Is a building-materials retailer's restocking charge on returned merchandise subject to sales tax?

Plain-English summary

B&L Wholesale Supply sells building materials and collects sales tax on every taxable sale. When a customer returns merchandise — in undamaged but less-than-saleable condition (needing cleaning, repackaging, etc.) — B&L refunds the purchase price and the sales tax collected on it, but deducts a restocking charge from that refund to cover the cost of getting the item back to saleable condition and returning it to inventory. Not every return triggers the charge, and B&L treats returns on its books as cancelled sales.

New York treats a genuinely cancelled sale as if it never happened for tax purposes — the customer gets back both the price AND the sales tax paid on the returned portion. The restocking charge is a SEPARATE transaction layered on top of that cancellation, and the customer receives no taxable property or service in exchange for it (it's just compensation for B&L's own handling costs). Following two prior rulings on essentially identical facts (a $1 layaway-cancellation fee, and another company's restocking charge), the Department confirmed a reasonable, separately stated restocking charge isn't itself a taxable receipt.

There's an important carve-out: if the customer is charged not just for restocking but for actual USE of the item before returning it (the ruling's example: a used tool that can no longer be resold as new), the portion of the original price retained to compensate for that USE stays taxable — only the true "reasonable, customary" restocking fee itself escapes tax, alongside the refund of tax on whatever portion of the price is genuinely returned.

What this means for you

Retailers with a returns/restocking policy

A reasonable, separately stated restocking fee — sized to your actual costs of returning merchandise to saleable condition and back to inventory — isn't subject to sales tax. Keep it genuinely separate from the refunded purchase price on your credit documentation, and keep the amount customary rather than inflated, to preserve this treatment.

Retailers who also charge for item usage before a return

If you dock part of the refund because the customer USED the item (not just because you need to restock it), that usage-based deduction is a different animal — it's retained consideration for the sale itself and stays taxable, layered on top of (and separate from) any genuine restocking fee.

Accountants and tax professionals

This ruling confirms and extends the established restocking-fee-is-nontaxable line (William Hengerer Co., STS Systems) to a building-materials context, and usefully separates the "pure restocking" analysis from the "partial refund for prior use" analysis within the same fact pattern.

Common questions

Q: Is a restocking fee on returned merchandise taxable in New York?
A: No, when it's a reasonable, separately stated charge reflecting the retailer's actual costs of restoring and re-shelving the item.

Q: Does the customer get the sales tax refunded on a return?
A: Yes, on the portion of the purchase price actually refunded — a cancelled sale is treated as if it never happened for tax purposes.

Q: What if the retailer also charges for the customer's prior use of the item?
A: That use-based portion of the retained amount stays taxable, separate from any restocking fee.

Q: Can another retailer rely on this Advisory Opinion for its own restocking policy?
A: No. It binds the Department only for the petitioner and facts described; another retailer's fee structure should be checked independently.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(3), (4)
• 20 NYCRR 525.2; 526.7; 534.6(a)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2005.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a05_46s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-05(46)S
Sales Tax
December 28, 2005

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S040913A

On September 13, 2004, the Department of Taxation and Finance received a Petition for
Advisory Opinion from B&L Wholesale Supply, Inc., 70 Hartford Street, Rochester, New York,
14605. Petitioner, B&L Wholesale Supply, Inc., provided additional information pertaining to
the Petition on November 5, 2004.
The issue raised by Petitioner is whether it is required to collect sales tax on its restocking
charge.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a vendor of building materials and supplies. When Petitioner makes a
taxable sale, it collects the purchase price of the property and the correct amount of State and
local sales tax on the purchase price. Petitioner’s customers are made aware at the time of sale
that returned materials may be subject to a restocking charge.
Petitioner’s customers will, for various reasons, wish to return all or part of the building
materials or supplies they have purchased. If a customer returns all the material purchased, it
receives a refund of the full purchase price and the full amount of sales tax collected. If the
customer returns only a portion of the materials, it receives the portion of the purchase price
attributable to the materials actually returned and the portion of sales tax collected attributable to
the refunded amount of the purchase price. Petitioner may deduct from the amount refunded to
the customer the restocking charge. Petitioner shows any restocking charge as a deduction from
the amount of the purchase price refunded on the credit slip issued to the customer. The returned
merchandise is returned to Petitioner’s inventory and treated on Petitioner’s books as a cancelled
sale.
The restocking charge is not necessarily charged to every customer making a return of
materials or supplies. It is meant to cover Petitioner’s cost of restoring the material to a saleable
condition (i.e., cleaning, repackaging, etc.) where the customer has returned the merchandise in
undamaged but less than saleable condition and, to a lesser extent, Petitioner’s cost of returning
the merchandise to its proper location in Petitioner’s inventory.
Applicable law and regulations
Section 1101(b) of the Tax Law provides, in part:

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When used in this article for the purposes of the taxes imposed by subdivisions
(a), (b), (c) and (d) of section eleven hundred five and by section eleven hundred ten, the
following terms shall mean:
*

