Article written by:
Judd Ballard, CPA
Senior Manager, State & Local Tax Services

Cash flow continues to be a major concern for all businesses during the COVID-19 pandemic and beyond. Business owners and corporate leadership are challenged with closely monitoring costs, possibly dancing through the inconsistencies of government loan programs, all the while hoping not to make the unfortunate, and ultimately unavoidable, decision of cutting staff.  As accounting firms aim to leverage the opportunity to engrain themselves further as trusted business advisors, GBQ is currently assisting a number of companies with cash conservation strategies that many businesses previously overlooked, or failed to even consider.

A large issue many companies were not prepared for, but forced to face head-on, is the sad but likely fact that customers are unable to make payments for previously delivered goods and services.  Envision the following scenario:

  • Retailer or vendor registered to collect sales tax on taxable sales to customers in a number of states.
  • Taxable sales were made in March to XYZ Company.
  • Retailer includes those taxable sales (as required) on March sales tax return filed in April and remits sales tax as if it was already collected, essentially an accrual-based sales tax collection and remittance system.

So far nothing out of the ordinary, but then…

  • XYZ falls on hard times as a result of the pandemic and does not make timely payment of various invoices which include sales taxes invoiced in a number of states.
  • By early May, the retailer discovers XYZ has gone out of business and the retailer will no longer be able to collect on those invoices or the sales tax for which payment has already been remitted to the state(s).

XYZ Co. is only customer number one. Then it becomes two, three or even more customers. Welcome to a real-world dilemma no one was expecting six months ago when the economy was pumping along.

What options does the retailer have for properly claiming a bad debt “credit” on its returns?

  • Contact each of the states individually to recover the overpayment?
  • At what point may a taxpayer be able to take the credit?
  • Is that determined by the state, or dependent on when the relevant bad debt is taken on a federal income tax return?
  • Do states allow you to “flush” overpayment credits through future returns?

These are just a few of the relevant questions that will need to be answered to determine the appropriate course of action. Any state and local tax advisor will tell you, there will not be a single consistent answer among any handful of states.

For additional insight and guidance, please contact a member of GBQ’s State & Local Tax Services team.

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