Did a VCR manufacturer have to refund sales-tax reimbursement when it, rather than the retailer, refunded a defective unit's price?

Plain-English summary

A customer bought a VCR from a retailer and paid a separately stated amount labeled sales tax. After the VCR malfunctioned and the manufacturer's service center could not fix it, the manufacturer refunded the purchase price but withheld that tax amount.

California explained that the separately stated amount was sales-tax reimbursement collected under the sale contract, while the retailer—not the customer or manufacturer—owed the sales tax. A returned-merchandise deduction was available only to the retailer that made the taxable sale, and only if that retailer accepted the return and refunded the full sale price plus the reimbursement.

Because the manufacturer made this refund and had not paid the tax on the customer's retail purchase, its payment did not qualify for the deduction. The law did not require the manufacturer or retailer to voluntarily refund the withheld amount, and neither would receive a deduction for a manufacturer-paid refund on these facts.

Common questions

Why could the manufacturer not claim the deduction?

It did not make the retail sale or pay the tax associated with that sale.

Could the retailer have claimed a returned-merchandise deduction?

Only if the retailer itself accepted the return and refunded the customer's entire sale price, including the sales-tax reimbursement.

Could either business still refund the amount for customer-service reasons?

Yes, but the letter said the Sales and Use Tax Law did not require it and did not allow a deduction on account of the manufacturer's refund.

Citations and references

• California returned-merchandise deduction — available to the retailer only when it gives the purchaser a full refund including sales-tax reimbursement

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/490-0228.pdf

Original ruling text

490.0228

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
(916) 445-5550

February 13, 1990

Mr. G--- O--XXXX --- --- #XXX
--- ---, CA XXXXX
Dear Mr. O---:
This is in response to your letter dated January 20, 1990 regarding the following circumstances: “In February of 1989, I purchased a VCR from M--- Stereo. The unit began to malfunction approximately 8 months later, so I took it to a [VCR] Service Center. They checked it over multiple times and the problem persisted, so they gave me an option to refund the price I paid for it. However, they deducted the sales tax from the amount refunded saying it was not up to them to refund the tax.” Initially, we note that although M--- probably itemized an amount on the invoice to you as “sales tax,” this amount was actually sales tax reimbursement. The retailer (M---) is the person who owes the sales tax, but the retailer may collect sales tax reimbursement from the customer if their contract of sale so provides. The retailer may take a deduction on his sales tax return when he accepts a return of the merchandise and refunds the full sale price including that portion designated as “sales tax.” This means that when a transaction qualifies for this deduction, the retailer is, in effect, not out of pocket for the amount of “sales tax” he refunds to the customer. As I understand the facts about which you inquire, it was not the retailer that refunded the money to you, but rather the manufacturer of the VCR. If the manufacturer were to refund the “sales tax” to you, the manufacturer would not be entitled to take a deduction on its sales tax return with respect to that refund since it paid no sales tax with respect to the sale of the VCR to you (M--- is the person paying the sales tax.) The only person who would have been entitled to take a deduction on its sales tax return with respect to a refund of “sales tax” to you is M---, the retailer, and only if M--- were the person giving you a full refund of your sale price plus “sales tax.” The refund given to you by the manufacturer does not qualify for the deduction. Although M--- or
[VCR] may wish to refund the “sales tax” to you for business reasons, the Sales and Use Tax Law does not require that they do so and does not permit them a deduction on account of such refund.

Mr. G--- O---

-2-

February 13, 1990
490.0228

I assume that this is not the answer that you had hoped for, but I hope that at least I have answered your question. If not, or if you have further questions, feel free to write again. Sincerely,

David H. Levine
Tax Counsel

DHL:wak