Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2016
Sales and Use Tax Annotations
490.0000 RETURNS, DEFECTS AND REPLACEMENTS—Regulation 1655
(a) RETURNED MERCHANDISE
(1) In General
490.0091 Returned Merchandise Deduction—Conditions. A firm purchases equipment for its own use and uses it. Later it begins negotiations with a third party lender to enter into a sale and leaseback transaction that will not qualify as a financing transaction nor as an acquisition sale and leaseback. The third party lender suggests that, instead of a sale and leaseback, the firm should arrange with the original vendor to "return" the equipment in exchange for a full refund of the original purchase price. The reason the vendor would be willing to refund such amounts is that the third party lender would agree to purchase the equipment for the original purchase price, that is, the amount refunded to the firm. The third party would then lease the property to the firm. The reason for structuring a transaction that otherwise constitutes a sale and leaseback in this fashion is to attempt to qualify for the returned-merchandise deduction.
The original vendor in this transaction is not entitled to a returned-merchandise deduction. A retailer is entitled to a returned-merchandise deduction when, upon return of the property by the purchaser, the retailer refunds the entire purchase price, plus sales tax reimbursement or use tax, and the purchaser is not required to purchase other property at a price greater than the purchase price of the returned property. The retailer is not entitled to the deduction if it imposes other conditions on the refund. For example, no deduction is allowed if the retailer conditions the refund on the purchaser's obtaining a new buyer for the property. Thus, when a retailer will "refund" the original purchase price only if the purchaser arranges for a new buyer to purchase the property at that same original purchase price, notwithstanding that at that time the fair market value of the property may be less than the original purchase price, the retailer is not entitled to a returned-merchandise deduction. 5/12/95.