May 26, 2009
You have requested a Letter Ruling pursuant to 830 CMR 62C.3.2(2) on behalf of your client, ******************************* [Retailer], regarding the manner in which sales tax should be refunded when a customer receives less than the original purchase price in exchange for returned merchandise.  In support of the request, you state the following:
Retailer, the taxpayer, is a specialty retailer of luxury, designer and fashion merchandise that sells its merchandise through brick-and-mortar stores located in Massachusetts [State] as well as numerous other states, and through Retailer's catalogs and websites. When Retailer makes a retail sale of merchandise, Retailer collects sales tax based upon the original purchase price from the customer and remits the tax collected to the State.
In March 2009, Retailer instituted a new return policy for merchandise purchased from its catalogs and websites. Under the New Policy, customers making returns to Retailer more than 60 days after their receipt of merchandise will be entitled to a partial refund of their original purchase price, as follows:
Amount of Credit
0- 60 days from receipt of merchandise
100% of original purchase price
61-120 days from receipt of merchandise
75% of original purchase price
121-180 days from receipt of merchandise
50% of original purchase price
181 + days from receipt of merchandise
The percentage reduction reflects the fact that the value of the merchandise decreases with the passage of time because product models go out of date, fashions and styles change with seasons, and previously returned merchandise generally is less valuable than merchandise that has not been previously sold. Retailer contacted its customers via letters and emails before implementing the New Policy, which is now available on its website. It is anticipated that the New Policy will encourage customers to return merchandise more promptly and discourage late returns.
You ask if a customer returns merchandise pursuant to the New Policy and receives less than the original purchase price, whether the customer, and thus, Retailer, is entitled to:
- A full refund of all sales tax paid, based upon the original purchase price;
- A partial refund of sales tax based upon the percentage of the original purchase price actually refunded to the customer; or
- No refund of sales tax?
As discussed below, the answer is (1): a full refund of sales tax based upon the original purchase price, provided that the return is made within 90 days from the date of sale. Note that no sales tax is to be refunded if the return is made more than 90 days from the date of sale.
III. Applicable Law
Massachusetts imposes a sales tax of 5% upon gross receipts from retail sales of tangible personal property and services. G.L. c. 64H, § 2. "Gross receipts" is defined as the total sales price received by a vendor for retail sales. Id. General Laws, chapter 64H, § 1 defines "sales price" as "the total amount paid by a purchaser to a vendor as consideration for a retail sale, valued in money or otherwise." In determining the sales price subject to tax, there is an exemption for
(ii) 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.
With respect to the amount of tax to be returned when the other conditions are met, the statute is explicit: a purchaser may obtain a refund of the entire sales tax previously paid on returned merchandise, despite the fact that the Retailer charges or retains a separate handling fee covering the vendor's handling, restocking or similar administrative costs. No deduction from the amount returned to the customer is allowed except for an "established handling fee." See Directive 06-4, Sales Tax Refunds: Rescission of Motor Vehicle Purchases. 
We now apply these rules to the returns made to Retailer under the new policy, and note, first, that at least some of these returns will be made beyond the 90 day window established by law. In such cases the customer is not entitled to any refund of sales taxes paid. For items returned within the 90 day window, the customer is entitled to all sales tax paid, regardless of whether the retailer retains a percentage of the purchase price, so long as the amount retained constitutes an established handling fee within the meaning of the statute.
We conclude that it does. Under Directive 06-4 an "established handling fee" "must be reasonable, may be a flat fee or a percentage of the sales price, and may be established by the dealer's customary policy or by written contract." While we express no opinion on any higher amount charged after 120 days, we cannot say the 25% deduction in force between days 61 and 120 is "unreasonable" as a matter of law, particularly as DD 06-4 permits a deduction based on a percentage of the original purchase price. Moreover, you state the Retailer contacted its customers through letters and emails before implementing the New Policy, and that the policy is available on its website. The policy is thus readily available to customers and meets the requirement that amount deducted be "established," whether by custom or contract.
We illustrate the working of the rules by the following example: A customer purchases a taxable item for $100.00, and is charged $5.00 in sales tax. On day 65, the customer returns the item and pursuant to the policy, is credited with $75.00 (75% of the original price of the item); the Retailer must, however, also refund the entire tax previously paid, i.e., $5.00. Retailer is then entitled to an adjustment or abatement of taxes previously paid over to the Department.
When a customer returns merchandise pursuant to the New Policy, Retailer and the customer have rescinded the original contract for sale. In such instances, if the item has been returned within 90 days, Retailer must refund the entire sales tax paid, but may separately charge or retain its established handling fees, where applicable, under Retailer's New Policy.
Very truly yours
/s/Navjeet K. Bal
Navjeet K. Bal
Commissioner of Revenue
Your ruling request states that the identical issue is not being considered by the Department of Revenue in connection with an active examination or audit of a tax return already filed, but that Retailer is currently requesting similar rulings in the District of Columbia, Florida, Minnesota and New York.
 While Directive 06-4 is expressly limited to motor vehicles, the statutory requirement with respect to the vendor's "established handling fee" is applicable to all returns of taxable merchandise. The standards for determining whether a given charge is an "established handling fee" are therefore the same.
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