Can a seller get a sales tax refund or credit for a bad-debt loss when a third-party-financed sale defaults and it repossesses the property?

Plain-English summary

Heavy Duty Truck Parts, Inc. sells trucks and other property. Some buyers borrow the purchase money from a finance company, and Heavy Duty may become the guarantor of the buyer's loan. If the buyer defaults, Heavy Duty must repay the finance company and can then repossess the truck; if what it recovers is worth less than what it owed, it takes a loss. It asked whether it can get a refund of or credit for the sales tax it already collected and remitted on the original sale.

The Department said no.

• The refund authority exists — but excludes third-party-financed sales. The Tax Commission may, by regulation, allow refunds or credits where a sale is cancelled, the property returned, or the receipt is uncollectible (Tax Law 1132(e)). But the implementing regulation expressly says it does not apply to a transaction financed by a third party or where the debt has been assigned to a third party (20 NYCRR 525.5(c)(1); 534.7(b)). Heavy Duty's sales were third-party-financed, so the bad-debt refund is unavailable.
• The original sale was complete and the tax properly due. The vendor must collect tax when it collects the price (Tax Law 1132(a)), and the tax becomes due at the transfer of the property, regardless of the time or method of payment (Tax Law 1137; 20 NYCRR 525.2(a)(2)). The sale was completed when the buyer took delivery and paid the invoice, so the return of the truck is not a cancelled sale (Matter of Maurice S. Englander, TSB-H-81(96)S).
• The repossession is itself a separate sale. A repossession under a security agreement is itself a sale within Tax Law 1101(b)(5), for consideration equal to the unpaid principal and interest under the mortgage plus any additional compensation the mortgagee pays (Matter of Denos Vourderis, TSB-H-78(54)S).
• Result. A bad-debt loss Heavy Duty sustains in discharging its obligation as a co-debtor/guarantor — even if the account is ultimately uncollectible — does not entitle it to a refund of or credit for the sales tax charged to its customer and due at the time of the sale.

What this means for you

Who finances the sale determines whether the bad-debt relief is even available. Under this opinion, when the buyer's purchase is financed by a third-party lender (or the receivable is assigned to one), the seller falls outside the sales tax bad-debt refund rule — the loss is the lender's/guarantor's problem, not a basis to recover the tax.

A completed, delivered sale isn't "cancelled" just because it later goes bad. The taxable event happened at delivery and payment of the invoice. A later default and repossession doesn't undo that sale for tax purposes.

Repossession is a new taxable event, not a rewind. Taking the collateral back under a security agreement is itself a sale, valued at the unpaid balance plus interest and any extra the mortgagee pays — so watch the tax consequences of the repossession too, not just the original sale.

Note: This 1985 opinion turns on a regulation that excluded third-party-financed debt from bad-debt relief. New York's bad-debt provisions for sales financed or assigned to third parties (for example, private-label credit card and lender bad-debt rules) have been the subject of later statutory and regulatory change. Confirm the current rule before relying on this result.

Common questions

Q: My customer's bank loan defaulted and I repossessed the goods at a loss. Can I recover the sales tax?
A: Under this opinion, no. Because the sale was financed by a third party, it falls outside the bad-debt refund regulation (20 NYCRR 525.5(c)(1)/534.7(b)).

Q: Doesn't returning the property cancel the sale?
A: No. The sale was complete at delivery and invoice payment; a later repossession is not a cancelled sale (Englander, TSB-H-81(96)S).

Q: Is the repossession itself taxable?
A: It is treated as a sale under 1101(b)(5), for consideration equal to the unpaid balance plus interest and any additional compensation paid to the mortgagee (Vourderis, TSB-H-78(54)S).

Q: Would it be different if I financed the sale myself?
A: This opinion addresses third-party-financed sales, which are excluded from the refund rule. Self-financed uncollectible receipts are governed by the bad-debt regulation's general terms — and note the caveat that these rules have since changed.

