Preliminary information for the Wholesale Marihuana Tax is now available.
Approved: December 2, 2015
(Replaces Revenue Administrative Bulletin 1989-61)
Pursuant to MCL 205.6a, a taxpayer may rely on a Revenue Administrative Bulletin issued by the Department of Treasury after September 30, 2006, and shall not be penalized for that reliance until the bulletin is revoked in writing. However, reliance by the taxpayer is limited to issues addressed in the bulletin for tax periods up to the effective date of an amendment to the law upon which the bulletin is based or for tax periods up to the date of a final order of a court of competent jurisdiction for which all rights of appeal have been exhausted or have expired that overrules or modifies the law upon which the bulletin is based.
RAB 2015-27. This Revenue Administrative Bulletin (RAB) describes the sales and use tax bad debt deduction, for periods before and after September 30, 2009. This RAB replaces RAB 1989-61.
The bad debt deduction allows a taxpayer to claim a refund for sales or use taxes it remits that become bad debts or to deduct bad debts from its gross proceeds for purposes of computing its sales or use tax liability. A “bad debt” is any portion of a debt arising from a taxable sale at retail that is eligible to be claimed, or would be eligible to be claimed if the taxpayer kept accounts on an accrual basis, as a deduction pursuant to the internal revenue code, IRC 166, excluding certain amounts, MCL 205.54i; MCL 205.99a. A taxpayer must meet certain requirements, discussed in detail below, to qualify for the deduction.
For periods before September 30, 2009, the deduction is only available to retailers, Menard, Inc. et. al. v Dep’t of Treasury, 302 Mich App 467 (2013). However, 2007 PA 105 expanded the deduction to include third-party lenders for periods on or after September 30, 2009. A third-party lender may claim the deduction if the retailer and lender execute and maintain a written election designating which party may claim the deduction. Additionally, the lender must demonstrate that no deduction or refund was previously claimed or allowed. Finally, the taxpayer must demonstrate that the account receivable has been found worthless and is or was written off by the taxpayer that made the sale or the lender designated to claim the deduction.
“Bad debt” means that portion of a debt relating to a taxable sale at retail, not otherwise deductible or excludable, that has become worthless or uncollectible. The debt must be eligible to be claimed as a deduction under IRC 166 or would be eligible if the taxpayer kept accounts on an accrual basis, MCL 205.54i(1)(a); MCL 205.99a(6)(a).
Prepaid sales taxes on fuel are eligible for the bad debt deduction, regardless whether the sale or transfer is a sale at retail, MCL 205.56a(5).
Bad debt does not include:
Example 1.
ABC Inc. is in the business of making retail sales of vehicles and incurs bad debt on certain vehicles it sold and financed. ABC repossessed and sold one of the vehicles at auction for 70% of the outstanding debt. ABC may not claim the bad debt deduction for any amounts represented by the repossessed vehicle, including the amounts it did not recover in the sale, i.e., 30% of the outstanding debt.
Example 2.
ABC Inc. is in the business of making retail sales. ABC financed sales for some of its customers and sold the debt to XYZ Inc. Some of the customers fail to pay for the property and bad debt is incurred. ABC may not claim a deduction for the bad debt.
The bad debt deduction allows an eligible taxpayer to deduct bad debts from its gross proceeds used to compute its sales and/or use tax liability, MCL 205.54i(2) and MCL 205.99a(1). To claim the deduction, the following requirements must be met:
If after claiming the deduction the taxpayer receives payment of all of a bad debt, the taxpayer must remit the taxes for which it had previously claimed the deduction on its next remittance to the Department. If a partial payment is received, the taxpayer must apply the payment to the taxable price of the property and the tax on the property before applying it to any interest, service, or other charge and remit the appropriate tax to the Department on its next remittance.
Example 3.
ABC Inc. finances the sale of taxable property to Customer for a sales price of $100. ABC properly remits 6% sales tax on the sale ($6). Customer fails to make any payments and ABC properly claims a bad debt deduction on the sale. After claiming the deduction on the gross proceeds of the sale, Customer makes a $50 payment. The balance of Customer’s account at the time of the payment is $150 due to interest and penalties. ABC must remit sales tax on the $50 payment it received ($3) on which it had previously claimed the deduction.
