Could a retailer charge sales tax on a properly calculated restocking fee deducted from a merchandise return?

Plain-English summary

A customer returned an $8.92 item the day after purchase. The retailer kept a 10% service charge of $0.89 and refunded only $0.48 of the $0.54 originally collected as sales-tax reimbursement—effectively charging $0.06 of tax on the restocking fee.

California said the retailer could deduct properly computed actual rehandling and restocking costs from the purchase-price refund. But restocking was a service, not a sale of tangible property, so the charge itself was not taxable.

The retailer had to credit the customer with the full sales-tax reimbursement first and then subtract the allowed service charge. Refunding tax only on the net amount after the restocking deduction was incorrect.

Common questions

Was the retailer allowed to keep a restocking charge?

Yes, assuming it represented actual rehandling and restocking costs computed as Regulation 1655 allowed.

Was that charge subject to sales tax?

No. It was a charge for services only.

How should the refund have been calculated?

Refund all sales-tax reimbursement and deduct the valid restocking charge separately from the purchase-price refund.

Citations and references

• Cal. Code Regs., tit. 18, reg. 1655(a) — returned-merchandise refund and actual rehandling or restocking costs

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/490-0223.pdf

Original ruling text

490.0223

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
(916) 445-6493
June 24, 1988
Mr. REDACTED TEXT
REDACTED TEXT
REDACTED TEXT
Rehandling and restocking charges
Dear Mr. REDACTED TEXT:
In your letter to the Board’s legal staff, which we received May 16, 1988, you enclosed two invoices from REDACTED TEXT in REDACTED TEXT, California. In summary, your letter and the invoices enclosed indicate that you purchased an item for $8.92 plus $0.54 sales tax from the REDACTED TEXT, and then returned it the following day. Rather than returning the entire amount of $9.46 to you, the REDACTED TEXT deducted $.89 as a “service charge,” (i.e., 10 percent of the
$8.92 purchase price) and refunded to you $8.03 plus $0.48 sales tax. In effect, the REDACTED TEXT charged you sales tax of $0.06 on an $0.89 service charge. You wonder whether a business is authorized to charge tax on this handling charge, which is essentially labor, under the Board’s Regulation 1655. You state that the Board’s local office has informed you that it is permissible for a business to deduct handling charges. Opinion Under Regulation 1655(a), merchandise returned to the seller is not subject to sales tax if the requirements of that regulation are met. Among other things, the regulation provides that the full sales price, including the portion designated as sales tax, must be refunded to the customer. But the taxpayer’s actual rehandling and restocking costs may be deducted from the purchase price, and the taxpayer is authorized to use a percentage of the sales price determined by the average cost of rehandling and restocking returned merchandise in order to compute the amount deducted from the refund for rehandling and restocking. For purposes of this opinion, we assume that the REDACTED TEXT has correctly computed its rehandling and restocking costs as provided in Regulation 1655. However, we agree with your contention that the REDACTED TEXT cannot charge you sales tax on its service charge for rehandling and restocking. This is a charge for services only, and not for the sale of tangible property. The REDACTED TEXT must refund you the entire sales tax on the returned merchandise, not just a portion. The REDACTED TEXT should properly deduct its service charge after crediting the customer with the refund of the sales tax, not before that credit. If the Board’s local office informed you the REDACTED TEXT’s procedure was correct, I believe our local office must have understood your question to be whether a seller may properly deduct a rehandling charge, and not whether that seller may collect sales tax on that charge.

Mr. REDACTED TEXT

-2-

June 24, 1988
490.0223

I enclose a copy of Regulation 1655 for your information. Please feel free to contact me if you have any further questions or comments about this letter. Sincerely, John Abbott Tax Counsel JA:jb Enclosure cc:

REDACT TEXT