Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2014
Sales and Use Tax Annotations
490.0000 RETURNS, DEFECTS AND REPLACEMENTS—Regulation 1655
(a) RETURNED MERCHANDISE
(1) In General
490.0034 Manufacturer Replacement. An out-of-state motor home manufacturer produced a model that was prone to catch fire in the engine compartment. The manufacturer offered for a limited time to exchange these motor homes for other models. The owners would be charged from $0 to $35,000 depending on the model they chose for the replacement. The owners were also responsible for tax and license on the new motor home.
A taxpayer purchased the particular model motor home from a dealer in Florida and subsequently acquired the replacement motor home in Iowa after paying the manufacturer an additional $12,000. The taxpayer subsequently drove it to California and applied for a tax clearance.
This transaction does not qualify under Civil Code section 1793.2 (the Lemon Law) because the customer must be given the option for cash restitution versus vehicle replacement. Also, the customer must be reimbursed for sales tax and license fees on the original transaction. In addition, the original vehicle was not purchased in California and, thus, no sales tax was remitted to California.
This transaction also does not qualify for a returned merchandise deduction since it was not returned to the original seller (Florida dealer). It was returned to the manufacturer. Furthermore, the returned-merchandise deduction is only allowed to the retailer who paid the sales tax to California.
The Iowa dealer made a sale of the motor home in part to the manufacturer (i.e., the portion paid by the manufacturer for the dealer to make the exchange) and in part to the customer (the charge for the upgrade). The charge to the manufacturer is either for resale (if the replacement is pursuant to a mandatory warranty) or at retail (if the replacement is pursuant to an optional warranty). Even if the latter, since the transaction occurred in Iowa, California tax does not apply because the manufacturer used the property in Iowa by making the replacement. The part of the sale to the customer, the upgrade charge, was a retail sale to the customer. Since the customer purchased that motor home for use in California, it owes California use tax on the upgrade charge. 4/13/94.