If a customer returns merchandise late and only gets a partial refund under our store's return policy, do we refund all the sales tax collected, or only the tax on the amount we actually refund?

Plain-English summary

A specialty luxury retailer adopted a sliding-scale return policy: customers get a full refund of the purchase price if they return merchandise within 60 days, but progressively less (75%, then 50%, then nothing) the longer they wait, reflecting that fashion merchandise loses value over time. The retailer asked whether it should refund the customer all of the sales tax originally collected, or only the tax proportional to whatever percentage of the price it actually refunds. The Department said only a proportional refund of the tax is required.

New York sales tax is a transaction tax — it's tied to the specific purchase transaction that gave the customer use or possession of the merchandise. A customer is entitled to get sales tax back only to the extent that the original transaction is actually undone. If the retailer keeps 50% of the original price (because the return happened late), the tax attributable to that retained 50% was properly collected and belongs to the state — it isn't refundable, because that part of the sale was never really unwound.

The Department worked through a concrete example: on a $100 item taxed at 8% ($8 total tax), a return 130 days later gets a 50% refund ($50) under the policy, plus the proportional tax on that $50 ($4) — a total refund of $54, while the other $4 of tax (tied to the $50 the retailer keeps) is not refundable. The Department also rejected the retailer's argument that the withheld amount should be treated like an untaxed "restocking fee" (which some past guidance had excused from tax) — here the reduction scaled with how long the customer had used the item, reflecting genuine value depreciation, not a flat fee for the mechanical cost of restocking. A refund claim can only be made once the tax has actually been refunded to the customer, and the retailer needs to keep adequate records to support it.

What this means for you

Retailers with tiered, late-return, or "restocking" refund policies

If your return policy holds back part of the purchase price (whether framed as a "restocking charge," a depreciation adjustment, or anything else tied to the passage of time or condition of the goods), refund sales tax only on the portion of the price you actually give back to the customer — not the full original tax. Keep records tying each refund to the specific transaction and amount refunded, since you can only claim your own credit/refund from the state once you've actually refunded the customer.

Customers returning merchandise under a partial-refund policy

Don't expect the full sales tax back if you're only getting a percentage of the purchase price back — the tax refund tracks the dollar refund proportionally.

Accountants and tax professionals

Watch the distinction this opinion draws with TSB-A-05(46)S (restocking charges, which were found not to be a taxable receipt at all): a flat restocking fee charged uniformly regardless of timing is analytically different from an escalating, time-based value adjustment like the one here, which the Department treated as simply an incomplete unwinding of the original taxable transaction rather than a separate charge.

Common questions

Q: Our return policy gives customers less than 100% back if they return items late — do we owe them all the sales tax they originally paid?
A: No. You only owe them (and can only claim from the state) the sales tax proportional to the percentage of the purchase price you actually refund.

Q: Can we call the withheld amount a "restocking fee" to avoid this analysis?
A: Only if it functions like one — a flat charge tied to the cost of returning merchandise to saleable condition, applied regardless of timing. An escalating, time-based reduction reflecting value depreciation (like the policy here) is treated as an incomplete refund of the original sale, not an untaxed restocking fee.

Q: When can we file our own refund/credit claim with the state for the tax we refund to a customer?
A: Only after you've actually refunded the tax to the customer, and you should keep documentation supporting the claim.

Q: Does this ruling apply to any retailer's return policy?
A: Not automatically. An advisory opinion binds the Department only as to the taxpayer who requested it and only on the facts described, though the transaction-tax reasoning it applies is general Department policy.

Citations and references

Statutes and regulations:

• Tax Law §1105(a) (sales tax on retail sales)
• Tax Law §1132(e) (refunds and credits)
• 20 NYCRR §525.2(a)(2) (taxed transaction)
• 20 NYCRR §534.6, §534.6(a)(2) (refunds/credits on returns)

Cited opinion:

• B&L Wholesale Supply, Inc., TSB-A-05(46)S (restocking charges)

Source

• Landing page: NY Sales Tax Advisory Opinions, 2009
• Original opinion: TSB-A-09(29)S

Original ruling text

New York State Department of Taxation and Finance

TSB-A-09(29)S
Sales Tax
July 15, 2009

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S090422A

On April 22, 2009, the Department of Taxation and Finance received a petition for an
advisory opinion from the Petitioner, name and address redacted.
The issue raised by Petitioner is 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.
In such a situation, is the customer entitled to a full refund of all sales tax paid, based upon the
original purchase price of the merchandise, or entitled only to a partial refund of sales tax
(determined by the percentage of the original price that is actually refunded to the customer)?
We conclude that the customer is entitled to only a partial refund of the sales tax, based
upon a percentage of the purchase price refunded. The New York State sales tax is a transaction
tax. Since the sales tax initially collected is based upon the purchase price in 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. If Petitioner
retains a percentage of the original sales price, the sales tax collected on that retained amount
(receipt) must be remitted to the State, and is not subject to a refund.
Facts
Petitioner is a specialty retailer of luxury, designer, and fashion merchandise, with stores
located in New York State. When Petitioner makes a retail sale of merchandise, it collects sales tax
based upon the purchase price charged to the customer and remits the taxes collected to New York
State. Petitioner has instituted a new return policy whereby customers making returns to Petitioner
more than 60 days after their receipt of merchandise will be entitled to only a partial refund of the
original purchase price. Petitioner’s refund policy is as follows:
Return Within
0-60 days from receipt of merchandise
61-120 days from receipt of merchandise
121-180 days from receipt of merchandise
181+ days from receipt of merchandise

