New York – Taxability of Bad Debt Write-Offs

2/01/2013

SALT Report 2105 – The New York Department of Taxation and Finance issued an advisory opinion regarding the application of sales tax to recovered bad debts. The Taxpayer is an equipment lease finance company that uses both true leases and financing leases to make sales in New York.

When the Taxpayer makes an outright sale of equipment, the title transfers to the purchaser at the outset of the contract; however, in many cases the Taxpayer provides the financing through a financing lease with the purchaser.  When the Taxpayer makes a sale under a true lease, the Taxpayer holds title to the property, but allows the lessee to have use of the property in return for periodic lease payments.

The Taxpayer requested guidance regarding the taxability of recoveries made on accounts under the two different lease scenarios in which the lessee defaults, the account has been written off for Federal income tax purposes, and the Taxpayer receives a court ordered judgment.

In the first scenario, the Taxpayer makes an outright sale of equipment under a financing lease agreement.  After the Taxpayer has collected and remitted sales tax to the Department, the purchaser defaults on its payments. The Taxpayer at this point, would write-off the account as a bad debt, and request a judgment from the court for the purchaser’s breach of contract.  If the Taxpayer wins, no part of the judgment would be subject to sales tax because the Taxpayer has already collected and remitted the full amount of sales tax due at the time of purchase under the financing lease agreement.

In the second scenario, the Taxpayer leases equipment under a true lease, which is typically 60 months. In this type of lease the Taxpayer would collect sales tax on each payment made under the terms of the agreement.  If the lessee defaults the Taxpayer can recover the property and sell it, which often leaves a net deficiency balance. Once this occurs, the Taxpayer may seek a judgment from the court against the lessee to recover the deficiency.  If the Taxpayer is successful, the judgment that the Taxpayer collects would be subject to sales and use tax because it represents payment for a liability that results from a lease in which the Taxpayer transferred possession of tangible personal property to the lessee for a consideration.

For Further Information

New York Department of Taxation and Finance – Advisory Opinion TSB-A-13(3) S