1. (a) Accounting methods.

   1. (1) For sales and use tax purposes, retailers may use a cash basis, an accrual basis, or any generally recognized accounting basis which correctly reflects the operation of their business. Retailers who wish to use an accounting system to report tax which is not on a pure cash or accrual basis or that is not a commonly recognized accounting system should obtain prior written approval from the comptroller.
   2. (2) Rentals and leases are not covered by this section. See §3.294 of this title (relating to Rentals and Leases of Taxable Items) for the accounting of rentals and leases.

2. (b) Credit sales.

   1. (1) Credit sales include all sales in which the terms of the sale provide for deferred payments of the purchase price. Credit sales include installment sales, conditional sales contracts, and revolving credit accounts.
   2. (2) Sales tax is due on insurance, interest, finance charges, and all other service charges incurred as a part of a credit sale unless these charges are stated separately to the customer by such means as an invoice, billing, sales slip, ticket, or contract.

   3. (3) Tax is to be reported on a credit sale based upon the accounting method used by the retailer.

      1. (A) If the retailer is on an accrual basis, the entire amount of tax is due and must be reported at the time the sale is made.
      2. (B) If the retailer is on a cash basis of accounting, the payment received from the customer includes a proportionate amount of tax, sales receipts, and may also include finance charges. Tax must be reported based upon the actual cash collected during the reporting period, excluding separately stated finance charges.
      3. (C) If the retailer uses an accounting basis which is not a pure cash or accrual basis, tax must be reported in a consistent manner which accurately reflects the realization of income from the credit sales on the retailer's books and records.
3. (c) Transfer or sale of sales contracts and accounts receivable. A retailer may sell, factor, or assign to a third party the retailer's right to receive all payments due under a credit sale. At the time the contract or receivable is sold, factored, or assigned, the tax becomes due on all remaining payments. The retailer is responsible for reporting all remaining tax due under the credit sale to the comptroller in the reporting period in which the contract or receivable is sold, factored, or assigned. No reduction in the amount of tax to be reported and paid by the retailer is allowed if the transfer to the third party is for a discounted amount. This section does not apply to the assignment or pledge of contracts or accounts receivable by a seller to a third party as loan collateral.

4. (d) Bad debts.

   1. (1) Any portion of the sales price of a taxable item which the retailer cannot collect is considered to be a bad debt.

      1. (A) A retailer is not required to report tax on any amount which has been entered in the retailer's books as a bad debt during the reporting period in which the sale was made and which will be taken as a deduction on the federal income tax return during the same or subsequent reporting period.
      2. (B) A retailer is entitled to a credit for tax reported and paid on an account later determined to be a bad debt. A retailer may take a deduction on the retailer's report form or obtain a refund from the comptroller in the reporting period in which the retailer's books reflect the bad debt. Deductions and refunds due to bad debts are limited to four years from the date the account is entered in the retailer's books as a bad debt.
   2. (2) The amount of the bad debt may include both the sales price of the taxable item and nontaxable charges such as freight or finance charges which were separately billed to the customer. A deduction may only be claimed on that portion of the bad debt which represents the amount reported subject to tax. In determining that amount, all payments and credits to the account may be applied ratably against the various charges comprising the bad debt, except as provided by subsection (d)(3) of this section.
   3. (3) A retailer may not deduct from the amount subject to tax to be reported the expense of collecting a bad debt or the amount retained by or paid to a third party for the service of collecting a bad debt.

   4. (4) To claim bad deductions a retailer's records must show:

      1. (A) date of original sale;
      2. (B) name and address of purchaser;
      3. (C) amount purchaser contracted to pay;
      4. (D) taxable and nontaxable charges;
      5. (E) amount on which retailer paid tax;
      6. (F) all payments or other credits applied to the account of the purchaser;
      7. (G) evidence that the uncollected amount has been designated as a bad debt in the retailer's books and records and has been or will be claimed as a bad debt deduction for income tax purposes.
   5. (5) If a retailer later collects all or part of an account for which a bad debt deduction was claimed, the amount collected must be reported as a taxable sale in the reporting period in which such collection was made.
   6. (6) Credit or installment sales may not be labeled as bad debts merely for the purpose of delaying the payment of the tax.

5. (e) Repossessions.

