Suspension of sales tax bad debt deduction for retail affiliates and lenders

California Senate Bill 167 (SB 167) brings important updates that may impact businesses by significantly altering the bad debt deduction related to sales and use taxes.

This legislation changes the definition of retailer and introduces other modifications that effectively eliminate the bad debt deduction for affiliates of retailers and lenders.

Who is affected by SB 167?

This new law will impact banks, credit unions, and other lenders that offer loans on common items like cars, motorcycles, RVs, appliances, and equipment.

Background on SB 167

Since the year 2000, affiliates of retailers and lenders, referred to as other parties, have been permitted under tax law to claim a sales tax deduction on bad debts. As part of a broader legislative effort to address the substantial budgetary shortfalls facing the state, SB 167 was signed into law by California Governor Gavin Newsom on June 27, 2024, and included significant changes to the sales tax bad debt deduction.

What changes are new?

The law prior to SB 167 is as follows.

California law allows retailers and others to claim a deduction for sales and use taxes they paid on accounts that are considered worthless and have been written off. If a lender holds the account, either the retailer or the lender — if they choose to — can get a deduction or refund for the sale or use tax the retailer already reported and paid, if certain conditions are met.

Key changes

There are three major changes introduced by SB 167:

• Suspension of bad debt deduction
• Amended definition of retailer
• Current statute repealed

Suspension of bad debt deduction

The bad debt deduction for charge-offs by other parties occurring after Dec. 31, 2024, is suspended. Other parties are unable to claim deductions for write-offs taken after this date under the new provision.

Amended definition of retailer

Effective Jan. 1, 2025, the definition of retailer is revised to exclude other parties. Thus, going forward, only retailers will be able to claim a bad debt deduction for sales and use taxes. Bad debt deductions for other parties are permanently disallowed.

Current statute repealed

Effective Jan. 1, 2028, the current statutes will be repealed and replaced with language limiting the bad debt deduction to retailers. The current language regarding other parties will be permanently removed from the statute.

Next steps with changes

Other parties that want to benefit from the sales tax bad debt deduction should evaluate their receivables and policies related to bad debts to determine what amounts can be written off as bad debts by Dec. 31, 2024, to qualify for the sales tax bad debt deduction.