Sales Tax Slice: ‘Tis the Season for Returning Gifts and Refunding Sales Tax

Like a lot of Americans at this time of the year, you’re probably taking stock of your holiday largesse and pondering what to do with the items still partially wrapped in tissue paper, peeking out of the gift bag that’s sitting by the front door. You may have decided to take a trip to the closest mall to relinquish those gifts that, as thankful as you are for the kindness, did not quite hit the mark. It happens to many of us. For instance, one of my colleagues is anxious to be rid of what he calls an “obnoxiously large wine opener” that he cannot see himself ever using. As for me, I admit that I seriously considered gifting my brother’s girlfriend a pair of Christmas-themed legwarmers that surely would have made their way back to the store.

If you’ve decided to return one or more gifts this season, likely far from your mind, as you prepare to plead your case with the cashier, is the question of whether your refund will include the correct amount of sales tax. In most states, if a customer returns an item for the full amount of the purchase price, the refund usually will include the amount of sales tax paid at the time of purchase. Some jurisdictions like Connecticut, the District of Columbia and Georgia, permit a refund of sales tax paid only for returns made within 90 days of purchase. Customers who can present a receipt showing sales tax paid, will fare much better than those without a receipt, in successfully obtaining sales tax reimbursements.

But even presenting a receipt is sometimes not enough. Last year, Wal-Mart settled a federal class action breach of contract suit brought by two Ohio customers against the retailer for failing to refund or credit the full amount of sales tax paid as shown on sales receipts.(SeeBrandewie v. Wal-Mart Stores Inc., and read BNA’s Ernst Hunter’s Jan. 2015 post about the case.) Apparently, the customers sought to return their items in Wal-Mart stores located in jurisdictions where the sales tax rate was lower than the rate applicable at the stores in which the purchases had been made. Wal-Mart would only refund the amount of sales tax controlling at the stores where the returns were made, not the higher amount paid by the customers at the time of purchase. Under the settlement, refunds are available to the members of the class of Wal-Mart and Sam’s Club customers in the U.S., who made in-store or online purchases, but were given a sales tax refund or credit for their returned goods that amounted to less than the sales tax paid. With the Wal-Mart action having been settled, the question of “sourcing” sales tax refunds on merchandise returned in one location, but purchased in another, both with differing sales tax rates, remains up in the air.

And the questions surrounding sales tax reimbursements for items returned with a gift receipt are similarly unresolved. Usually the sales price, and any applicable sales tax, is deliberately absent from the gift receipt. So, just how much sales tax are retailers refunding to customers who present gift receipts? If the donor purchased an item from a retail outlet located in a Maryland, with a 6 percent sales tax, and the gift recipient returns the item to a store in Alaska, a non-sales tax state, must the retailer refund the sales tax to the gift recipient in Alaska? If not, is the donor entitled to a refund in Maryland for the sales tax paid—and should the donor seek that refund from the retailer or from the state? State statutes do not appear to address the specific issue of gift receipt sales tax refunds. Perhaps that’s our penalty for holiday de-gifting in the first place.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn:  Is it time for sales tax refund reform?

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By René Blocker