Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 490.0016


(1) In General

490.0016 Arbitration Award. In 1991, a taxpayer sold computer software to a purchaser pursuant to a sales contract which provided that any disputes between the parties shall be resolved through arbitration. In February 1994, the purchaser filed a "Demand for Arbitration" seeking a refund of the purchase price of the computer software. The resulting arbitration award ordered the purchaser to return the software to the taxpayer and ordered the taxpayer to refund a portion of the purchase price to the purchaser. The taxpayer was ordered to pay the arbitration costs.

In this case, under the contract, the parties agreed to resolve all disputes through arbitration. Arbitration is a process of dispute resolution in which a neutral third party renders a decision after a hearing at which both parties have an opportunity to be heard. The arbitration award at issue herein ordered the taxpayer to refund a portion of the purchase price to the buyer. The taxpayer did not voluntarily refund the purchase price. Thus, the amounts paid by the seller to the buyer in accordance with the arbitration award are analogous to damages paid by the seller to the buyer as a result of litigation arising out of a sale transaction. (See Southern California Edison Company v. State Board of Equalization (1972) 7 Cal.3d 652.) Therefore, because the payment by the taxpayer to the buyer was pursuant to the arbitration award, the taxpayer does not qualify for a defective merchandise deduction under Regulation 1655. 2/6/96.