Was tax measured only by the discounted cash price when the retailer also received $5,000 for the customer's old product?

Plain-English summary

The retailer sold a product for a $28,000 stated price less a $2,800 cash discount, so the customer paid $25,200 in cash. The customer also surrendered an old product, which the retailer sent to the manufacturer and for which the manufacturer paid the retailer $5,000.

Cash discounts allowed and taken were excluded from gross receipts, so the $2,800 did not enter the taxable measure. The old product was different: the customer had agreed to transfer it as consideration for the new product, and the stated facts valued it at $5,000.

The retailer therefore received $25,200 plus $5,000, for taxable gross receipts of $30,200. Even if the customer had paid reimbursement measured only by $25,200, the retailer still owed tax on $30,200 and could collect additional reimbursement up to that measure if the sales contract allowed it.

Common questions

Did the manufacturer's payment make the $5,000 a nontaxable rebate?

No under the stated facts. The letter treated the amount as the value of the old product the customer transferred as part of the purchase consideration.

Was the retailer's $29,000 acquisition cost the tax measure?

No. The opinion measured tax by the retailer's gross receipts from the customer transaction.

Citations and references

• California Revenue and Taxation Code sections 6012(a) and 6051 (gross receipts and retail sales tax, as cited)
• California Revenue and Taxation Code section 6012(c)(1) (cash discounts allowed and taken, as cited)
• California Civil Code section 1656.1 (sales-tax reimbursement by contract, as cited)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/140-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/140-0026.pdf

Original ruling text

140.0026

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 322-2976

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

September 20, 1994

BURTON W. OLIVER
Executive Director

Mr. REDACTED TEXT
Re:

Unidentified Taxpayer

Dear Mr. REDACTED TEXT:
This is in response to your letter dated July 11, 1994 regarding the application of sales tax to transactions involving cash discounts to customers and rebates from manufacturers. You ask how tax applies to the following scenario: “Product is purchased for resale (ex-tax) from distributor (A) for $29,000. “Product is subsequently sold by seller (B) to customer (C) as follows: Gross sale price

$28,000

Cash discount

(2,800)

Net sale price

$25,200

“Sales tax is charged to customer (C) based upon net sale price of $25,200. “The customer's old product is taken upon sale of new product and under an incentive program with the manufacturer, is sent to the manufacturer who subsequently forwards a rebate of $5,000 to the seller (B).”

Mr. REDACTED TEXT

-2-

September 20, 1994
140.0026

Retail sales of tangible personal property in California are subject to sales tax, which is measured by gross receipts, unless specifically exempt by statute. (Rev. & Tax. Code § 6051.) Taxable gross receipts include the total amount of the retail sale, valued in money, whether received in money or otherwise. (Rev. & Tax. Code § 6012(a).) However, gross receipts do not include cash discounts allowed and taken on sales. (Rev. & Tax. Code § 6012(c)(1).) In your example, the customer has contracted to pay a certain sum of money plus transfer the old product as consideration for acquiring the new product. Taxable gross receipts from this sale include the fair market value of the old product. As described in your letter, the value of the old product is $5,000, and that amount must be included in the seller's taxable gross receipts. On the other hand, since the seller does not receive the amount of the cash discount from the customer, the cash discount amount is not part of the seller's gross receipts with regard to its sale to the customer. Thus, under the facts in your scenario, the seller has received $30,200, and that total is the correct measure of tax. The sales tax is imposed upon the retailer, but the retailer may collect sales tax reimbursement from the purchaser if the contract of sale so provides. (Civ. Code § 1656.1.) Under your scenario, even if the purchaser has paid sales tax reimbursement on $25,200, the seller still owes tax on $30,200. If the contract provides for sales tax reimbursement, the seller can collect reimbursement from the customer measured by an amount up to, but not over, $30,200. If you have any further questions, please feel free to write again. Sincerely,

Kelly W. Ching
Staff Counsel
KWC:cl
REDACTED TEXT.ltr

cc:

San Jose District Administrator