*

*

(3) Receipt. The amount of the sale price of any property and the charge for any
service taxable under this article, including gas and gas service and electricity and electric
service of whatever nature, valued in money, whether received in money or otherwise,
including any amount for which credit is allowed by the vendor to the purchaser, without
any deduction for expenses or early payment discounts and also including any charges by
the vendor to the purchaser for shipping or delivery . . .
Section 525.2 of the Sales and Use Tax Regulations provides, in part:
Nature of tax. (a) Sales tax. (1) (i) Except as specifically exempted or excluded,
sales tax is imposed on the receipts from:
(a) every retail sale of tangible personal property, as provided in section 1105(a)
of the Tax Law;
(b) every sale, other than a sale for resale, of specifically enumerated services, as
provided in sections 1105(b) and (c); . . .
*

*

*

(2) Except as specifically provided otherwise, the sales tax is a "transactions tax,"
with the liability for the tax occurring at the time of the transaction. Generally, a taxed
transaction is an act resulting in the receipt of consideration for the transfer of title to or
possession of (or both) tangible personal property or for the rendition of an enumerated
service. The time or method of payment is generally immaterial, since the tax becomes
due at the time of transfer of title to or possession of (or both) the property or the
rendition of such service . . . .
Section 526.7 of the Sales and Use Tax Regulations provides, in part:
(a) Definition. (1) The words sale, selling or purchase mean any transaction in
which there is a transfer of title or possession, or both, of tangible personal property for a
consideration.
(2) Among the transactions included in the words sale, selling or purchase are
exchanges, barters, rentals, leases or licenses to use or consume tangible personal
property.

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*

*

*

(c) Rentals, leases, licenses to use. (1) The terms rental, lease and license to use
refer to all transactions in which there is a transfer for a consideration of possession of
tangible personal property without a transfer of title to the property. Whether a
transaction is a "sale" or a "rental, lease or license to use" shall be determined in
accordance with the provisions of the agreement. . . .
Section 534.6(a) of the Sales and Use Tax Regulations provides, in part:
Cancelled sales and returned merchandise. (1) Exclusion from return. Where a
contract of sale has been cancelled or the property returned within the reporting period in
which the sale was made, a vendor of tangible personal property or services . . . may
exclude such receipts, charges, or rents from his sales and use tax return.
(2) Credit where tax previously remitted. Where a contract of sale has been
cancelled or the property returned and the tax collected thereon refunded to the customer,
and such tax had been paid and reported on a return by the vendor of tangible personal
property or services, . . . an application for refund or credit for the tax paid upon such
receipt, charge, or rent shall be filed with the Department of Taxation and Finance within
three years from the date when the tax was payable by such person to the Department of
Taxation and Finance. The applicant may, as part of the application for credit, take the
credit on the return which is due coincident with or immediately subsequent to the time
such application is filed. The application for refund or credit shall be subject to the
provisions of subdivisions (a), (b) and (c) of section 1139 of the Tax Law and section
534.2 of this Part.
Opinion
Petitioner may charge certain customers a restocking charge to cover its costs of restoring
returned merchandise to its inventory. Petitioner refunds its customer’s purchase price
attributable to the returned merchandise along with the applicable sales tax. Such returns are
shown on Petitioner’s books as cancelled sales. Cancelled sales are, for sales tax purposes,
treated as sales which were never consummated. See section 534.6(a) of the Sales and Use Tax
Regulations. Petitioner provides its customer with a credit receipt showing the amount of refund
including the attributable sales tax, and a subsequent, separate charge for “restocking.” The
restocking charge represents a transaction separate from the cancelled sale and is not a part of the
original receipt. See section 1101(b)(3) of the Tax Law.
Petitioner states that this restocking charge is imposed to cover its costs of making certain
that the returned merchandise is in a saleable condition and restoring the merchandise to its
inventory. The customer does not receive any property or service taxable under section 1105 of

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the Tax Law in exchange for this consideration. In Matter of the Petition of William Hengerer
Co. Division of Associated Dry Goods Corp., Dec State Tax Comm, September 3, 1982,
TSB-H-82(93)S, it was determined that a $1.00 charge imposed upon cancelled layaway sales
was not a receipt from the sale of taxable property or services. In STS Systems, Ltd., Adv Op
Comm T&F, November 5, 1998, TSB-A-98(73)S, it was held that a restocking charge to
customers upon the return of property upon a cancelled sale was likewise not a receipt from the
sale of taxable property or services. Accordingly, a reasonable charge by Petitioner imposed
solely for restocking returned merchandise as described in this Advisory Opinion is not a receipt
subject to the sales tax. See section 1101(b)(3), (4) of the Tax Law and section 525.2 of the
Sales and Use Tax Regulations.
It should be noted that if Petitioner’s customer is charged for making some use of the
returned merchandise, the sales tax will only be refunded on the portion of the original receipt
actually refunded to the customer. For example, assume Petitioner’s customer purchases a tool
which is later returned to Petitioner. Petitioner notes that the tool has been used and cannot
return the tool to its inventory to be sold as "new." In determining the amount of the refund to
the customer, Petitioner keeps a prorated amount of the purchase price based on its customer’s
use of the tool. In addition, Petitioner charges its customer a restocking charge at the customary
amount. The portion of the receipt Petitioner keeps for the use of the tool is subject to sales tax.
See section 526.7 of the Sales and Use Tax Regulations. The restocking charge is considered a
separate transaction not subject to sales tax, provided such charge is separately stated and at the
customary amount.

DATED: December 28, 2005

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein