How should a battery retailer split a $10 guarantee allowance when the failed battery still had $1 of junk value?

Plain-English summary

A customer paid $20 plus $0.60 tax for a battery with a 24-month guarantee. It failed after 12 months, and the retailer gave a $10 allowance toward a new battery while requiring return of the failed unit, which was worth about $1 as junk in the example.

California said the $10 allowance had two components. The $1 junk value was a trade-in allowance, while the remaining $9 was attributable to the defect.

The retailer could claim a $9 defective-merchandise allowance. Alternatively, it could identify the full $10 as the defect allowance but then add the $1 trade-in value to taxable gross receipts from the replacement sale. Either method preserved tax on the property's remaining value.

Common questions

Was the whole $10 automatically a defect allowance?

No. The returned battery still had trade-in or junk value.

What defect allowance did the example support?

$9, after subtracting the $1 trade-in value.

Could the retailer use a $10 defect allowance?

Yes, if it separately added the $1 trade-in value to the replacement sale's taxable gross receipts.

Citations and references

• California defective-merchandise and trade-in rules — required the retailer to preserve the failed battery's separate value as taxable consideration

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/490-0820.pdf

Original ruling text

490.0820

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
June 25, 1958
REDACTED TEXT
Attention:

REDACTED TEXT
Manager, Tax Department

Gentlemen:
Mr. Harry Say and Mr. William Denny have discussed with me the subject of your letter of June 17, and have asked me to reply thereto. In the example set out in your letter, a customer purchases a battery for $20.00 plus sales tax of 60¢, total $20.60. The battery is guaranteed for 24 months. At the end of twelve months, the battery fails. The customer is allowed $10.00 as a defective merchandise allowance. A new battery is sold to the customer for $10.00 plus tax of 30¢, making a total of $10.30. The customer is requested to turn in his defective battery, which is worth from 50¢ to $1.50 to you ask junk. It appears, accordingly, that actually the allowance to the customer consists of two parts which total $10.00. If the old batter has, for example, a value to you of $1.00, it would seem appropriate to regard this as a trade-in allowance and to regard the balance of the total allowance as a defective merchandise allowance. Therefore, it is our view that you are entitled to take a defective merchandise allowance of $9.00 in the example given. In the alternative, the defective merchandise allowance could be regarded as
$10.00, provided the trade-in value of $1.00 is added to the taxable gross receipts from the second sale. Very truly yours, E. H. Stetson Tax Counsel EHS:tl cc:

Los Angeles – Administrator