How did discounts and refunds for unused diamonds affect tax on diamond drill-bit sales?

Plain-English summary

A cash discount given when a diamond drill bit was sold reduced the taxable sales price, so tax was due on the net amount. A discount given later after the customer returned the unused portion of the diamonds did not reduce the original tax base; tax remained due on the original price before that later discount.

Calling part of the diamond price an escrow or deposit did not change the sale. To keep the deposit out of the tax base, the seller had to refund the entire deposit plus the applicable tax. If only part was refunded based on diamond consumption, no tax was to be refunded.

Common questions

Did a cash discount at the time of sale reduce taxable price? Yes. Tax was due on the net amount.

Did a later credit for returned unused diamonds reduce the original tax base? No. Tax was due on the original price before that discount.

When was a diamond deposit excluded from the tax base? Only when the entire deposit and the applicable tax were refunded.

What if only part of the deposit was refunded based on diamond use? The letter says no tax should be refunded.

Citations and references

The reproduced letter cites no numbered statute or rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8507L0652A14

Original ruling text

July 30, 1985

Dear ***:

Your letter concerning the sale of diamond bits has been forwarded to
me for response.

The first two questions from your letter do not warrant repeating, but
I will say this: The Comptroller's office does not presume to tell retailers
what prices to charge for their goods nor do we dictate business practices or
procedures in soliciting sales. These are governed by the market place. Our job
is to see that the interests of the state are protected and to advise, where
possible, retailers on their responsibilities for collecting tax on their
taxable sales.

Your company and our office are no strangers to the issues you brought up in your
letter and without further clarification they would appear to be the same practices
of the past.

You asked if you give any discounts, do you owe taxes on the original price before
discount?

If you give your customer a cash discount at the time of the sale, tax is due on the
net. If you give your customer a discount after they return the unused portion of the
diamond bits, tax is due on the original price prior to the discount.

Next you asked if you take any monies as an escrow or a deposit, do you owe taxes on
these monies or just on the net amount actually sold after you have consummated your deal?

This sounds like your previous practice of calling the price for the diamonds a deposit.
You are selling a drill bit with diamonds, irregardless of how you separate out your
charges or the terms used on your invoices. You would have to refund the total deposit,
plus applicable tax, for the deposit not to be considered in the tax base. If only a
portion is refunded, based on diamond consumption, no tax should be refunded.

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, please call us at
1-800-252-5555 toll free from anywhere in Texas. You may write us at the Tax
Administration Division.

Sincerely,

Tax Policy Section
Tax Administration Division