Citations and references

Tax Law:

• 1132(e) — authorizes refunds/credits by regulation where a sale is cancelled, property returned, or a receipt is uncollectible
• 1132(a) — the vendor must collect the tax when it collects the purchase price
• 1137 — the total tax due must be paid with the timely return for the current period
• 1101(b)(5) — definition of "sale"; a repossession under a security agreement is itself a sale

Regulation:

• 20 NYCRR 525.5(c)(1); 534.7(b) — bad-debt/uncollectible-receipt refund; expressly inapplicable to third-party-financed debt or debt assigned to a third party
• 20 NYCRR 525.2(a)(2) — tax becomes due at the transfer of property; time or method of payment is immaterial

Prior decisions cited:

• Matter of Maurice S. Englander, TSB-H-81(96)S — a completed, delivered sale is not "cancelled" by a later return
• Matter of Denos Vourderis, TSB-H-78(54)S — a repossession is a sale; consideration is the unpaid balance plus interest and any added compensation

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a85_43s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(43)S
Sales Tax
September 9, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S850321A

On March 21, 1985 a Petition for Advisory Opinion was received from Heavy Duty Truck
Parts, Inc., 1177 Brighton Henrietta Townline Road, Rochester, N.Y. 14623.
The issue raised is whether Petitioner is entitled to a refund of or credit for sales tax charged
to customers and remitted to the Tax Department at the time of the sale, when subsequent
repossession of the property results in a bad debt loss to Petitioner.
Petitioner sells personal property (trucks, etc.). Some of its customers obtain their purchase
money from a finance company, and in that event Petitioner may become the guarantor of the
customer's obligation to the financing organization. If the customer defaults in the loan payments to
the third party, repayment of the remaining debt devolves upon the Petitioner, who then has the right
to repossess the collateral. Ultimately, if Petitioner's obligation to the finance company exceeds its
proceeds from the recovered property, it may have realized less than the original sales price for the
property.
The New York State Tax Commission is authorized by statute to provide, by regulation, for
the exclusion from taxable receipts of amounts representing sales where the contract of sale has been
cancelled, the property returned or the receipt has been ascertained to be uncollectible or, in case the
sales tax has been paid upon such receipt, for refund of or credit for the tax so paid. (Tax Law
1132[e]).
The pertinent Sales and Use Tax Regulations Section provides that "where a receipt. . . has
been ascertained to be uncollectible, either in whole or in part, a vendor of tangible personal
property. . . may apply for a refund or credit of the tax paid on such receipt. . . . This section shall
not be applicable to a transaction which has been financed by a third party or where the debt has been
assigned to a third party." (20 NYCRR 525.5[c][1], repealed, filed Nov. 19, 1984 eff. Nov. 19,
1984; 534.7[b][1], [3], filed Nov. 19, 1984 eff. Nov. 19, 1984).
Section 1132(a) of the Tax Law requires the vendor to collect the sales tax when collecting
the purchase price. Section 1137 of the Tax Law provides that the total sales tax due must be paid
when the sales tax return for the current period is timely filed. Regulations Section 525.2(a)(2) states
that the tax becomes due at the time of the transfer of property, and that the time or method of
payment is immaterial.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-85(43)S
Sales Tax
September 9, 1985

Accordingly, Petitioner was required to collect and remit the sales tax at the time of the sale.
The sale was completed when the customer took delivery of the property and paid the invoice
amount. Therefore, the return of the property under the circumstances described in the petition does
not qualify as a cancelled sale. Matter of Maurice S. Englander, Decision of the State Tax
Commission, April 10, 1981, TSB-H-81(96)S. The repossession of property under the terms of a
security agreement constitutes in itself a sale within the meaning and intent of Section 1101(b)(5)
of the Tax Law, and the consideration paid for a transfer of property under such conditions is the
unpaid balance of the principal and interest under the mortgage, plus the additional compensation
(if any), paid by the mortgagee for the transfer. See Matter of Denos Vourderis, Decision of the State
Tax Commission, August 25, 1978, TSB-H-78(54)S.
Furthermore, in accordance with Sales and Use Tax Regulations Section 525.5(c)(1), quoted
above, a bad debt loss sustained by Petitioner in discharging its obligation as a co-debtor, even if the
end result were an uncollectible account, does not entitle Petitioner to a refund of or credit for the
sales tax charged to its customer and due to the Tax Department at the time of the sale.

DATED: August 22, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.