On December 27, 2022, Ohio Governor Mike DeWine signed HB 223 into law, expanding the ability of vendors to deduct sales tax for bad debts. The bill impacts businesses, such as retail stores, that offer store-branded credit cards and applies to debt charged off as uncollectible on or after July 1, 2023.
Previous to HB 223, a vendor that generated bad debt could claim it as such for tax purposes, but the vendor who ultimately would not receive payment in the transaction still had to pay sales tax on the purchase with no opportunity for a refund from the state. Below outlines how HB 223 works:
- Vendors can deduct bad debts/unpaid balances on private label credit accounts or private label credit accounts receivables. For example, Home Depot can deduct bad debt on its Home Depot credit cards without paying sales tax on those transactions if the revenue is not, ultimately, collectable.
- Any vendor taking this deduction must include all credit sales transactions outstanding at the time of the charge off.
- Only purchases made on the vendor’s private label credit account or by the vendor’s affiliates or franchisees are eligible for the deduction on the basis of bad debt.
- If a vendor writes off any bad debt, they must keep detailed documentation in the event the state requests a review.
- If during a later period the lender successfully collects on the bad debt, the vendor must collect and pay tax on the original amount deducted.
- Vendors may carryforward the deductions for future periods in which the deduction exceeds taxable sales.
A win for retailers, vendors will want to act now to communicate with third-party accounts and potentially delay write offs until July 1 to maximize the new debt write-off rules.
Contact Nick Longo at nlongo@cohencpa.com, Mike Fink at mfink@cohencpa.com or a member of your service team to discuss this topic further.
