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, § 33, as amended by St. 1998, c. 485, §§ 20, 23, effective January 1, 1999 and G.L. c. 64I, § 34. This TIR supersedes and revokes TIR 92-2. Under the bad debt reimbursement provisions, vendors may file a claim for reimbursement of sales or use tax they have 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.
II. Filing Requirements
Bad debt reimbursement claims must be filed on form ST-BDR (or ST-BDR-Meals for sales tax on meals). Bad debt reimbursements may not be claimed on any other return and bad debts may not be subtracted from gross receipts on a vendor's sales or use tax return.
B. New Filing Dates
Reimbursements are paid annually without interest. Effective January 1 (1) , 1999, a bad debt reimbursement claim for a vendor's prior fiscal year must be filed on Form ST-BDR on or before the due date, including extensions, of the vendor's federal income tax return (or annual federal filing in the case of an exempt organization) for the prior fiscal year. Previously, a vendor was required to file bad debt reimbursement claims on a calendar year basis by April 15th, regardless of their fiscal year for other tax purposes. As a result of this change, corporate vendors on a calendar year basis for federal tax purposes that have not requested a federal extension must file their 1999 bad debt reimbursement claims with Massachusetts by March 15, 2000.
C. Transition Rule for 1999 Tax Years
Taxpayers with a fiscal year for federal tax purposes (or annual federal filing in the case of an exempt organization) starting after January 1, 1999 may include in their 1999 ST-BDR claim any bad debts incurred on or after January 1, 1999 and before the start of their 1999 fiscal year.
D. Change of Fiscal Year
Taxpayers who change their fiscal year for federal tax purposes in tax years after 1999 may include in their ST-BDR claim for the first fiscal year after the change any bad debts incurred after the last day of their prior fiscal year and before the first day of their new fiscal year, providing that these claims have not been included in any other ST-BDR.
E. Subsequent Recovery of Amounts Allowed as Bad Debts
The requirement is unchanged that 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 its gross receipts on the sales or use tax return covering the period in which the recovery occurs.
III. Documentation and Calculation
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 that contains the following information:
The date and amount of each sale. The buyer's name and address. The buyer's federal identification number, if available. 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 that 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 fiscal year, and the denominator of which is the total sales for the fiscal 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 excluding 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.
A vendor that uses the aggregation proration method and subsequently recovers, in whole or in part, a bad debt for which a reimbursement has been received, must generally report the actual amounts of taxable Massachusetts accounts recovered on the sales or use tax return covering the period in which the recovery occurs. Only if the vendor is unable to document separately the portion of recovered accounts representing taxable Massachusetts sales may the vendor prorate its total recoveries by the same method used to prorate its bad debts.
To claim the bad debt reimbursement on an aggregated basis vendors must comply with all of 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' names, addresses, and federal identification numbers, if available, and all facts pertinent to the determination that the accounts are worthless.
/s/Frederick A. Laskey
Frederick A. Laskey,
Commissioner of Revenue
February 10, 2000
1. When G.L. c. 64H, § 33 (sales tax bad debts) was recently amended, a corresponding change was not made to G.L. c. 64I, § 34 (use tax bad debts). However, the Department believes this was an oversight and the legislative intent was to make the new filing requirements applicable to both sales and use tax bad debts. Accordingly, effective January 1, 1999, the Department will accept claims for use tax bad debts under the new filing requirements contained in G.L. c. 64H, § 33, as amended, and TIR 00-3.