How should a replacement-engine seller treat a customer allowance that included both defect compensation and trade-in value?

Plain-English summary

A seller gave customers allowances when they bought replacement engines or components and turned in previously purchased equipment.

California said a trade-in allowance remained part of the taxable sales price because consideration includes cash, property, and anything else of value. A genuine price reduction attributable to a defect in the original merchandise could be excluded.

When one allowance contained both elements, the retailer had to segregate them. Only the amount specifically attributable to the defect was deductible; the property's value as a trade-in in defective condition remained taxable.

Common questions

Was every allowance deductible because the old equipment was defective?

No.

What part could reduce the tax measure?

The amount genuinely allowed on account of the original defect.

What part remained taxable?

The value of the property accepted as a trade-in.

Citations and references

• Historical California Ruling 65 — merchandise traded in
• Historical California Ruling 66 — defective merchandise
• Historical California Ruling 67 — replacement parts, enclosed by the source but described as apparently inapplicable to the stated facts

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/490-0800.pdf

Original ruling text

STATE OF CALIFORNIA

490.0800

STATE BOARD OF EQUALIZATION
November 12, 1964
REDACTED TEXT
Attention:

REDACTED TEXT
Secretary – Controller

Gentlemen:
This is in reply to your letter of October 15, 1964, requesting information concerning the application of California use tax with respect to certain “allowances” which you give to your customers when purchasing replacement engines and components for previously purchased equipment. If the allowance is in the nature of a trade-in allowance, the amount thereof cannot be excluded from the measure of your use tax liability. The tax applies to “Sales price” which the law defines as the total amount of the consideration paid by the customer whether in the form of cash, property, or anything else of value. The only type of “allowance” that may legally be excluded from the measure of the tax is an allowance for defective merchandise. Thus, if the original merchandise proves defective, any reduction in the sales price made on account of the defects is a valid deduction. Sometimes there is both a trade-in allowance and a defective merchandise allowance, and the retailer must make a segregation and deduct only the allowance for defects and not for the merchandise traded in. Enclosed are copies of sales and use tax ruling 65, Merchandise Traded In, and 66, Defective Merchandise. While not, apparently, applicable to the fact stated in your letter, we are, however, also enclosing ruling 67, Replacement Parts. Very truly yours, E. H. Stetson Tax Counsel EHS:md Enclosures cc:

Out-of-State – District Administrator
San Francisco – District Administrator
Hollywood – Subdistrict Administrator