This rule was adopted on December 8, 2005, and becomes effective January 8,
2006. It may be used to determine tax liability on and after the effective
date, until the codified version is available from the code reviser's office.
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AMENDATORY SECTION (Amending WSR 05-04-048, filed 1/27/05,
WAC 458-20-196 Bad debts. (1) Introduction.
(a) New laws effective July 1, 2004. This rule provides
information about the tax treatment of bad debts under the
business and occupation (B&O), public utility, retail sales, and
use taxes, and reflects legislation enacted in 2003 and 2004
conforming Washington law to provisions of the national
Streamlined Sales and Use Tax Agreement. See chapter 168, Laws
of 2003 and chapter 153, Laws of 2004. The new laws related to
bad debts are effective July 1, 2004.
(b) Bad debt deduction for accrual basis taxpayers. Bad
debt credits, refunds, and deductions occur when income reported
by a taxpayer is not received. Taxpayers who report using the
cash method do not report income until it is received. For this
reason, bad debts are most relevant to taxpayers reporting
income on an accrual basis. However, some transactions must be
reported on an accrual basis by all taxpayers, including
installment sales and leases. These transactions are eligible
for a bad debt credit, refund, or deduction as described in this
rule. For information on cash and accrual accounting methods,
refer to WAC 458-20-197 (When tax liability arises) and WAC 458-
20-199 (Accounting methods). Refer to WAC 458-20-198
(Installment sales, method of reporting) and WAC 458-20-199(3)
for information about reporting installment sales.
(c) Relationship between retailing B&O tax deduction and
retail sales tax credit. Generally, a retail sales tax credit
for bad debts is reported as a deduction from the measure of
sales tax on the excise tax return. The amount of this
deduction, or the measure of a recovery of sales tax that must