Washington’s Sales Tax Exemption for Customer Returns

When a customer uses a store credit from a return in Washington, the purchase is exempt from Washington sales tax if two conditions are met.

  1. The merchandise purchased must be the same or “like-kind” to the merchandise returned.
  2. The retailer must have records that show the purchased property is the same as the merchandise returned.

In Wash. Dept. of Revenue v. GameStop, an appellate court held invalid a Department of Revenue requirement that a customer’s return and purchase must happen the same day in one transaction to be exempt.

Exchanges and Store Credits for Customer Returns

A Washington tax statute says that the price paid for merchandise in a retail sale is subject to sales tax except for consideration that is a “trade-in of like kind property.” So, for example, a customer would not pay sales tax when returning merchandise if:

  • the customer exchanged the returned merchandise the same kind of property; and
  • the new merchandise had the same price.

If the price is higher, the customer pays sales tax on the price difference.

In GameStop, a video game retailer in gave Washington customers store credits when they returned merchandise. When customers used the credits toward a purchase, the retailer did not charge sales tax on the sale.

Later, the department of revenue, relying on its interpretation of the statute in a department regulation, found the retailer liable for sales tax on customer purchases made with store credits. The department said the sales tax exemption applies only if merchandise is:

  • exchanged the same day in the same transaction; and
  • for the same kind of property.

Sales Tax Exemption Available for Purchases with Store Credits

A Washington appeals court held the department’s same day, single transaction rule invalid. The court noted that the sales tax exemption in the statute did not impose timing requirements on a retail trade-in. To qualify for an exemption from sales tax, the trade-in property, or property exchanged, only must be “like kind”, i.e., the same kind of merchandise.

Video Game Software and Hardware are Not the Same Kind of Property

Although the court held that part of the department’s rule invalid, the retailer remained liable for sales tax on store credit purchases.

The department’s regulation also states that video game software and video game hardware are not “like kind” property.  If a customer got a store credit when returning a video game and used the store credit to buy a video game console, the whole purchase price would be subject to sales tax. The court agreed with the department’s rule, finding that software and hardware do not perform the same function and are not used the same.

Recording Sales for Store Credits

The retailer’s records at the time of the store credit purchases did not indicate what merchandise the customer exchanged for the credit. The court noted that the retailer’s “sales documents state the amount of store credit…, but not the specific merchandise traded in.”

The retailer argued that purchases with store credits were exempt because the property returned, or traded in, is listed in the store’s records when it is returned. However, as the court pointed out, if a customer returned a console and several video games for a store credit and used only part of the credit for a later purchase, the retailer’s system would not show that like kind property was purchased.

Retailers in Washington State

In GameStop, the department’s interpretation of a tax statute was held invalid. Basically, the department had added a requirement for a sale to qualify for a sales tax exemption. Washington retailers that have been following the same day, single transaction rule will likely erview their sales tax collection practices on store credit purchases.

In doing so, they will also want to make sure records for store credit purchases support those practices.

By Lisa Lopata, JD

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All stories by: CCHTaxGroup