   1. (1) When taxable items upon which tax has been paid by the retailer are repossessed, the retailer is allowed a credit or deduction for that portion of the actual purchase price remaining unpaid. The deduction must not include any nontaxable charges which were a part of the original sales contract. Any payments made by the purchaser prior to repossession must be applied ratably against the various charges in the original sales contract.
   2. (2) A retailer may not deduct from the tax to be reported the expense of collecting an account receivable or the amount retained by or paid to a third party for the service of collecting an account or repossessing or selling a repossessed item.

   3. (3) To claim a deduction or credit the retailer's records must show:

      1. (A) date of original sale;
      2. (B) name and address of purchaser;
      3. (C) amount purchaser contracted to pay;
      4. (D) taxable and nontaxable charges;
      5. (E) amount on which retailer paid tax;
      6. (F) all payments or other credits applied to the account of the purchaser.
   4. (4) Sales tax is due on the sale of a repossessed item whether sold by a vendor, mortgagee, secured party, assignee, trustee, sheriff, or an officer of the court unless the sale is otherwise exempt. If the vendor, mortgagee, secured party, assignee, trustee, sheriff, or officer of the court does not collect the tax, the purchaser must remit the tax directly to the comptroller.

6. (f) Interest on sales tax. For the purposes of this section, the terms interest and time price differential will be referred to as interest. The term credit includes all deferred payment agreements.

   1. (1) Effective January 1, 1982, sellers on a cash basis of accounting who sell taxable items on credit and charge interest on the amount of credit extended, including sales tax, are required to remit to the comptroller a portion of the interest collected on the state, city, and metropolitan transit authority taxes. This section applies to all interest collected on or after January 1, 1982, on sales occurring before, on, and after January 1, 1982.
   2. (2) If the amount of interest charged on the tax is 18% or less, the seller must remit to the comptroller one-half of the interest charged on the tax.
   3. (3) If the amount of interest charged on the tax is greater than 18%, the seller must remit the amount of interest charged less 9%, i.e., 21% charged less 9% deduction equal 12% interest remitted. A seller will not be allowed the 9% deduction if the interest rate charged on sales tax is different from the interest rate charged on sales tax is different from the interest rate charged on the sales price of the taxable item.
   4. (4) In determining the amount of interest to be remitted to the comptroller, it is not necessary for a seller to calculate the interest on each individual account. A formula for the calculation may be used if the formula correctly reflects the amount of interest collected. The formula will be subject to verification upon audit of the taxpayer's records.
   5. (5) Except for the provisions of Texas Tax Code, §151.423 and §151.424, all reporting, collection, refund, and penalty provisions of Texas Tax Code, Chapter 151, including assessment of penalty and interest, apply to interest due.

7. (g) Trade-ins. For the purpose of this subsection, a trade-in is a taxable item which is being used to reduce the purchase price of another taxable item.

   1. (1) The sales price of a taxable item does not include the value of a trade-in taken by a seller as all or part of the consideration for a sale of a taxable item of the same type normally sold in the regular course of business. For example, sales tax will be due only on the difference between the amount allowed on an old typewriter taken in trade and the sales price of a new typewriter.
   2. (2) The sales price of a taxable item does include the value of a trade-in taken by a seller as all or part of the consideration for the sale of a taxable item if the trade-in is of a different type from the type normally sold in the regular course of business. For example, a seller of a typewriter taking a desk in trade as part of the sales price of a typewriter would collect sales tax on the retail sales price of the typewriter without any deduction for the value of the desk. In this situation, the seller and buyer are considered to be bartering. However, if a seller of typewriters is also a seller of desks, the value of the desk would be allowed as a trade-in.
   3. (3) Persons removing items from a tax-free inventory for use as a trade-in owe sales tax on the cost price of the items. If both parties to a transaction are removing items from a tax-free inventory to trade for other items to be used by each party, the transaction will be regarded as barters by both parties. Each party to the barter will be required to collect sales tax on the retail sales price of the item being transferred. For example, a retailer of drill pipe trades pipe to a retailer of aircraft in exchange for an aircraft. Both retailers are trading the respective items for use, not resale. The pipe retailer must collect sales tax on the retail sales price of the pipe. The aircraft retailer must collect sales tax on the retail sales price of the aircraft.
   4. (4) See §3.336 of this title (relating to Sales of Gold, Silver, Coins, and Currency) for information on persons who barter for taxable items with gold, silver, diamonds, or precious metals.

Source Note:The provisions of this §3.302 adopted to be effective January 1, 1976; amended to be effective November 14, 1984, 9 TexReg 5583; amended to be effective September 16, 1985, 10 TexReg 3323.