Amount of Credit
100% of original purchase price
75% of original purchase price
50% of original purchase price
0%

Petitioner explains that the percentage reduction reflects the fact that the value of the
merchandise decreases with the passage of time. This is because product models go out of date,
fashions and styles change with seasons, and returned merchandise generally is less valuable than
merchandise that has not been previously sold.

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TSB-A-09(29)S
Sales Tax
July 15, 2009

In addition, the extended period of use and/or possession by the customer after the initial
sale date diminishes the value of the merchandise to Petitioner because, among other things, it
prevents Petitioner from having the merchandise in its inventory and available for sale to others (at
full market value). Thus, in the above refund situations, Petitioner holds back a percentage of the
original purchase price based on that use/possession by the customer and to compensate Petitioner
for the diminishing value of the returned merchandise over time.
Analysis
Tax Law §1105(a) imposes sales tax upon “[t]he receipts from every retail sale of tangible
personal property, except as otherwise provided in this article” (emphasis added). The New York
State sales tax is a transaction tax. Indeed, section 525.2(a)(2) of the New York State Sales and Use
Tax Regulations provides: “a taxed transaction is an act resulting in the receipt of consideration for
the transfer of title to or possession of tangible personal property . . . .” The regulations
promulgated pursuant to Tax Law §1132(e) provide for refunds and credits of the tax paid on
cancelled sales and returned merchandise. 20 NYCRR §534.6. They do not, however, address the
particular situation about which Petitioner inquires.
Petitioner properly collects sales tax based upon the original purchase price charged to the
customer. Petitioner’s new return policy allows customers making returns to Petitioner more than
60 days after their receipt of merchandise to obtain only a partial refund of the purchase price paid
to Petitioner. As previously noted, Petitioner’s percentage reduction in the amount of refund it will
provide its customer is a reflection of the fact that the value of the merchandise decreases
proportionately to the increased passage of time after the initial sales transaction. As Petitioner
notes, product models go out of date, fashions and styles change with the seasons, and returned
merchandise generally is less valuable than merchandise that has not been previously sold.
Since the value of the merchandise has diminished, this prorated refund reflects a charge by
Petitioner to the customer to compensate for the loss in value/marketability of the item that
Petitioner incurs as a result of having to resell the item (likely at reduced cost) two months or more
after the original sale. Moreover, sales tax is a transaction tax. 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. If Petitioner 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.
While Petitioner suggests that the retained amount be treated like a restocking charge, which
was determined not to be a receipt subject to sales tax (B&L Wholesale Supply, Inc.,
TSB-A-05(46)S), this approach is not borne out by the facts presented. Here, the prorated charge
bears no relationship to a cost for “restocking” the merchandise, where Petitioner would be charging
customers to recover the cost of restoring the product to a saleable condition and returning the
merchandise to its proper location in Petitioner’s inventory. Were that the case, Petitioner would
charge a flat restocking fee whenever merchandise was returned, regardless of the date of the return.
Here, however, Petitioner’s escalating percentage reduction for refunds is expressly tied to the date

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TSB-A-09(29)S
Sales Tax
July 15, 2009

of the return, and provides that less money be refunded as time passes after the initial purchase date,
a clear reflection of the diminution in value of the merchandise over time.
Based on this conclusion, Petitioner should refund to the customer only the sales tax
proportionately attributable to the purchase price actually refunded. For example, assume that a
customer purchases an item of merchandise from Petitioner for $100 where the receipt would be
subject to a combined State and local sales tax rate of 8 %. In this example, the total tax that should
be collected on the original sales transaction is $8.00. If the customer returns the merchandise 130
days from its purchase, Petitioner will refund the customer $50.00 (50% of the purchase price based
on its return policy), plus the amount of tax attributable to that $50.00, which is $4.00, for a total
refund of $54.00. The amount of tax attributable to the retained amount ($50.00) of the purchase
price, which is $4.00, is not subject to a refund or credit. Petitioner can claim a refund or credit for
the $4.00 in sales tax that it has refunded to its customer. It should be noted that Petitioner may file
the claim for refund or credit in a case only when the tax has actually been refunded to the
customer. See 20 NYCRR §534.6(a)(2). Petitioner should maintain adequate documentation to
support its refund claim(s).

DATED: July 15, 2009

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the person
or entity fully and accurately describes all relevant facts. An Advisory
Opinion is based on the law, regulations, and Department policies in effect as
of the date the Opinion is issued or for the specific time period at issue in the
Opinion.