Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 490.0325


(2) "Full Sale Price"

490.0325 Trade-In of Defective Aircraft. A California firm purchased a new 1982 aircraft directly from the factory and paid the California use tax on the purchase price of $490,000. About a year later, the aircraft was found to be defective which made it unsafe and unsuitable for the purchaser's use. The purchaser reached an agreement with the manufacturer that the aircraft could be returned. The manufacturer and purchaser agreed that a new 1984 model aircraft would be substituted for the defective older aircraft. The purchaser was required to pay the manufacturer an additional $60,000 which reflected the difference in value between the defective aircraft $490,000 and the new aircraft which was $550,000.

The transaction will not meet the returned merchandise deduction requirements unless the vendor refunds the full purchase price of the original aircraft and does not require the purchase of a replacement greater than the value of the credit given. From the facts presented in this case, the buyer is required to purchase an aircraft of greater value in order to obtain the deduction.

Based on the foregoing, the purchaser would be liable for use tax on this transaction measured by $60,000 plus the trade-in value of the aircraft. The only amount which may be excluded from the $550,000 sales price of the new aircraft is the amount which the seller allows or credits against the sales price on account of the defects in the 1982 aircraft. If no allowance or credit was given on account of the defects, no deduction could be taken against the sales price. Of course, the amount of the allowance or credit for the defect must be reasonable and records must be kept to substantiate the allowance or credit. 1/16/85.