I. Introduction

The purpose of this Technical Information Release (TIR) is to explain the documentation and calculation requirements for claiming the bad debt reimbursement. Under Massachusetts General Laws, Chapter 64H, section 33, vendors may file a claim for reimbursement for sales or meals tax remitted to the Department of Revenue on accounts which are later determined to be worthless. An account is determined to be worthless when it is written off as uncollectible for federal income tax purposes under section 166 of the Internal Revenue Code. Reimbursements are paid annually without interest and must be claimed by mailing Form ST-BDR by April fifteenth for accounts determined to be worthless in the prior calendar year. Any vendor who recovers, in whole or in part, a bad debt for which a reimbursement has been received must include the recovered amount in the gross receipts amount on the sales or meals tax return covering the period in which the recovery occurs.

II. Documentation and Calculation

A. General Rules

In order to claim the bad debt reimbursement, vendors must subtract any finance charges and other nontaxable charges such as charges for nontaxable services, non-Massachusetts sales and the sales tax itself, from the account determined to be worthless. The remaining taxable portion of the worthless account is multiplied by the sales tax rate to determine the reimbursement amount. The taxpayer must document each worthless sale by attaching an explanation to the claim which lists the date and amount of each sale, the buyer's federal identification number, if available, and all facts pertinent to the determination that the account is worthless.

B. Aggregated Proration

Vendors who are unable to document separately the portion of each worthless account which represents taxable Massachusetts sales may calculate the reimbursement on an aggregated basis. The reimbursement should be calculated on an aggregated basis by multiplying total worthless accounts by a fraction, the numerator of which is the total taxable Massachusetts sales for the calendar year, and the denominator of which is the total sales for the calendar year. The resulting prorated amount of worthless accounts is multiplied by the sales tax rate to determine the reimbursement amount. "Total worthless accounts" equal any amount determined to be worthless under section 166 of the Internal Revenue Code but exclude any finance charges. "Taxable Massachusetts sales" equal total Massachusetts sales attributable to taxable tangible personal property and taxable services. "Total sales" equal total sales everywhere.

To claim the bad debt reimbursement on an aggregated basis vendors must comply with the following additional requirements:

1. The procedures used to compute the bad debt reimbursement must reflect the actual experience and knowledge of the vendor. For example, a vendor who has knowledge that certain worthless accounts consist of exclusively non-Massachusetts sales must exclude these accounts from "total worthless accounts."

2. The vendor must identify and explain these procedures and attach a supporting schedule to Form ST-BDR.

3. The vendor must be consistent in applying these procedures in subsequent years.

4. The procedures must be consistent with the procedures used by the vendor in claiming bad debt reimbursements in other states.

5. The vendor must attach a list which contains the buyers' federal identification numbers, if available, and all facts pertinent to the determination that the accounts are worthless.

Mitchell Adams
Commissioner of Revenue

TIR 92-2

March 27, 1992