When a retailer sells its credit-card receivables to a financial institution, can the retailer claim a sales tax bad debt deduction for accounts the institution later writes off — and does it matter whether the sale to the institution is a true recourse arrangement or a discounted factoring sale?

Plain-English summary

A retailer that finances its own private-label credit card sales through a financial institution asked whether it could take a sales tax bad debt deduction for accounts the institution later wrote off. The retailer's understanding — based on an earlier 1992 Comptroller memo — was that if it sold its credit card receivables "subject to recourse," it could claim the deduction.

The retailer described its arrangement: the financial institution buys the credit card accounts and pays the retailer a percentage of face value; the payout is adjusted quarterly for actual bad-debt write-offs, but only up to 7.25% of average net receivables — losses beyond 7.25% are the financial institution's own cost, and (as a practical matter) the retailer's portfolio has never exceeded that threshold. The retailer argued this made the arrangement "full recourse."

The Comptroller's legal answer: a retailer that factors receivables to a third party under a genuine recourse provision may claim a bad debt deduction on the accounts written off because of that recourse (Rule 3.302(d)). But under Rule 3.302(c), a retailer that simply factors (sells) receivables for less than their face value cannot reduce its tax by that discount — that's an ordinary factoring sale, not a recourse arrangement.

But the Comptroller pushed back on how the taxpayer characterized its own facts. The letter walks through the stated facts and concludes they actually support both a recourse reading and a factored-sale reading, and specifically disagrees with the taxpayer's claim that the 7.25% cap amounts to "full recourse": the fact that the retailer's actual losses had never exceeded 7.25% doesn't itself prove the institution has recourse for all bad debts, and the "dollar-for-dollar" recourse characterization wasn't supported by the facts as presented. The Comptroller asked the taxpayer to correct the record if any facts had been misconstrued, rather than confirming the deduction outright.

The letter also flags a relevant statutory change: House Bill 3211, amending Tex. Tax Code § 151.426 effective October 1, 1999, lets a person who extends credit to a purchaser under a retailer's private-label credit agreement (or an assignee/affiliate of the creditor or retailer) take a credit for Texas sales/use tax remitted that is later written off as a bad debt.

What this means for you

Retailers with private-label credit card financing arrangements

Don't assume a cap on the financial institution's bad-debt exposure (like the 7.25% ceiling here) automatically makes your arrangement "full recourse" for sales tax bad-debt purposes. The Comptroller looks closely at whether the institution genuinely bears the risk on a dollar-for-dollar basis, not just at how the deal is labeled.

Retailers who factor receivables at a discount

If you're simply selling receivables for less than face value with no true recourse provision, Rule 3.302(c) blocks you from treating that discount as a tax-reducing bad debt.

Accountants and tax professionals

This letter is a good illustration that the Comptroller will scrutinize the underlying deal mechanics — not just how a taxpayer characterizes the arrangement — when distinguishing a genuine recourse factoring deal (Rule 3.302(d), credit allowed) from an ordinary discounted factoring sale (Rule 3.302(c), no credit). Also worth flagging the 1999 statutory expansion (§ 151.426, via H.B. 3211) letting assignees/affiliates of private-label credit issuers take the bad debt credit.

Common questions

Q: Can a retailer take a sales tax bad debt deduction when it sells its credit card receivables to a financing institution?
A: Only if the sale genuinely involves recourse — the institution can charge the retailer back dollar-for-dollar for bad debts. A discounted factoring sale without true recourse doesn't qualify under Rule 3.302(c).

Q: Does a cap on the institution's bad-debt exposure (like a 7.25% ceiling) prove full recourse?
A: Not by itself — in this letter, the Comptroller specifically disagreed that a cap the retailer's losses had never exceeded amounted to full recourse against the retailer for all bad debts.

Q: Did a 1999 law change anything here?
A: Yes. House Bill 3211 amended Tex. Tax Code § 151.426, effective October 1, 1999, to let a person extending credit under a retailer's private-label credit agreement (or an assignee/affiliate) take a bad debt credit for sales/use tax already remitted.

Q: Can I rely on this letter for my own financing arrangement?
A: No. This opinion is based on the facts presented, and the Comptroller here specifically questioned whether those facts were accurately characterized; it can be relied on only by the taxpayer it was issued to.

