Most businesses can benefit from certain exemptions and deductions that are often overlooked.Among these are the deduction for bad debts, the deduction for tax paid purchases resold, and the exemption for printed sales messages.

Printed sales messages (Regulation 1541.5) means catalogs, letters, brochures, and pamphlets printed for the principal purpose of advertising or promoting goods or services. Since many businesses advertise and use printed matter to accomplish this, a few rules can make these advertising pieces exempt from tax.

First, they must be printed to the special order of the business.

Secondly, they must be mailed or delivered by the seller (or by the seller’s agent or mailing house) by U S mail or common carrier.

Thirdly, they must be received by any other person (not the business) at no cost to that person who becomes the owner of the printed sales message.

Most businesses accomplish numbers one and three but often fail number two. A simple remedy is to never take possession of the printed matter but instead instruct the printer to either mail it to the intended parties or have them deliver to a mailing house who will mail the individual pieces to the intended parties.

Bad debts (Regulation 1642) are also allowed as a deduction on the sales tax return if they relate to sales previously reported as taxable. Since all retailers must report sales tax liability on an accrual basis, bad debts are deductible when they are found to be worthless and charged off for income tax purposes. If the person claiming a bad debt deduction for sales tax purposes is on a cash income tax reporting basis, they will still be allowed the deduction even though not written off. Also, the bad debt deduction is limited to the taxable sale originally reported therefore no deduction is allowed for the expense of collection.

A successor of a business that purchases accounts receivable will be entitled to the bad debt deduction just as if he were the original retailer. A purchaser of receivables other than a successor cannot obtain a bad debt deduction on accounts not collected.

The last deduction often missed is the deduction for tax paid purchases resold (Regulation 1701). In some cases retailers pay tax to their vendor or accrue use tax on purchases that are later resold before any use is made. This deduction should be claimed in any of the following circumstances:

1) The retailer when making the purchase intends to use the property rather than resell it, but later resells it before making any use thereof.

2) The particular property is of a kind not ordinarily sold or stocked by the retailer, and not customarily covered by resale certificates given to his vendors and is the subject of an unusual sale, such as a sale for the accommodation of a customer, employee, etc.

3) The particular property is generally for the use of the retailer, but a small portion is incidentally resold.

4) Through error, sales tax reimbursement or use tax is paid by the retailer with respect to the purchase price of property purchased for resale in the regular course of business.

In these instances a deduction for the cost of the property on which tax was paid is allowed. This deduction, should be taken in the period in which the sale is reported. Although Regulation 1701 does not require the sale to be taxable, the Sales Tax Department’s policy is that this credit is limited to the taxable sales reported. This can often present a peculiar problem for construction contractors who are buying all materials tax paid. The problem comes in when some of those materials are sold for resale to other wholesalers or interior designers. In these cases, the tax paid purchase resold deduction may generate a refund on the tax return. In some cases the refund will not be made by the State Board of Equalization even though the audit manual states this is the correct way a contractor should handle this (audit manual 1206.07 & 1206.10). In the alternative the contractor would either buy some items without tax (commingled tax paid and ex-tax inventory) which is an accounting nightmare, or buy everything for resale and report the cost of the materials used on contracts on line 2 of the sales tax return. If the Sales and Use Tax Department continues to insist that no refund can be allowed for tax paid purchases, this method would be the only other way to not pay tax on the cost of materials relating to non taxable sales.