appliance seller must collect sales tax on the retail sales price of the refrigerator. See §3.336 of this title (relating to Currency, Certain Coins, and Gold, Silver, and Platinum Bullion) for information on persons who barter for taxable items with gold, silver, diamonds, or precious metals.
(g)
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. 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.
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; amended to be effective January 6, 2022, 46 TexReg 9410.
Source: official text