January 6, 2023
Ohio expands sales tax bad debt deduction to allow for debts written off as uncollectible by credit account lenders
On December 22, 2022, Governor Mike DeWine signed House Bill 223 (HB 223), which allows vendors to deduct sales tax remitted for bad debts on private-label credit accounts when the debt is written off as uncollectible by the credit account lender or by a person succeeding to those accounts. The expansion of the deduction for sales tax remitted on bad debt (bad debt deduction) is effective July 1, 2023.
Ohio Rev. Code 5739.121 allows a vendor to deduct sales tax collected and remitted on a sale on credit, when the purchaser defaulted on payment. To qualify for the deduction, the debt must be uncollected for at least six months and must be deductible for federal income tax purposes. Vendors may only deduct sales tax remitted on debts that have become worthless or uncollectible (i.e., deductible for federal income tax purposes) during the most recent sales tax reporting period. The deduction applies against the sales tax remitted by the vendor for the applicable reporting period, with a refund available if the bad debt exceeds the vendor's taxable sales for the reporting period. If the vendor subsequently collected the debt, it must pay the tax previously deducted.
In 2009, the Ohio Supreme Court held that a vendor using an unrelated finance company to handle its private-label credit card transactions could not deduct the sales tax remitted on the defaulted accounts because it did not charge off the debts as uncollectible on its own books, as Ohio Rev. Code 5739.121 then required.1 Thus, the law in effect until June 30, 2023 only allows vendors that deducted a bad debt for federal tax purposes to claim the deduction; vendors cannot deduct sales tax remitted on bad debts that were deducted on a third party's books.
HB 223 changes to the deduction
HB 223 expands the bad debt deduction by allowing vendors to deduct sales tax remitted on bad debts on private-label credit accounts used to make purchases from the vendor or its affiliates, even when the debt is charged off on the credit account owner's books (referenced in the statute as the "lender") and not the vendor's. A "private-label credit account" is a credit account (1) that carries, refers to, or is branded with the vendor's name, and (2) for which the lender complies with applicable Ohio and federal consumer protection laws when establishing the consumer's credit account.
For the vendor to be eligible for the expanded deduction, the lender must be able to deduct the private-label account debt for federal income tax purposes and charge it off as uncollectible on or after July 1, 2023. The expanded deduction is available for sales tax remitted on the bad debt of the original account issuer; it also applies to sales tax remitted on the bad debt of any other person acquiring the accounts or acquiring receivables from those accounts (i.e., factoring agents and debt collectors, which HB 223 defines as "lenders"), either from a third party or the vendor, provided the vendor remitted the applicable sales tax. If the lender eventually collects the debt, the vendor must pay any deducted tax. HB 223 allows a vendor to claim the deduction based on the lender's bad debt without regard to the vendor's reporting period during which the debt became worthless or uncollectible to the lender.
While vendors are allowed a refund when their own bad debt exceeds their taxable sales for the reporting period, a refund is not available for excess bad debt related to private label credit accounts claimed under the expanded deduction. Instead, vendors may carry forward the remaining deduction to future reporting periods. HB 223 does not limit the carryforward period.
Vendors that utilize private-label credit accounts should be aware of this change, as they may be able to claim the expanded deduction starting July 1, 2023.
Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor
1 See Home Depot USA, Inc. v. Levin, 2009 Ohio 1431.