Tax Commission Rule R865-19-20S dealing with the basis for sales tax reporting was recently revised to include an explanation of the required method of claiming a sales tax credit on repossessions.

Effective on January 28, 1991, only the vendor who made the sale and collected and remitted the sales tax to the Tax Commission is eligible for a credit on his sales tax return. On non-recourse financed repossessions, financial institutions may arrange with the selling vendor for the selling vendor to take a credit and forward the funds to the financial institution.

In cases where a selling vendor is no longer in business, financial institution may file a claim for refund of sales tax directly with the Tax Commission. If the original selling vendor went out of business owing sales tax, no refund will be made because it is assumed the tax in question was never paid to the Tax Commission.

In some instances, a person purchases an item from someone other than a vendor licensed to collect sales tax and uses a direct loan from a financial institution. In other cases, a customer may obtain a direct loan even though he purchases from a dealer. If a repossession occurs involving a product purchased using a direct loan, the financial institution is not eligible to apply for a refund.

Repossessions as detailed in Tax Bulletin 14-88, a sales tax credit is allowed for repossessions on the basis of the original amount subject to tax, less the down payment. This amount is multiplied by the ratio of the number of monthly payments not made to the total number of monthly payments required by the contract. The repossession credit applies to all items of tangible personal property, not just to motor vehicles.

For example, a $30,000 taxable car sale, with a $5,000 down payment, financed on a 60-month contract and repossessed after 20 "full payments" were made, would have a repossession credit of $16,667. "Full payments" is determined by dividing the total received on the contract by the monthly payment amount.

Credit Computation: Ratio of line 4 to line 5 times taxable base financed equals the repossession credit.

40/60 X $25,000 = $16,667

Bad Debts
The credit for bad debts, discounts and allowances is calculated differently from repossessions. Amounts charged off for bad debts must first be reduced by any charges added, such as interest or other collection charges. After these adjustments are made, the sales tax shall be calculated on the remaining amount, using the tax rate in effect at the time of the sale.

This same method should be used to calculate a sales tax credit for discounts and allowances which are made after the sales transaction has been recorded in the accounting records. If a discount or allowance is given at the time of sale, tax should be calculated after applying the discount or allowance.

When recoveries are made on bad debts or repossessions for which a sales tax credit has been claimed, tax must be calculated on the full amount of recovery. The tax due must be calculated before any legal or collection fees are deducted or paid.

 The credit for repossession or bad debts, discounts or allowances is shown on line 6 of the dealer's or vendor's sales tax return. Attach a schedule showing the computations and appropriate adjustments for any tax rate changes between the date of sale and the date of repossession.

Any questions regarding this Tax Bulletin should be directed in writing to Taxpayer Services, 160 East 300 South, Salt Lake City, UT 84134 or by calling (801) 530-4848 or toll-free within Utah 1-800-662-4335.