You have requested a letter ruling about the application of Massachusetts sales and use tax to defective merchandise or merchandise otherwise unsatisfactory to the retail customer that is replaced with an identical or similar item by the retail vendor without charge, either in accordance with a written warranty or other customer service policy.
You are a registered vendor of taxable tangible personal property operating large retail stores selling a wide variety of merchandise in Massachusetts. Occasionally, a retail customer wishes to exchange or obtain a replacement for taxable merchandise that is either defective or unsatisfactory, the customer does not have the original sales receipt that would verify the date and place of sale, and store personnel cannot locate the transaction information within the store's electronic journal system. Either the store's written warranty policy or the store's customer service policy  allow the retail customer to obtain a replacement item that may be identical or similar for no additional charge, an "even exchange," even though the retail customer is unable to produce the original sales receipt.
When a retail vendor exchanges or replaces taxable merchandise with identical or similar merchandise for no additional consideration because of a defect or because the item is otherwise unsatisfactory to the retail customer, is additional sales tax due from the retail customer if (1) the retail customer is unable to produce the original sales receipt or other verification of the date and place of purchase or (2) the exchange or replacement takes place more than ninety (90) days after the original retail sale?
Discussion of Law
Massachusetts imposes a 5% sales tax on sales of tangible personal property and telecommunications services unless otherwise exempt. Excluded from the statutory definition of "sales price" and the vendor's gross receipts subject to tax are "the amount charged for property returned by purchasers to vendors upon rescission of contracts of sale when the entire amounts charged therefor, less the vendors' established handling fees, if any, for such return of property, are refunded either in cash or credit, and when the property is returned within ninety days from the date of sale, and the entire sales tax paid is returned to the purchaser . . . ." G.L. c. 64H, § 1.
When an item of tangible personal property is sold with either an explicit or implicit warranty or "customer satisfaction policy," the cost of that warranty or satisfaction policy is included in the retail sales price paid at the time of purchase. Subsequent repair, replacement or exchange of the item for an identical or similar item with no additional consideration from the retail customer, an "even exchange," is neither a rescission of the retail sale nor an additional sale as there is no additional consideration paid by the retail customer in money or otherwise. See generally Sales Tax Information Letter #3 , which provided, " Q. An automobile dealer replaces a defective part in a new automobile during the warranty period. No charge is made to the customer. However, the dealer bills the manufacturer for the cost of the part. Is sales tax due? A. No sales tax is to be collected. The sales price of the new automobile included the warranty." 
Note that "uneven exchange" transactions  are considered rescissions of the original contract of sale. Sales tax paid on the original sale may only be credited or refunded if the customer produces the original receipt or other verification of the date and place of purchase substantiating that the original sale was within ninety (90) days of the date of the return and that Massachusetts sales tax was paid in accordance with G.L. c. 64H, § 1.
When a retail vendor exchanges or replaces taxable merchandise with identical or similar merchandise for no additional consideration because of a defect or because the item is otherwise unsatisfactory to the retail customer, an "even exchange," no additional sales tax is due from the retail customer regardless of whether the retail customer is unable to produce the original sales receipt or other verification of the date and place of purchase, or the exchange or replacement takes place more than ninety (90) days after the original retail sale. The vendor's books and records must contain sufficient information to permit the Department to verify that a transaction is an even exchange as described in this ruling.
Very truly yours,
Commissioner of Revenue
 See generally The Neiman Marcus Group, Inv. v. Commissioner of Revenue, A.T.B. Docket No. F245638 (2001) and TIR 01-14. The taxpayer in that case had an unconditional customer satisfaction policy communicated directly to sales associates and indirectly to retail customers.
 The first guidance published by the Department following enactment of the sales tax was in the form of "Sales Tax Information Letters." Each letter covered a variety of topics in question and answer format. They are no longer published, and many are obsolete, having been superseded by subsequent law changes and current DOR regulations, rulings, directives and TIRs.
 Note that a different result occurs when an optional service contract is sold independently of tangible personal property. In that situation, the service contract itself is not subject to tax. Sales or use tax generally must be paid by the service enterprise on any replacement parts or other taxable property transferred in connection with such a contract in accordance with 830 CMR 64H.1.1(5)(g). Also see LR 79-19.
 Uneven exchanges occur (1) where a customer returns taxable merchandise and wishes to purchase a different, more expensive item and pays an additional amount or (2) returns taxable merchandise and wishes to purchase a different, less expensive item and receive a refund or credit of the difference in price.
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