Prepared by the Department of Revenue

Summary of proposed legislation

This proposed legislation would narrow the scope of the business and occupation (B&O) tax bad debt deduction, and the related sales and use tax bad debt credit/refund. Specifically, by revising the definition of “bad debts,” this proposal would eliminate a seller’s ability to claim those bad debt tax preferences for amounts the seller pays as reimbursement of losses sustained by a third-party creditor of the seller’s customer. As a result, the bad debt tax preferences would be limited to bad debts incurred directly by a seller as a result of the nonpayment to the seller by its customers, consistent with the Department’s historical interpretation prior to the Washington Supreme Court’s Lowe’s decision (Lowe’s Home Centers, LLC v. Dep’t of Revenue, 195 Wn.2d 27 (2020)).

This proposal revises the definition of “bad debts” by:

• Requiring that sellers actually qualify for the federal bad debt deduction and not merely claim the deduction on their federal return.
• Requiring sellers to actually write off the bad debt before claiming the bad debt deduction, credit, or refund.

Excluding amounts paid by a seller to a third-party creditor of the buyer to reimburse that creditor for the buyer’s nonpayment of an obligation to the creditor.

Current law

Under current law, a seller is entitled to:

• A B&O tax deduction for bad debt amounts.
• A credit or refund for sales and use taxes previously paid by the seller on bad debts for which the seller has been unable to collect from the customer.

In the Lowe’s decision, the Washington Supreme Court ruled that Lowe’s was entitled to a bad debt refund on credit sales for amounts Lowe’s paid to third-party private label credit card providers (banks). These amounts were paid pursuant to contracts in which Lowe’s guaranteed a portion of the banks’ losses from defaulting cardholders. The Department of Revenue (Department) had denied the bad debt refund because, following the private label credit card purchases, the banks sent Lowe’s full payment for the purchases, including sales taxes, and Lowe’s then paid those sales taxes to the Department.

Revenue impact

This proposal impacts approximately 46,000 taxpayers and will have the following state impacts: