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REFUNDS AND YOUR SALES TAX COMPLIANCE

By Robert Dumas on Tue, Aug 01, 2023 @ 11:00 AM

TOPICS: SALES TAX COMPLIANCE SALES TAX RETAIL ECOMMERCE

It seems like a simple part of selling online. You sell an item to a customer,
they decide for whatever reason to return it, and you give them a refund.
Simple.

Except when sales tax becomes involved. 

One in every five …

What are the odds your online company will have to deal with returns and make
refunds? Pretty likely: At least one in every five products ordered online are
returned, versus maybe one in 10 bought in a brick-and-mortar store. Clothing
and shoes are the most returned product category, followed by electronics. One
in four products come back just because a buyer changed their mind.

And the state or local sales tax you also charged on the purchase? You have to
refund the right amount of that, too. Here it gets complicated:

 * How much did you charge the customer in sales tax?
 * Where was the sale made (and did it incur sales tax based on destination or
   origin)?
 * When was the return made?
 * What was returned?
 * What extra charges were involved in the return?
 * Have you already filed your sales tax return based on the original amount of
   sales tax charged?

General rules, specific states

Almost all the states (and the District of Columbia) that impose a sales tax
generally allow retailers to deduct or exclude sales tax refunds for returned
goods from taxable sales. Some states – Connecticut, Massachusetts, Michigan,
Rhode Island and D.C., for example – impose a time limit, usually 90 days but up
to 120 days or even 180 days in Michigan and Massachusetts for certain items. If
you refund the full price, then you’re entitled to take a credit with the state
for the full sales tax you returned to the customer.

To do so if you’ve already filed your sales tax return, you’ll have to amend the
return – more complicated in some states than in others. In Texas, for example,
you take a credit on a future return using

The sales tax treatment on full refunds for returns can be straightforward
compared with those of partial refunds. A New York case demonstrated this when a
merchant asked the state tax department for an opinion on how much sales tax may
be subject to a refund or credit when a customer returns merchandise but
receives less than the original purchase price as a refund.

How much of the sales tax goes back to the customer and how much is the subject
of a state tax credit for the merchant? This merchant’s new return policy
allowed customers only a partial refund after 60 days, a reflection of the value
of the merchandise (fashionable clothing) decreasing proportionately to the
passage of time after the initial sale.

“Since the sales tax initially collected is based upon the amount of the
original transaction that gave the customer the use and /or possession of the
merchandise, the customer is entitled to a refund of sales tax only to the
extent the original transaction is undone,” New York opined. “If [the merchant]
retains a percentage of the original sales price, the sales tax collected on
that retained amount must be remitted to the State and is not subject to a
refund or credit.”

At issue too in the New York case was yet another wrinkle in returns, refunds
and sales tax: a restocking charge.

Restocking is generally considered a service and as such wouldn’t incur sales
tax in many states. In California, for instance, “to qualify for a returned
merchandise deduction, the retailer must refund the full retail selling price
less any restocking charges. The charge for restocking returned merchandise is a
charge for service and is not subject to tax. The retailer must refund the full
sales tax reimbursement, not merely the tax on the net amount of the credit
after the restocking charge.”

These are just a few examples of how refunds can complicate sales tax and open
your company to cost and risk, especially if you try to track and calculate
refund-related sales tax issues manually.

TaxConnex expertly helps companies in many industries alleviate the burden of
sales tax. Contact us to learn more about how TaxConnex can take sales tax off
your plate entirely. 

 * 
 * Share
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WRITTEN BY ROBERT DUMAS

Accountant, consultant and entrepreneur, Robert Dumas began his public
accounting career on the tax staff at Arthur Young & Co., followed by a brief
stint at Grant Thornton. In 1998, Robert founded Tax Partners, which became the
largest sales tax compliance service bureau in the country, and later sold it to
Thomson Corporation. Robert founded TaxConnex in 2011 on the principle that the
sales tax industry needed more than automation to truly help clients, thus
building within TaxConnex a proprietary platform and network of sales tax
experts to truly take sales tax off client’s plates.



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