How should an auto-parts seller handle sales-tax reimbursement on a refundable core deposit?

Plain-English summary

For a qualifying exchange of a worn auto part for a reconditioned part, California allowed tax to be measured by the cash exchange price. When the seller also took a refundable “core deposit” to ensure that the customer later returned the worn part, the seller should initially charge tax reimbursement on both the exchange price and the deposit.

If the customer did not return the old part and forfeited the deposit, the transaction became a straight cash sale and tax applied to the total price. If the customer returned the core, the seller should refund both the deposit and the tax reimbursement attributable to it. The current official annotation page says retaining that tax amount would be excessive tax reimbursement under Revenue and Taxation Code section 6901.5.

The supporting PDF preserves the 1964 letter's reference to former section 6054.5 and also includes a September 29, 1989 memorandum directing that references to that repealed section be deleted. Because the PDF incorporates that correction, this page uses the 1989 date while explaining the original letter and the current annotation wording.

Common questions

Should the seller charge tax reimbursement on the core deposit at checkout?

Yes, to cover the possibility that the customer keeps the replacement and forfeits the deposit.

What happens when the customer returns the worn part?

The seller refunds the deposit and the related tax reimbursement.

Why does the PDF mention a different statute from the current annotation page?

The original 1964 letter cited section 6054.5; the included 1989 memorandum says that section had been repealed, and the current page cites section 6901.5.

Citations and references

• California Revenue and Taxation Code § 6901.5 (current annotation page)
• Former California Revenue and Taxation Code § 6054.5 (repealed effective January 1, 1979)
• California Code of Regulations, title 18, Regulation 1546

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/315-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/315-0400.pdf

Original ruling text

315.0400

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)

November 4, 1964
Mr. J--- K--XXXX --- Avenue
--- ---, California XXXXX

-- XXXXX
K--- and R--- A--- P---

Dear Mr. K---:
This is to inform you the position we have taken with respect to your petition for redetermination of sales tax. We regret that we must recommend that the petition be denied. As we discussed at the hearing, your present method of invoicing your customers when a “core deposit” is taken is proper. If the customer does not bring in the exchange part and thus forfeits the core deposit, tax applies to the total price. Therefore, to protect yourself, you should charge tax reimbursement upon the total of the exchange price plus the core deposit. However, when you refund the core deposit to the customer and do not also refund that portion of the tax reimbursement attributable to the deposit, you obtain excessive reimbursement with the meaning of § 6054.5 of the California Sales and Use Tax Law (copy enclosed). You have represented to your customer that the amount of tax charged will be paid to the state. Accordingly, you must repay such amounts to your customer, or in the alternative pay them to the state as taxes otherwise due. In order to avoid this problem in the future, we suggest that you refund tax reimbursement on the core deposits. Otherwise, it will have to be paid to the state. You did not specify in your petition for redetermination whether you wanted a board hearing or would be satisfied with the preliminary hearing held in West Los Angeles. If you disagree with our conclusions and desire an oral hearing before the board, we will schedule it upon request. Please let us know within 30 days so that we may make necessary arrangements. If you do not desire a board hearing, please sign and return two of the enclosed waiver of board hearing forms. The third copy is for your files. Very truly yours,

John H. Knowles
AssociateTax Counsel
JHK:mm
Enc.
cc:
--- – Subdistrict Administrator
Attached are two copies of hearing officer’s report dated 10-21-64, which has been approved. This hearing was held in West Los Angeles on 8-26-64.

State of California

Memorandum

To:

Mr. W. E. Burkett

From:

D. B. Furnish

Subject:

Business Taxes Law Guide Annotation 314.0400

Board of Equalization

315.0400

September 29, 1989

The subject annotation should be amended to delete references to excess tax reimbursement and Section 6054.5, which was repealed effective January 1, 1979.