A taxpayer must retain records of all of the following:
Upon request of the Department, the above records must be provided to substantiate the deduction.
Additionally, if the bad debt claimed is the result of the sale of a vehicle, the taxpayer requesting the refund or claiming the deduction must provide a RD-108 Application for Title and Registration validated by the Secretary of State for each vehicle for which it claims the deduction. However, if a validated RD-108 is unavailable the taxpayer may provide a cleared check in payment of the tax along with other documentation that demonstrates that the payment was directly related to the vehicle sale upon which it is claiming the bad debt deduction.
For bad debts incurred before September 30, 2009, the deduction may only be taken by the person that remitted the sales or use tax directly to the Department (the retailer), MCL 205.54i(1)(e); MCL 205.99a(6)(e); lenders may not claim the deduction for bad debts incurred prior to that date. Furthermore, the retailer must independently meet all of the statutory requirements to claim a bad debt deduction. In other words, a retailer may not rely on another party, e.g., a third party lender, to meet the requirements of the deduction. For example, if a retailer sells the account receivable associated with the bad debt to a third-party lender, it may not claim the deduction because it did not write the bad debt off its own books and records, Menard, Inc., supra.
After September 30, 2009, either a retailer or a lender may claim the deduction if the following conditions are met:
The written election must clearly and unequivocally state which party is entitled to the deduction; the mere assignment of the right to the debt alone does not satisfy the written election requirement. The written election must be executed before the bad debt is incurred.
A “lender” includes any person that holds or has held an account receivable purchased directly from the taxpayer that reported the tax (i.e., the retailer), any person that holds or has held an account receivable pursuant to a contract with the taxpayer that reported the tax, or the issuer of a private label credit card (PLCC), MCL 205.54i(1)(b); MCL 205.99a(6)(b).
A PLCC is a credit or charge card that is branded with the name or logo of a retailer that can only be used for purchases from that retailer, MCL 205.54i(1)(d); MCL 205.99a(6)(d). A “lender,” for purposes of the deduction, does not include the issuer of a credit or charge card that can be used to make purchases from a person other than the retailer whose name and logo appears on the card, MCL 205.54i(1)(c); MCL 205.99a(6)(c).
Example 4.
ABC Inc., a retailer, and XYZ Inc., a third-party lender, enter a written agreement assigning ABC’s accounts receivable to XYZ for sales financed by XYZ. The agreement does not provide a written election specifying the party entitled to claim the Michigan bad debt deduction. Neither ABC nor XYZ may claim the deduction.
Example 5.
ABC Inc., a retailer, and XYZ Inc., third-party lender, enter a written agreement assigning ABC’s accounts receivable to XYZ for sales financed by XYZ. The agreement does not provide a specific written election specifying the party entitled to claim the Michigan bad debt deduction. XYZ is denied a refund request on bad debts it purchased from ABC because it failed to execute and maintain a written election designating XYZ as the party entitled to claim the deduction. XYZ obtains the written election from ABC after the refund is denied. XYZ may not claim the deduction because it did not timely execute and maintain the written election.
Example 6.
ABC Inc., a retailer, and XYZ Inc., third-party lender, enter a written agreement on January 1, 2015 assigning ABC’s accounts receivable to XYZ for sales financed by XYZ. The agreement also provides a written election specifying that XYZ is entitled to claim the Michigan bad debt deduction. XYZ, but not ABC, may claim the deduction for bad debts it financed that are incurred on or after January 1, 2015.
A Certified Service Provider (CSP) that assumes sales and use tax filing responsibilities on behalf of taxpayers under the Streamlined Sales and Use Tax Administration Act, MCL 205.801 to 205.833, may claim a bad debt deduction on behalf of the taxpayer. The CSP must credit or refund the amount of the deduction claimed to the taxpayer. Taxpayers, and CSPs on behalf of taxpayers, that file under the Streamlined Sales and Use Tax Administration Act may allocate a bad debt deduction among SSUTA member states if the taxpayer’s books and records support such an allocation.
