Many shoppers went online this season to find the perfect gift. It’s a safe bet that few of them hit the target, which leads to returns, which leads to refunds from sellers, to which leads to the nagging question: Does sales tax get refunded along with the purchase price?
The simple answer is yes. The more accurate answer, particularly when something as complex as sales tax gets involved, is: Probably, but watch the details.
The most wonderful time of the year
In 2022, the cost of retail returns in the U.S. hit $817 billion, a quarter of that from online retailing. And of those online sales, as many as one in six ended up as returns (the growing trend of “bracketing,” in fact, means that more shoppers both online and in-person buy multiple items with the premediated intention of returning some of them).
Perhaps because of at-the-doorstep ease of using courier and delivery services versus standing in a snaking line in a brick-and-mortar store, items bought online are more likely to be returned: Capital One reports that eCommerce or online sales returns increased 7.22% from 2022 to 2023 while in-store returns dropped 19.3%. The average retail return rate is 26.4% for eCommerce versus 10% for in-store purchases.
Almost one in five consumers are more likely to return products they purchased online as opposed to in-store purchases, though nearly half of eCommerce returns are made in-store (this process is known as BORIS, or buy online, return in-store).
Clothing is most likely to be returned; computers are last. On all items, major online retailers often offer time limits on returns – well into January, for instance, for holiday-season purchases on the likes of Amazon, Target or Walmart. Most also make it clear that a refund from a third-party vendor who sells on the site can take longer.
Figuring the tax to refund
Is sales tax refunded when an item is returned? Yes, you the seller must refund the precise amount of tax, but the calculation depends on several factors:
- How much did you charge the customer in sales tax?
- Where was the sale made (and did it incur sales tax based on destination or origin)?
- When was the return made?
- What was returned?
- What extra charges were involved in the return?
- Have you already filed your sales tax return based on the original amount of sales tax charged?
Almost all the states that impose a sales tax generally allow retailers to deduct or exclude sales tax refunds for returned goods from taxable sales. Some states – Connecticut, Massachusetts, Michigan, Rhode Island and D.C., for example – impose a time limit, usually 90 days but up to 120. If you refund the full price, then you’re entitled to take a credit with the state for the full sales tax you returned to the buyer. To do so if you’ve already filed your sales tax return, you’ll have to amend the return, which can be more complicated in states such as Texas.
A few more points:
- The full sales tax refund treatment for returns can be straightforward compared with those of partial refunds.
- How much of the sales tax goes back to the customer and how much is the subject of a state tax credit for the merchant?
- Restocking, a frequent charge to customers from retailers who receive a returned item, is generally considered a service and so doesn’t incur sales tax in many states.
Obviously, sales tax refunds can open your company to cost and risk, especially if you try to track and calculate refund-related sales tax issues manually.
If you want to explore further how to effectively handle sales tax in the context of returns and refunds, check out our resources and insights.
If you think your business may be impacted by sales tax complexities and decisions, contact TaxConnex. TaxConnex provides services to become your outsourced sales tax department.
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