Could a tractor seller rescind a sale, keep a rental charge for the buyer's prior use, and still claim a returned-merchandise deduction?

Plain-English summary

A seller sold a Caterpillar tractor for $20,000 and paid sales tax on the transaction. Five months later, changed operating plans led the buyer to return it, and the parties agreed to rescind the sale while substituting a rental charge for the buyer's prior use.

California treated the original transaction as a completed sale. The seller could claim a returned-merchandise deduction only by refunding the entire sale price, including sales-tax reimbursement, except for permitted actual restocking costs.

Keeping a rental or usage charge was inconsistent with that full-price requirement and could circumvent it. California therefore recommended denying the seller's petition.

Common questions

Could the first transaction be recharacterized as a rental?

No. California treated it as a completed sale followed by rescission.

Why did the rental charge defeat the deduction?

Because the seller did not return the full sale price.

Could the seller retain any return-related costs?

Only allowable actual restocking-type costs under the historical guidance, not rent for prior use.

Citations and references

• Cal. Rev. & Tax. Code § 6006 — sale and rental characterization raised by the seller
• Cal. Rev. & Tax. Code § 6012 — full-sale-price refund requirement
• Historical Sales Tax Bulletin 52-8 and Ruling 64 — allowable return costs discussed in the source

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/490-0180.pdf

Original ruling text

490.0180

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
5-17-57
REDACTED TEXT
It is our understanding that on 4-1-56, you sold Caterpillar tractor serial # REDACTED TEXT to the REDACTED TEXT Company (California) for $20,000, and reported and paid the sales tax thereon. Subsequently on 9-1-56, due to unforeseeable circumstance, the operating plans of the purchasing company were changed and the tractor was returned to you. Shortly thereafter, it was agreed between the two companies that the sale of the equipment would be rescinded and that a rental would be substituted as a charge for its use. In your letter, you stated that “Assuming then that the transaction was some sort of sale within the purview of the Act, it must have been, under § 6006, a type of ‘rental’ which was ‘in lieu of a transfer of title’ and the ‘Sales Price’ must accordingly be the ‘total amount’ of rental paid.” We believe, however, that the transaction must be regarded as a sale rather than as a rental. It is our opinion that a completed sale took place followed by a rescission of the contract of sale. At the time of the sale, you (as the seller) became liable for the sales tax measured by the entire gross receipts from the sale. When the contract was subsequently rescinded, you could have taken a deduction if the entire sales price, including any amount collected as sales tax reimbursement, had been refunded to the purchaser, as required by § 6012 of the Sales and Use Tax Law. To allow a charge for usage or “rent” to be made and still allow a deduction of the selling price would seem quite inconsistent with § 6012, and would afford a means of circumventing its specific requirement of a return of the full sales price, thus rendering the requirement of the section practically meaningless. Sales Tax Bulletin 52-8, copy enclosed, Indicates the extent to which the retailer may make a charge for costs of restocking, etc., and still be regarded as having refunded the full sales price. You will observe that this does not include a rent or usage charge. Ruling 64, mentioned in the bulletin, is also enclosed. It will be our recommendation to the board that your petition be denied. You shall receive notice of the board’s official action in due course. vty - EHS