Citations and references

Rules and statutes:

• 34 Tex. Admin. Code Rule 3.302(d) (bad debt deduction available for genuine recourse factoring arrangements)
• 34 Tex. Admin. Code Rule 3.302(c) (no bad debt credit for a discounted, non-recourse factoring sale)
• Tex. Tax Code § 151.426, as amended by House Bill 3211 (effective 10/1/1999) (bad debt credit extended to private-label credit issuers/assignees/affiliates)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200002599L

Original ruling text

February 23, 2000

Dear **:

Thank you for your recent letter concerning bad debt write-offs.

It was your understanding, based upon my memorandum of December 17, 1992, that
if accounts were sold subject to recourse to a financial institution financing
the retailer's credit card, the bad debt write-offs would be available to the
retailer for sales tax purposes.

The facts in your situation are as follows:

1. The retailer has entered into an agreement with a financial institution
   financing for credit cards issued in the retailer's name.

2. When items are purchased with the retailer's credit card, the financial
   institution pays the retailer a percentage of the face value of the sale, as
   specified in the agreement, and takes ownership of the account.

3. The financial institution earns its money on the interest on the credit card
   and other charges such as insurance, late charges, etc.

4. The amount paid by the financial institution to the retailer with respect to
   credit card sales is determined by taking into account credit card bad debts
   and is adjusted quarterly based on actual bad debt write-offs. However, in
   order to ensure that the financial institution is diligent in collecting the
   amounts owed by the retailer's customers, the agreement provides that in
   determining the amount to be paid to the retailer, an adjustment will only be
   made for bad debts to the extent that bad debts do not exceed 7.25% of average
   net receivables. Losses in excess of 7.25% represent a cost to the financial
   institution, however, the retailer's portfolio has never experienced losses in
   excess of this amount. Thus, as a practical matter, under the terms of the
   agreement the financial institution has full recourse against the retailer for
   all bad debts.

Essentially, the financial institution pays the retailer face value for the
credit card sales, and the retailer is contractually required to pay the
financial institution on a dollar for dollar basis for bad debt losses on the
credit card sales.

5. The retailer reports sales tax on the accrual basis of accounting.

6. On a daily basis, the financial institution settles-up with the retailer by
   paying the retailer for all sales based upon the agreed upon percentage
   referred to above, which is determined after adjusting for uncollectible
   accounts.

7. The retailer records the uncollectible accounts reported by the financial
   institution bad debts and writes such amounts off on its federal income tax
   return.

It is your understanding from our conversation that the retailer may take a bad
debt deduction for these charged back items so long as it complies with section
(d) of Comptroller's Rule 3.302. For purposes of our response, you ask that we
assume the preceding facts.

Response: A retailer that makes taxable sales and assigns or factors the
rights to collect the receipts to a third party (your fact #2) may claim a bad
debt on accounts receivables that are written off their books as a result of
recourse provisions contained in the agreement. However, as stated in Rule
3.302 (c), a retailer that factors receivables and receives a lesser amount for
the receivables than the face value of uncollected accounts cannot reduce the
amount of the tax payable for the discounted amount.

The facts presented appear to support both a recourse (credit allowed) and a
factored account (no credit allowed) scenario. For example: Fact 2 above
states that the financial institution pays a percentage of the face value to
the retailer (factored account). Fact 3 states that the financial institution
earns its money on interest and other factors but does not state that the
institution receives no profit when the incidence of loss (actual bad debts) is
less than 7.25%. Fact 4 states that the factored amount is arrived at by
looking at historical bad debts costs and is adjusted quarterly. This is
actually a normal practice in factoring loans and does not create a recourse
situation for the initial 7.25%. Fact 4 states that losses in excess of 7.25%
represent a loss to the financial institution. This is indicative of a non
recourse factoring arrangement. I disagree with the contention that the fact
that losses have never exceeded the 7.25% creates a situation of full recourse
against the retailer for all bad debts. The statement that the retailer pays
the financial institution on a "dollar-for-dollar basis" for bad debt losses is
not supported by the facts that preceded it.

Please contact me if I have misconstrued the above facts.

You may wish to review recent House Bill 3211 amending Section 151.426 of the
Texas Tax Code. The amendment allows a person that extends a credit to a
purchaser under a retailer's private label credit agreement (or an assignee or
an affiliate of the creditor or retailer) to take credit for Texas sales or use
tax remitted to the Comptroller that is later written off as a bad debt. This
provision was effective October 1, 1999.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Kevin Koller
Tax Policy Division