Could a paint retailer deduct a customer credit for job time lost because the retailer delivered the wrong paint?

Plain-English summary

A paint retailer delivered the wrong paint to a commercial painter. It properly gave full credit for the unusable paint, replaced it, and invoiced the replacement at the regular price plus sales-tax reimbursement.

The retailer also credited the customer's account for hours lost on the job because of the wrong delivery. California said that additional credit was a payment of estimated damages and a business expense, not a reduction of the replacement paint's sale price.

Using an account credit rather than paying cash did not turn the damages into a returned-merchandise, defective-merchandise, or bad-debt deduction. Only the credit attributable to the returned paint reduced taxable gross receipts.

Common questions

Was the credit for the returned wrong paint deductible?

Yes; the source says that return was properly allowed and claimed.

Was the commercial painter's lost-time credit deductible?

No.

Did crediting accounts receivable instead of paying cash change the result?

No. The credit still satisfied a damages claim rather than changing the property's sale price.

Citations and references

• California returned- and defective-merchandise deductions — the source distinguished the returned paint from the separate damages credit
• California bad-debt deduction — the source said the fully invoiced replacement sale did not produce a bad-debt write-off

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/490-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/490-0090.pdf

Original ruling text

State of California

Board of Equalization
Legal Division

Memorandum

To:

Audit Review & Refund (GMD)

From:

Tax Counsel (JM) - Headquarters

Subject:

O--- Q--- Paint Company

490.0090
Date:

June 21, 1972

SR – XX-XXXXXX

This is in reply to your memo of May 25, 1972 in which you request our opinion concerning the propriety of allowing a deduction by the above-referenced taxpayer for amounts credited to a customer’s account receivable under the circumstance described in your memo. It is our opinion that the deduction should not be allowed. In the first instance full credit for the return of the unusable paint was allowed by the taxpayer to the purchaser. This return, we understand was properly allowed and claimed. In the second instance the paint is replaced and invoiced by the taxpayer to the purchaser at the regular sales price plus tax reimbursement. Because the purchaser is a valued customer and complains that the delivery of the incorrect paint has caused him to suffer loss of time on the job, taxpayer credits the customer’s account receivable based on so many dollars per hour of lost time. The credit allowed is, in our opinion, in the nature of payment of damages incurred as a result of taxpayer’s delivery of the improper paint under the original transaction. The allowance of the credit to the account is merely a method of satisfying the customer in lieu of paying the estimated damages in cash. The paint delivered in the second transaction was not defective merchandise and the sales transaction upon which sales tax reimbursement was computed did not result in a bad debt write off. The fact that the expense of the claim of damages was satisfied by an offset to accountant’s receivable rather than by payment of cash does not constitute an allowance for defective merchandise nor a bad debt write off. The reduction of the account receivable under the circumstances constitutes a business expense of taxpayer which may not be deducted from gross receipts.

Audit Review & Refund (GMB)

-2-

June 21, 1972
490.0090

The credit is not a reduction of the sales price of the property to the purchaser but a reimbursement to him for expenses incurred by reason of the taxpayer’s improper delivery of the original order. We are returning the file and documents to you.

JM:smb
cc:

490.0090.doc

Los Angeles Dist. – Dist. Admin.
Long Beach – Subdist. Admin.