After a sale is completed, can the retailer and buyer rescind it, claim a sales-tax refund, and resell the property to a leasing company that then leases it back to the buyer?

Plain-English summary

A company sells and services communications equipment and collects Colorado sales tax. Sometimes, after billing the customer, the customer asks the company to redirect the bill to a leasing company — which then leases the equipment back to that same customer. The leasing companies present a retailer's sales-tax license (so the resale to them is tax-free) and collect tax on the lease payments. The company asked: can the parties rescind the completed sale, claim a sales-tax refund, and recast it as a sale-to-lessor-plus-leaseback?

The general rule: a completed sale stays taxed. Sales tax is a tax on a transaction; once the transaction is complete, the tax is due. Later events — destruction of the property, or a buyer's subsequent decision to resell it — generally don't affect the obligation to pay tax on the original sale. So the Department won't let parties undo a completed deal just because they later want to recast it in a different form (here, a sale-leaseback).

The exception: a true full refund. Colorado law lets a retailer claim a sales-tax refund (a credit) if it gave the purchaser a full refund of the purchase price (§ 39-26-102(12) — credit for the sale price of returned property "when the full sale price thereof is refunded whether in cash or by credit"). To honor that statute, the Department allows the refund only if, at the time of the redirect request, the retailer would have unconditionally accepted the return and refunded the entire purchase price — even if the customer had not asked to redirect the bill to the leasing company.

If the refund would have been only partial — no sales-tax refund. If the retailer would have given only a partial refund (e.g., to reflect use or diminished value), it gets no refund of the sales tax on the original sale.

The Department scrutinizes these claims. It looks at whether the retailer had a written return policy spelling out the customer's refund right; it disfavors refunds where the customer used the property more than incidentally before redirecting, or where there's a significant delay between purchase and the request (cf. California Sales Tax Counsel Ruling No. 330.5160); and it critically examines refunds for non-returnable goods like custom-made items or electronic equipment the industry generally doesn't take back.

What this means for you

Equipment vendors structuring sale-leasebacks

You can't simply rewind a completed sale to convert it into a sale-to-a-leasing-company so the customer avoids up-front tax and pays tax on lease payments instead. The pivot works only if you'd have given the customer a genuine, unconditional full refund anyway — return the whole price, not a use-adjusted amount.

Your return policy is the evidence

The Department weighs whether you had a written return policy establishing the customer's refund right, how much the customer used the goods first, and how much time passed. The cleaner and more standard the return, the more defensible the tax refund; a bespoke "recast" after meaningful use looks like exactly what the Department won't allow.

Custom and electronic goods are hard cases

Refund claims on custom-made goods or electronics that aren't normally returnable get extra scrutiny. Don't assume a sale-leaseback recast on such items will support a sales-tax refund.

Common questions

Q: Can we rescind a completed sale and get the sales tax back so the deal can run through a leasing company?
A: Only if, at the time of the request, you would have unconditionally refunded the customer's full purchase price even without the leasing arrangement. Otherwise the original sale stays taxed.

Q: What if we'd only give a partial refund?
A: Then you get no refund of the sales tax on the original sale. A partial refund (for use or diminished value) doesn't qualify under § 39-26-102(12).

Q: What does the Department look at?
A: Whether you had a written return policy, whether the customer used the goods more than incidentally, how long passed before the request, and whether the goods are the kind normally returnable (custom or electronic goods are scrutinized).

Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance, not binding on the Department.

Citations and references

Statutes:
- § 39-26-102(12), C.R.S. — credit for the sale price of returned property when the full price is refunded
- (Persuasive) California Sales Tax Counsel Ruling No. 330.5160 — use and delay disfavor refund claims

Related Colorado refund / tax-base letters:
- [[gil-08-015-reporting-tax-credit]] — how to recover an overpayment (return credit on the return, or DR 0137 refund)
- [[gil-08-020-taxability-of-certain-goods-and-services]] — restocking fees that forfeit the sales-tax refund because the full price isn't refunded

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-07-021.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-2007-21

XXXXXXXXXXXXX
Attn: XXXXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXX
December 4, 2007
Re: refunds for completed sales transactions
Dear XXXXXXXXXXX,
This letter is in response to your letter to the Colorado Department of Revenue, dated May 29, 2007, regarding
refunds of sales tax for rescinded transactions.
Issue
Can a retailer and purchaser, after a purchase has been completed, rescind the purchase, request a tax refund,
and resell the property to a leasing company, who then leases the property to the original purchaser?
Background
[Company] sells and services communications equipment and collects Colorado sales and use tax.
Occasionally, a customer decides, after it has been billed, that it would like your company to redirect the bill a
leasing company. You state that most leasing companies have exemption certificates. I assume that the
leasing companies are presenting you with a retailer’s sales tax license, not an exemption certificate.
Presumably, the leasing company enters into a lease with the purchaser to lease the communications
equipment and collects sales or use tax on the lease payments.
Discussion
Refunds allowed only if retailer would have allowed a refund in the absence of the agreement of the customer
and leasing company to repurchase the equipment.
Sales tax is a tax on a transaction. Once the transaction is completed, the tax is due. Events which occur after
the sale, such as destruction of the property or a buyer’s subsequent decision to resale the property to another
party, generally have no affect on the retailer’s and purchaser’s obligation to pay sales tax on the initial
transaction. For this reason, the department generally does not allow parties to undo a completed transaction
and claim a sales tax refund simply because they later decided to recast the transaction in a different form.
However, Colorado law allows a retailer to claim a sales tax refund (a credit against taxes paid) if the retailer
issued the purchaser a full refund of the purchase price. See, §39-26-102(12), C.R.S. (“The taxpayer may take
credit in this report of gross sales for an amount equal to the sale price of property returned by the purchaser
when the full sale price thereof is refunded whether in cash or by credit.”).

In order to give effect of this refund statute, the department allows a refund if, at the time of the purchaser’s
request to redirect the bill to a leasing company, the retailer would have unconditionally accepted the return of
the property and refunded the full purchase price to the purchaser. Unconditional acceptance, in this case,
means that the retailer would have refunded the entire purchase price to the purchaser even if the purchaser
had not asked that the bill be redirected to the leasing company.
If, however, the retailer would not have unconditionally refunded the full purchase price to the purchaser in the
absence of the agreement to repurchase the equipment, then the retailer cannot claim a refund of the sales tax.
For example, if, at the time the purchaser requests that the transaction be redirected to the leasing company,
the retailer would have given only a partial refund of the purchase price (e.g., to reflect the diminished value of
the property or use of the property by the purchaser), the retailer is not entitled to any refund of the sales tax
paid on the initial sale.
The department will critically examine refund claims such as this. Among other things, the department will look
to see whether the retailer had, at the time of the transaction, a written return policy that clearly sets forth the
customer’s right to a refund. The department will not look favorably on refunds claim where either the
purchaser used the property more than incidentally prior to asking that the retailer redirect the bill to the leasing
company or where there is a significant delay between the initial purchase and the request to redirect the bill.
Compare, e.g., California Sales Tax Counsel Rulings No. 330.5160. The department will also critically examine
claims for refunds for goods that are generally not returnable, such as custom-made goods or goods that the
industry generally does not offer refunds, such as electronic equipment.
Finally, the Department makes a good faith effort to provide accurate and complete answers to questions posed
to it by taxpayers. However, the information and answers provided here are not binding on the Colorado
Department of Revenue, nor do they replace, alter, or supersede Colorado law and regulations. The Executive
Director, who by statute is the only person having authority to bind the Department, has not formally reviewed
and/or approved this response.
Respectfully,

Office of Tax Policy
Colorado Department of Revenue