If a manufacturer buys back equipment from a customer under its own satisfaction guarantee (separate from the retailer's original sale), can the retailer refund the sales tax it collected, or can the retailer get that tax refunded from the state?

Subject

Returned Merchandise — Manufacturer's Buy-Back Does Not Entitle Retailer To A Sales Tax Refund

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9306L1258A05

Plain-English Summary

This June 1993 letter answers a retailer's question about who is entitled to a sales tax refund after a piece of medical equipment was returned under unusual circumstances.

The retailer had sold medical equipment to a doctors' office on August 28, 1992, and the doctors paid the retailer the sales price plus tax. Separately, the doctors had obtained a letter from the equipment's manufacturer — a letter the retailer knew nothing about — promising "uncompromising customer satisfaction" and a money-back guarantee for six full months. When the doctors later tried to return the equipment, they went through the manufacturer, not the retailer: the manufacturer (not the retailer) picked up the equipment and refunded the doctors' money, and the retailer never refunded any money to the doctors or credited any sales price on its own books.

The Comptroller concluded that because the retailer's original sale to the doctors and the manufacturer's separate buy-back are related but distinct transactions, the doctors are not entitled to a refund of the sales tax paid on the original sale. The letter also warns that if the retailer chooses to refund the tax to the doctors anyway, the Comptroller will not, in turn, refund that tax to the retailer. Sales tax is characterized as a transaction tax, and the retailer's original taxable sale to the doctors was never negated — only the manufacturer voluntarily bought the equipment back as a good-will gesture.

What This Means For You

If you are a retailer whose manufacturer offers its own satisfaction guarantee

A manufacturer's independent money-back guarantee to your customer is a separate transaction from your original sale. If the manufacturer buys the item back and refunds the customer, that does not undo your sale or your obligation to have properly collected tax on it — you generally cannot refund the sales tax to the customer based on the manufacturer's buy-back.

If you are considering refunding tax to a customer in this situation

Be aware: the Comptroller stated plainly that if the retailer refunds the tax to the customer without a valid basis, the Comptroller will not refund that tax back to the retailer. Doing so would leave the retailer bearing the tax cost itself.

If you are documenting who picked up and paid for a returned item

The facts mattered here: the retailer did not pick up the equipment, did not refund any money, and did not credit any sales price on its books — the manufacturer did all of that independently. Keeping clear records of who performs a buy-back (and under what guarantee) can help establish that a return was not part of the original sale transaction.

Q&A

Q: Can the doctors get a refund of the sales tax they paid to the retailer?
A: No. Based on the facts presented, the Comptroller ruled the doctors were not due a refund of the tax they paid to the retailer.

Q: What happens if the retailer decides to refund the tax to the doctors anyway?
A: The Comptroller stated that if the retailer refunds the tax to the doctors, the Comptroller will not refund that tax to the retailer — the retailer would bear that cost itself.

Q: Why doesn't the manufacturer's buy-back cancel out the original taxable sale?
A: Because the retailer's sale to the doctors and the manufacturer's buy-back are related but separate and distinct transactions. Sales tax is a transaction tax, and the original sale transaction was not negated by the manufacturer's later, separate buy-back.

Q: Did the retailer know about the manufacturer's money-back guarantee when it made the original sale?
A: No. The letter states the retailer was not aware of the manufacturer's guarantee letter and had no knowledge of it until the doctors tried to return the equipment to the retailer.

Q: Did the retailer pick up the equipment or refund any money to the doctors?
A: No. Per the facts described, the retailer did not pick up the equipment and did not refund any money or credit any sales price on its books; the manufacturer picked up the equipment and issued the refund to the doctors.

Q: Could this outcome change under different facts?
A: Yes. The letter notes explicitly that the opinion is based on the facts presented, and if there are additional or different facts, the opinion may change.

Original ruling text

June 16, 1993

Dear **:

I am responding to your letter regarding the medical equipment sold to
a doctors' office and later returned to the manufacturer. Because of
the unusual circumstances, you asked whether the sales tax should be
refunded to the doctors.

You explained that on August 28, 1992, your company sold a piece of
medical equipment to the doctors for use in their office. The doctors
obtained a letter from the manufacturer stating that the manufacturer
"is committed to uncompromising customer satisfaction and we will
guarantee your complete satisfaction or your money back for six full
months." Your company was not aware of this letter nor guarantee. The
agreement between the manufacturer and the doctors was not a part of
the sale of the equipment from your company to the doctors; in fact,
your company had no knowledge of this guarantee until the doctors
tried to return the equipment to your company. It was never your
company's intent to pick up this equipment, unless it was faulty.

You further stated that (1) once the pick-up request was made by the
doctors you turned the situation over to the manufacturer. (2) Your
company did not pick up the equipment. (3) Your company is not
refunding any money received from the doctors nor running any credit
of sales price through your books or records. (4) The money refunded
to the doctors is from the manufacturer. (5) And, presumably, the
manufacturer is responsible for picking up the equipment from the
doctors.

Based upon the facts presented above, the doctors are not due a refund
of taxes paid to your company. If your company does refund the tax to
the doctors, the Comptroller will not refund the tax to your company.
As the facts are presented, your company sold the equipment to the
doctors the doctors paid your company the sales price and the tax. The
manufacturer enacted a separate buy-back transaction (presumably a
good-will effort on the manufacturer's part) with the doctors.

Although these transactions are related, they are separated and
distinct. Sales tax is a transaction tax; your original transaction
(sale) has not been negated. Therefore, your company cannot refund the
tax to the doctors without incurring the tax liability yourself.

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

You may write Tax Administration Division, Comptroller of Public
Accounts.

Sincerely,

Tax Administration Division

NOTE: Previous Accession Number 93070171L.5 and/or 9307171L