A registered retailer of taxable tangible personal property operates large stores selling a wide variety of merchandise in Connecticut. Occasionally, a customer will seek 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 retailer’s electronic journal system. In these circumstances, either the retailer’s warranty policy or the retailer’s customer satisfaction policy allows the customer to obtain a replacement item that may be identical or similar for no additional charge (an “even exchange”), even though the customer is unable to produce the original sales receipt. 

ISSUES:

When a retailer 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 customer, whether additional sales tax is due from the customer if (1) the customer is unable to produce the original sales receipt or other verification of the date and place of purchase and/or (2) the exchange or replacement takes place more than 90 days after the original retail sale.

RULING:

When a retailer 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 customer, no additional sales tax is due from the customer regardless of whether the customer is unable to produce the original sales receipt or other verification of the date and place of purchase, and/or the exchange or replacement takes place more than 90 days after the original retail sale. The retailer’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.  The Department’s Audit Division is available to review whether a retailer’s procedures for documenting even exchange transactions are satisfactory.

DISCUSSION:

Connecticut imposes a sales tax on sales of tangible personal property unless otherwise exempt. Excluded from the statutory definition of sales price and gross receipts subject to tax are “any portion of the amount charged for property returned by purchasers, which upon rescission of the contract of sale is refunded either in cash or credit, provided the property is returned within ninety days from the date of purchase.” Conn. Gen. Stat. § 12-407(a)(8)(B)(ii) and §12-407(a)(9)(B)(ii). This statute governs in all circumstances where a customer returns an item for a refund or credit.

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 sales price paid at the time of purchase. Subsequent replacement or exchange of the item for an identical or similar item with no additional consideration from the customer is neither a rescission of the retail sale nor an additional sale as there is no additional consideration paid by the customer in money or otherwise. Therefore, in such circumstances, no additional tax is due.

Note that “uneven exchange” transactions are considered rescissions of the original contract of sale, and as such are treated in the same manner as a return of merchandise for a cash or credit refund by the retailer. Uneven exchanges occur (1) where a customer returns taxable merchandise and wishes to purchase a different (dissimilar) or more expensive item and pays an additional amount or (2) returns taxable merchandise and wishes to purchase a different or less expensive item and receives a refund or credit of the difference in price. 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 90 days of the date of the return and that Connecticut sales tax was paid in accordance with Conn. Gen. Stat. § 12-407(a)(8)(B)(ii) and §12-407(a)(9)(B)(ii).

LEGAL DIVISION

November 21, 2005