Director's Rule 5-063
Returned goods, allowances, cash discounts
Returned goods, allowances, cash discounts
(1) Contract of sale subject to cancellation or revision. When a contract of sale is (1) subject to cancellation at the option of one of the parties, (2) subject to revision in the event the goods sold are defective, or (3) subject to cash or trade discounts, the gross proceeds of sales shall be determined by the transaction as finally completed.
(2) Returned goods. When the purchaser returns goods purchased and the entire selling price is refunded or credited to the purchaser, the seller may deduct an amount equal to the original selling price from the seller's gross proceeds of sales used in computing that period's tax liability. If the goods purchased are not returned within the guaranty period as established by contract or by customs of the trade, or if the full selling price is not refunded or credited to the purchaser, it shall be determined that the goods returned represent an exchange or a repurchase by the vendor.
To illustrate: S sells an article for $60.00 and credits his sales account therewith. The purchaser returns the article purchased within the guaranty period and the full amount of the purchase price is refunded or credited to the purchaser. S may deduct $60.00 from the gross amount reported on his tax return covering the period of the returned merchandise.
If the amount of returned goods in a particular reporting period exceeds the gross income for such period, the excess of the amount of the returned goods deducted during such period may be deducted from the gross income of subsequent tax reporting period(s).
(3) Defective goods. When bona fide refunds, credits or allowances are given within the guaranty period by a seller to a purchaser because of defects in the goods sold, the amount of such refunds, credits or allowances, exclusive of sales tax refunded or credited, may be deducted by the seller in computing tax liability.
To illustrate: S sells an article to B for $60.00 and credits his sales account therewith. The article is later found to be defective.
(a) S gives B credit of $50.00 on account of the defect, and also a credit of sales tax collectible on that amount. S may deduct $50.00 from the gross amount reported in his tax returns. This is true whether or not B retains the defective article.
(b) B returns the article to S who gives B an allowance of $50.00 on a second article of the same kind which B purchases for an additional payment of $10.00, plus sales tax on the $10. S may deduct $50.00 from the gross amount reported in his tax returns. The sale of the second article, however, must be reported for tax purposes as a $60.00 sale and included in the gross amount in his tax return.
(c) B returns the article to S who replaces it with a new article of the same kind free of charge, and without sales tax. S may deduct $60.00 from the gross amount reported in his tax returns, but the $60.00 selling price of the substituted article must be reported in the gross amount.
No deduction is allowed from the gross amount reported for tax if S in (b) and (c) of this subsection, does not credit his sales account with the selling price of the new article furnished to replace the defective one, but instead merely credits the sales account with an amount equal to the additional payment received, if any. In such case, the allowance for the defect is already shown in the sales account by the reduced sales price of the new article.
(4) Discounts. If the original selling price of a service or good reported on a previous tax return includes the amount of bona fide discounts which are subsequently taken by the buyer, the amount of such discount may be deducted from gross proceeds of sales in the subsequent period. (SMC 5.45.100 (K)).
(a) Discount deductions will only be allowed under the extracting or manufacturing classifications when the selling price determines the amount subject to tax. When the value of products under the extracting or manufacturing classification is determined by costs or some other non-sales method, no discount deduction is allowed.
(b) Patronage dividends which are granted in the form of discounts in the selling price of specific articles (for example, a rebate of one cent per gallon on purchases of gasoline) are deductible.
Effective: July 15, 2005
DIRECTOR'S CERTIFICATION
I Kenneth J. Nakatsu, Director of the Department of Executive Administration of the City of Seattle, do hereby certify under penalty of perjury of law, that the within and foregoing is a true and correct copy as adopted by the City of Seattle, Department of Executive Administration.