Publication 64, Jewelry Stores
Credits for Losses and Returned Items

Some losses and returns can be listed under exempt transactions on your sales and use tax return and deducted from the total taxable sales. Other losses cannot be deducted. This chapter covers some of the losses and returns common to jewelry stores, including bad debts, repossessions, robbery and theft, and returned merchandise for which you give refunds.

Bad debts and other losses

Bad debts

If you make a sales tax payment to us on a credit sale and later find you cannot collect on the balance due, you may be able to deduct the taxable percentage of the uncollectable amount on a later return. Bad debt deductions for losses from both repossessions and sales made on account generally are taken in the same way.

Generally, you can deduct taxable sales when you have been unable to collect payment for them, as long as the accounts (including uncollectible amounts and bad checks) are considered worthless and have been charged off for income tax purposes.

You should claim the deduction for the period in which you found the account worthless and wrote it off, under Bad Debt Losses on Taxable Sales on your sales and use tax return. If you receive payment at a later date, you must report it on the return for the period in which you received the payment.

Portions of your loss not allowed as deductions

The maximum allowable deduction is measured by the uncollected amount on which tax was actually paid with your tax return. Adjustments must be made for amounts that were not originally subject to tax, such as the sales tax itself, insurance, the wholesale value of repossessed items, and finance charges. To calculate a bad debt deduction, you must determine how much of your total loss was subject to tax, based on the taxable percentage of the original total selling price.

Please note: Even though this example shows tax calculated at a rate of 8.25 percent, you should use the rate in effect at your business location.

Example (Insufficient payment—no repossession): You sold a bracelet for $1,000, plus a 4 percent, nontaxable insurance charge ($40) and 8.25 percent sales tax ($82.50), for a total of $1,122.50. The taxable amount of the sale was the original price of the item ($1,000) since neither sales tax nor insurance are subject to tax. You received $400 in payments for the bracelet. Your total loss (the amount you could not recover) was $722.50.

Your bad debt deduction would be calculated as follows:

Total loss calculation:

Allowable sales tax deduction calculation:

Repossessions

To determine the allowable deduction for a repossessed item, you must also deduct the wholesale value of the item from the original, taxable selling price.

Example (repossession): Using the example above, you would make the following adjustment if you repossessed a bracelet with a wholesale value of $300:

Total loss calculation:

Allowable sales tax deduction calculation:

You cannot deduct collection expenses for bad debts. You must keep adequate and complete records to support any bad debt deduction you claim.
Determining the allowable deduction for a bad debt can be complicated. For more specific information, see Regulation 1642, Bad Debts.

Tax rate changes

If the tax rate has changed since you made the sale, you must adjust the amount of the bad debt deduction to conform to the tax rate in effect at the time of the sale. Please call our Customer Service Center for assistance at 1-800-400-7115 (TTY:711).

Robbery and theft

Because sales tax is measured by sales you have made, robberies of cash are not deductible. You are required to pay sales tax on all taxable sales despite any loss of proceeds from them.

Losses of merchandise due to robbery, theft, or shoplifting are not deductible. However, since they may affect your cost of goods sold, you must document them in your records in case of an audit. Acceptable forms of documentation include police reports, insurance claims, reports from private investigating agencies, and so forth.

Returned merchandise with full refund or credit given

Under certain circumstances, you may deduct the value of returned merchandise on your tax return. To take the deduction, you must:

• Refund the full sales price (including sales tax) in cash or by giving the customer a full credit minus any restocking charges, and
• Not require the customer to purchase other merchandise that costs more than the returned item.

However, if you require the customer to purchase more expensive merchandise to receive credit for the return, you may not take the returned merchandise deduction. In that instance, the return is considered a trade-in. Application of sales tax to trade-ins is covered in Taxability of Sales and Labor Charges.

Generally, a charge for restocking returned merchandise is a charge for a service and is not subject to tax. The amount withheld for restocking may not exceed the actual cost of restocking the returned merchandise. However, instead of using the actual cost for each transaction, the amount withheld for rehandling and restocking may be a percentage of the sales price determined by the average cost of rehandling and restocking returned merchandise during the previous accounting cycle (generally one year). You must keep documentation to support this method for calculating rehandling and restocking charges.

Restocking fee – Percentage of sales price

Restocking fee - Actual cost to restock

For more information on returned merchandise and restocking charges, see Regulation 1655, Returns, Defects and Replacements.

Revision July 2026