As a Washington State business owner — especially if you’re operating as an LLC — you’re likely familiar with filing quarterly Sales & Use Tax Returns. But what happens when a customer returns merchandise in a different quarter than when the sale was originally reported?
This is a common scenario and one that’s important to handle correctly to ensure your business doesn’t overpay sales tax and remains in good standing with the Washington State Department of Revenue (DOR). Here’s what you need to know.
💡 The Basics: Sales Tax on Merchandise Sold
When you sell a taxable item in Washington, you’re responsible for collecting sales tax from the buyer at the time of purchase. That collected tax is then reported and remitted to the DOR in your quarterly Sales & Use Tax Return.
But if the customer returns the merchandise, you’re no longer required to remit sales tax on that transaction even if the return occurs in a different quarter.
🧾 What to Do When the Return Crosses Quarters
Let’s say you sell a product in Q1 and collect sales tax on that transaction. The customer then returns the product in Q2. You’ve already reported and paid the tax in Q1, so how do you get credit for the returned merchandise in Q2?
The Washington State DOR allows you to report the return as a deduction in the quarter the merchandise is returned.
Steps to Report It:
- Locate the Deduction Line
On your Sales & Use Tax Return, look for the line item labeled:
✅ “Returned Goods (Retail Sales Tax)”
This is where you’ll input the amount of the return. - Enter the Deduction in the Quarter the Return Occurred
You do not need to amend your Q1 return (where the sale originally happened). Instead, simply deduct the value of the returned item (including the sales tax you refunded) in Q2, under the “Returned Goods” deduction. - Maintain Proper Documentation
Always keep clear records showing:- The original sale (invoice, receipt, or POS record)
- The date and amount of the return
- Evidence of the refunded sales tax
🏢 Special Notes for LLCs and Small Businesses
If you operate as an LLC, you follow the same process—but make sure your business registration with the DOR is up to date, especially if you’ve made changes to your structure, tax status, or locations.
Additionally, if your return significantly alters your gross receipts for the quarter (e.g., large returns), be sure it aligns with your business records, bookkeeping, and financial statements.
📉 Example Scenario
- Q1 Sale:
- Sold item: $1,000
- Sales tax collected: $100
- Total reported: $1,100
- Q2 Return:
- Customer returns item, and you refund $1,100
- Q2 Sales & Use Tax Filing:
- Enter $1,000 under “Returned Goods” in the deduction section of your Sales & Use Tax Return
- This reduces your taxable gross sales accordingly, and offsets the previously remitted tax
⚠️ Common Mistakes to Avoid
- Don’t amend your original quarter’s return.
Unless the return itself was filed with an error, you don’t need to touch Q1. Report the return in Q2. - Don’t forget to refund the sales tax to the customer.
You must return the full amount (including tax) to claim the deduction. - Don’t lump deductions together.
Always label returned goods correctly so the DOR can track the deduction type accurately.
✅ Summary
- Report the return as a deduction in the quarter the return happens.
- Use the “Returned Goods” deduction line on the Sales & Use Tax Return.
- Keep good records in case of an audit.
- No need to amend the quarter the original sale occurred.
If you need help navigating this or preparing your Sales & Use Tax Return, the team at Huddleston Tax CPAs can assist. We provide bookkeeping, tax filing, and DOR compliance support tailored to Washington businesses—so you can stay focused on growing your company with confidence.
📞 Call us at (425) 483-6600 or contact us online to schedule a consultation.