Is a 'core charge' on a replacement part taxable, and is the tax refunded when the customer returns the old part?

Plain-English summary

A retailer asked how Kansas sales tax applies to "core charges." A core charge is an added fee tacked onto a replacement part (for cars, trucks, and other equipment) when the customer doesn't have the old part to trade in. Later, the customer returns the used part, gets the core charge refunded, and the retailer sends the used "core" to a re-manufacturer to be rebuilt.

Kansas treats the core charge as an anticipated trade-in. At the time of sale, the retailer cannot know whether the customer will bring the old part back. So the core charge is subject to sales tax as part of the selling price. When the customer returns the used part, the retailer should refund both the core charge and the state and local sales tax collected on it. This tracks Kansas law allowing a credit against the selling price for "an amount equal to the allowance given for the trade-in of property" (K.S.A. 79-3602(h)): when the core charge is first billed there is only the possibility of a trade-in; when the part comes back, the trade-in effectively occurs and reduces the selling price, so the tax on it is refunded.

The specific answers:

• Are core charges taxable? Yes — collect sales tax on the core charge. When the customer returns a part and is paid, refund the sales tax on that payment. (This covers the taxpayer's first, second, and fourth questions.)
• Partial refund for a damaged/defective returned part? Same rule. Collect tax on the entire selling price including the core charge; refund tax on the amount actually paid to the customer for the returned part — i.e., the reduced payment for a damaged core, not what a good part would have earned.
• Worked example: an alternator sells for $50 plus a $15 core charge → charge state and local sales tax on $65. When the customer returns the used alternator for the $15 credit, they receive the $15 plus the sales tax figured on that $15.

What this means for you

Parts retailers

Charge sales tax on the full price including the core charge (e.g., tax on $65 for a $50 part + $15 core). When the customer brings back the old core and you pay them, refund the sales tax on the amount you pay — the return is treated as a trade-in that reduces the taxable selling price.

Damaged cores and partial refunds

If you pay a reduced amount for a damaged or defective returned core, refund tax on that actual amount, not the original core charge. The tax follows the money you actually pay back.

Keep records tying the refund to the return

Because the tax refund is tied to the trade-in credit under K.S.A. 79-3602(h), document the original taxable sale and the later return/payment so your refunded tax is supported.

Common questions

Q: Do I charge sales tax on a core charge?
A: Yes. The core charge is taxable as part of the selling price at the time of sale.

Q: What happens when the customer returns the old part?
A: Refund both the core charge and the state and local sales tax collected on it — the return is treated as a trade-in that reduces the selling price under K.S.A. 79-3602(h).

Q: What if the returned part is damaged and I only pay part of the core charge?
A: Refund the sales tax on the actual amount you pay for the returned part, not the full core charge.

Q: Can you show the math?
A: A $50 alternator plus a $15 core charge is taxed on $65. When the used alternator is returned for the $15 credit, the customer gets $15 plus the sales tax figured on that $15.

Citations and references

• K.S.A. 79-3602(h) — allows a credit against the selling price for an amount equal to the allowance given for a trade-in of property; the Department treats a returned core as such a trade-in, so the tax on the core charge is refunded.
• K.A.R. 92-19-59 — the regulation authorizing Kansas private letter rulings.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2002-053

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

June 14, 2002

XXXX
XXXX
XXXX

RE: Your letter dated June 3, 2002

Dear XXXX:

Thank you for your recent letter. You ask how Kansas sales tax applies to “core charges.” I will explain what our understanding is of core charges and how tax on core charges is accounted for in Kansas. I will then answer your specific questions.

Replacement parts for cars, trucks and other equipment are often sold with an added fee called a “core charge” when the customer does not have the old part to trade-in. Sometime after the sale, the customer returns to the retailer, turns in the used part, and is refunded the core charge. The retailer then forwards the used part to a re-manufacturer to be rebuilt.

Kansas treats these transactions basically as the anticipated trade-in of a used part. The retailer, at the time of sale, cannot determine whether the customer will turn in the used part for the refund. Thus, the core charge is subject to sales tax as part of the selling price. When the part is turned in, the retailer should refund both the core charge and the state and local sales tax that was collected on the core charge. This practice is consistent with Kansas law that allows a credit when the selling price is established for “an amount equal to the allowance given for the trade-in of property.” K.S.A. 79-3602(h).

You ask if core charges are taxable. The answer is yes, sales tax should be collected on the core charge. However, when the customer returns with a part and is paid for it, sales tax should be refunded on the payment for the part. This rule applies to all core charges. This answers your first two questions and your fourth question.

You next ask how a partial core charge refund is treated because the returned part if damaged or defective. Again the same rule applies. Sales tax should be collected on the entire selling price, including the core charge. Sales tax should be refunded on the amount that is paid to the customer when the part is returned. This would be the actual payment made for the part, rather than payment that could have been made if the part was in good condition.

Your last question posses an example. In it, an alternator is sold for $50 plus a core charge of $15. Under the Kansas approach, the customer should be charged state and local sales tax on $65. Later the customer returns with the used alternator for the $15 credit (core charge). The customer should receive the $15 plus the state and local sale tax figured on the $15. This approach is consistent with Kansas law that allows a credit when the selling price is established for “an amount equal to the allowance given for the trade-in of property.” K.S.A. 79-3602(h). When a core charge is first made, there is only the possibility of a trade-in. When the part is returned, the trade-in effectively takes place, which reduces the selling price. This means that the tax should be refunded on the amount the seller pays to the customer for the part being returned.

I believe that I have answered all of your questions about core charges. If you need to discuss anything further, please call me at 785-296-3081. This private letter ruling is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to make an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this private letter ruling.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 06/18/2002 Date Modified: 06/18/2002

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