Section 458-20-278 - Returned goods, defective goods-Motor vehicle lemon law(1)Introduction. This rule explains how sellers should report business and occupation (B&O) tax and retail sales tax when goods are returned and refunds or credits are granted. (a)Contract of sale. Generally, when a contract of sale is made subject to cancellation at the option of one of the parties or to revision in the event the goods sold are defective, the gross proceeds actually derived from the contract and the selling price are determined by the transaction as finally completed.(b)Examples. The examples in this rule identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.(2)Returned goods. When sales are made either upon approval or upon a sale or return basis, and the buyer returns the property purchased and the entire selling price is refunded or credited to the buyer, the seller may deduct an amount equal to the selling price from gross proceeds of sales in computing tax liability. A deduction is available under the retail sales tax classification only if the amount of sales tax previously collected from the buyer has been refunded by the seller to the buyer. If the property purchased is not returned within the guaranty period as established by contract, or if the full selling price is not refunded or credited to the buyer, a presumption is raised, subject to rebuttal by a preponderance of the evidence, that the property returned is not a returned good but is an exchange or a repurchase by the seller.(a)Example 1. Stan sells an article for $60.00 and credits his sales account with the sale. The buyer returns the article purchased within the guaranty period and the purchase price and the sales tax previously paid by the buyer is refunded or credited to the buyer. If the sale has not been reported to the department of revenue, Stan may deduct $60.00 for the returned article from his gross sales amount. If Stan has already reported the sale on his excise tax return, he may take a deduction for $60.00 for the returned article on his next filed excise tax return.(b)Restocking fees charged on returned goods. A "restocking fee" is a fee intended to cover the cost, by the seller, of restoring returned items to saleable condition and returning them to inventory. The restocking fee is the same regardless of when a purchased item is returned to the seller by the buyer. If all the conditions of this subsection are met for returned merchandise with the exception of a restocking fee, the transaction will be viewed as a sale return and not as a repurchase. When a sale return occurs, a deduction may be taken under the appropriate tax classification used in reporting the original sale. However, the restocking fee is considered income and taxable under the service and other business activities B&O tax classification.
(i)Example 2. Ace Auto Parts (Ace) sells a catalytic converter to Stan for $400.00 plus tax. The receipt that Ace gives Stan states that returns must be made within 30 days and a $35.00 restocking fee will apply to returns. Stan realizes after he gets the part home that it is the wrong one for his car. When Stan returns the part, he finds that Ace does not have the catalytic converter that he needs for his car. Ace computes Stan's refund of $400.00 plus sales tax minus the $35.00 restocking fee. Ace may reduce its gross retail sales by $400.00, but must report the $35.00 restocking fee under the service and other business activities B&O tax classification.(ii)Example 3. Breen's Department Store (Breen's) accepts returned items, in new condition, but may discount the original purchase price based on the time elapsed since purchase. Return within | Amount of credit |
0 - 30 days from receipt | 100% of original purchase price |
31 - 60 days from receipt | 75% of original purchase price |
61 + days from receipt | 50% of original purchase price |
For example, Jill purchases a dress from Breen's and returns the dress 45 days after purchase. Breen's refunds or provides a credit to her of 75 percent of the cost of the dress. The amount retained by Breen's is not considered a restocking fee. This is considered a repurchase by Breen's, and thus no deductions are allowed under the retailing B&O tax or retail sales tax classifications on Breen's excise tax return.
(3)Defective goods. This subsection does not apply to new motor vehicles under an original manufacturer's warranty. See subsection (4) of this rule regarding new motor vehicles under an original manufacturer's warranty. When bona fide refunds, credits, or allowances are given within the guaranty period by a seller to a buyer on account of defects in goods sold, the seller may deduct the amount of such refunds, credits, or allowances in computing its tax liability, if the seller has refunded the proportionate amount of the sales tax it previously collected from the buyer.
Example 4. On April 5th, Stan sells an item to Bob for $60.00. Stan records the sale as gross income. The item is later found to be defective by Bob.
(a) Bob returns the item prior to Stan reporting the sale on his excise tax return, and remitting B&O tax and the collected retail sales tax. Stan refunds Bob the purchase price including the retail sales tax. Stan may subtract $60.00 from his gross income when completing his excise tax return.(b) Bob returns the defective article and Stan allows him a full credit of $60.00 towards another article. The new article's price is $80.00. Bob pays, in cash, the additional $20.00 plus retail sales tax on the $20.00. Stan records the $20.00 as gross sales. The allowance for the defective article ($60.00) is already included in Stan's gross sales, thus only the $20.00 ($60.00 credit and $20.00 cash = $80.00 purchase price) should be added to the gross sales amount.(c) Bob waits a month to return the defective item for a refund. Stan refunds Bob the full purchase price of $60.00 plus the retail sales tax. As Stan has already reported the sale on his excise tax return, he may deduct $60.00 under "Returns" for both the retailing B&O tax and retail sales tax classifications on his next excise tax return.(d) Bob is willing to keep the defective item but requests a partial refund to offset repair costs. Stan refunds Bob $25.00 of the purchase price, plus the applicable retail sales tax. As Stan has already reported the sale on his excise tax return, he may take a deduction for $25.00 under both the retailing B&O tax and retail sales tax classifications on his next excise tax return.(4)Motor vehicle warranties - Lemon law. A manufacturer that replaces or repurchases a new motor vehicle under warranty because of a defective condition is required to refund to the consumer the "collateral charges" (RCW 19.118.021(2)) which include retail sales tax. The refund will be made to the consumer by the manufacturer or by the dealer for the manufacturer. The department of revenue will then verify calculations and credit or refund the correct amount of the tax so refunded. For information on the lemon law, other than retail sales tax, contact the attorney general's office.(a)What documentation is needed for credit or refund? To receive a credit or refund, the manufacturer or dealer must provide the following information to the department of revenue establishing that the dealer collected the retail sales tax and that it was refunded to the consumer: (i) A complete copy of the new motor vehicle arbitration board decision including the owner signed acceptance/denied page; or(ii) The Lemon Law Refund Request Verification Form completed in nonarbitrated situations; and(iii) A statement signed and dated by the consumer accepting the arbitration board decision or the manufacturer's nonarbitrated repurchase offer. The statement must include the consumer's name, repurchase offer date, total repurchase amount, sales tax amount refunded, the name of the manufacturer issuing the refund and any other supporting documents needed to substantiate the claim; and(iv) A copy of the dealer invoice (purchase order) or lease agreement, signed by the consumer, that shows the amount of retail sales tax paid; and(v) A copy of the manufacturer's refund check(s) for repurchase drawn payable to the consumer and/or lien holder; and(vi) For the calculation of reasonable offset for mileage provide all supporting documentation necessary to verify the calculation used and documentation (e.g., all dealer repair records or service records) to verify the attempted repairs to the vehicle did comply with RCW 19.118.041.(b)Where can I obtain the Lemon Law Refund Request Verification Form? The "Lemon Law Refund Request Verification Form" is available on the department's website at dor.wa.gov, or by calling the department's telephone information center at 360-705-6705, or writing to: Taxpayer Services
Department of Revenue
P.O. Box 47478
Olympia, WA 98504-7478
(c)Where should documentation be sent? All documentation from manufacturers for credit or refund on lemon law refunds should be sent to: Audit Division/Lemon Law Refund Section
Department of Revenue
P.O. Box 47474
Olympia, WA 98504-7474
Wash. Admin. Code § 458-20-278
Adopted by WSR 15-15-157, Filed 7/21/2015, effective 8/21/2015Amended by WSR 23-14-002, Filed 6/21/2023, effective 7/22/2023