Did a customer still owe sales tax on catalog jewelry that was returned but lost in transit before the retailer received it?

Plain-English summary

A customer bought diamond earrings from a catalog, immediately returned them for full credit, and insured the return shipment. The earrings were lost in transit and never reached the retailer. After a tracer failed, the shipper paid the customer the insured amount, which the customer forwarded to the retailer as instructed.

The Comptroller said the customer still owed the retailer sales tax. A sale had occurred, and Texas Tax Code § 151.052(a)(1) made sales tax part of the sales price and a debt of the purchaser to the seller.

The letter also observed that the return shipment appeared underinsured because the shipper's payment did not cover the sales tax demanded by the retailer.

What this means for you

A return that disappears in shipping does not necessarily unwind the original taxable sale. Insurance coverage for a returned item may need to account for sales tax as well as the item's stated price.

Common questions

Did the retailer receive the returned earrings? No. They were lost in transit.

Did the shipping company pay the customer? Yes, for the insured amount stated in the redacted letter.

Why was sales tax still due? The original sale occurred, and § 151.052(a)(1) treated the tax as part of the sales price and a debt to the seller.

Citations and references

• Tex. Tax Code § 151.052(a)(1) — sales tax is a debt of the purchaser to the seller

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9107L1121A11

Original ruling text

July 22, 1991

Dear **:

This is in response to your recent letter regarding the sales tax
on a returned purchase which was lost in shipment.

You stated in your letter that you purchased diamond earrings in
the amount of $* from the COMPANY A merchandise catalog.
Upon receipt, you immediately returned them for full credit. The
earrings were insured for shipment via to COMPANY A in
Florida. The earrings were lost in transit and never received by
COMPANY A. A shipper tracer failed to locate the earrings and
issued you a check in the amount of $***, which you
immediately used to purchase a cashier's check in the same amount
and forwarded it to the address on your monthly statement per
instructions from COMPANY A. COMPANY A expects payment from you
for the sales tax on the earrings.

A sale occurred between you and COMPANY A and sales tax is
due by you to COMPANY A. It appears that the earrings were
underinsured at the time of return shipment, since * paid
you $***. Unfortunately, in your case, you were not aware
of the fact that sales tax becomes a part of the sales price and
is a debt of the purchase to the seller. See Texas Tax Code
151.052(a)(1).

This opinion is based on the facts presented. If there are
additional or different facts, the opinion may change.

If you have any questions or need more information, you may call
me toll free at 1-800-531-5441, extension 5-0330. The regular
number is 512/463-4600, or write Tax Administration Division.

Sincerely,

Bettie U. Peterson
Tax Administration Division