When could a drilling-bit retailer deduct the original sale after supplying a replacement bit?

Plain-English summary

A drilling-bit retailer sold carbide-tipped bits under a manufacturer program that repaired or replaced bits damaged in use. Customers paid a percentage of the price based on prior use and sometimes bought a new bit immediately while waiting for the original to be repaired or returned.

For a bit damaged after use, sales tax applied to the entire selling price of both the original bit and the new replacement. A later credit reduced by a use charge did not undo either taxable sale.

Different treatment applied when the original bit was defective on its initial use. If the manufacturer authorized a no-charge replacement and the retailer refunded the customer's entire original purchase price, including sales-tax reimbursement, the retailer could claim the defective-merchandise deduction for that first sale.

Common questions

Were both bits taxable when the original was damaged after use?

Yes.

What was required for the initial-defect deduction?

A manufacturer-authorized replacement and refund of the original bit's full price, including sales-tax reimbursement.

Could the retailer keep a percentage for customer use and still claim the full deduction?

Not under the ordinary use-damage facts described.

Citations and references

• Historical California Ruling 66 — defective-merchandise deduction cited for the fully refunded initially defective bit

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/490-0760.pdf

Original ruling text

490.0760

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

December 17, 1964
F--- P--- & S--- Co.
P.O. Box XXX
---, California XXXXX

Attention:

-- - XXXXX
-- - XX-XXXXXX

Mr. O---. P. S---

Gentlemen:
Your letter of November 16, 1964, addressed to Mr. J. R. Couly, District Tax Administrator, has been referred to this office for reply. It is our understanding that you sell carbide-tipped bits to well drillers. The manufacturer has a policy of repairing or replacing the bits if they are damaged in use. In either case, the customer is charged a percentage of the purchase price for the amount that the bit has been used. Sometimes, the well driller needs a replacement drill immediately. He purchases a new one for the full purchase price. When the original bit has been repaired or returned by the manufacturer, the driller may keep the repaired bit or return it to you. If he returns it, you give him credit for the full purchase price, less the percentage charge for his use of the original bit. Under the foregoing circumstances, sales tax is applicable with respect to the entire selling price of the original bit and the replacement bit. In reply to your second question, if the original bit proves defective upon initial use, and the manufacturer authorizes you to issue a “no charge” replacement and you have already sold the driller a replacement bit, upon your refunding of the entire purchase price of the original bit, including sales tax reimbursement, you will be entitled to take deduction for defective merchandise on your sales tax return, pursuant to sales and use tax ruling 66, copy enclosed Very truly yours,

George A. Trigueros
Associate Tax Counsel

GAT:md
cc:
--- – District Administrator