Deduction of Sales Returns from Gross Sales of a Manufacturer

January 3, 1980 BIR RULING NO. 004-80 Sycip, Gorres, Velayo & Co. Certified Public Accountant P.O. Box 589, Manila Attention: Mr . M . Gutierrez Tax Division Gentlemen : This refers to your letter dated July 31, 1978 on behalf of the Tire Manufacturers Association of the Philippines requesting a clarificatory ruling on the new method of computing the 10% manufacturer's tax payable by the members of the Association in the light of P.D. No. 1358 and its implementing Regulations No. 8-78. Specifically, you would like our opinion on the following set of facts stated in your letter, viz: cdt "Prior to P.D. 1358, your Office has consistently ruled that discounts (e.g., cash discounts, prompt payment discount, volume discounts, special or confidential discounts) can be deducted from the gross selling price for purposes of computing sales tax provided that such discounts are ascertainable or actually given at the time of sale, and that although not shown in the invoices, they must be accurately shown in credit memoranda, credit note, or other supporting papers. We believe the reason for the deductibility of the said discounts from the 'gross selling price' can be found in the definition of the term 'gross selling price' which stated that "'Gross selling price' or 'gross value in money' of articles sold, bartered or exchanged is the total amount of money or its equivalent which the vendee pays to the vendor for the goods." "Since the amount paid by the buyer to the seller to acquire the goods is the net discounted value, then the sales tax should be based on this amount. "Above premises considered, we would like to know whether the following credits given before the sale can be deducted from the gross selling price, although they are not indicated in the sales invoices but expressly shown in the credit memoranda or credit notes issued to the customers: "a) Credits given to customer by way of credit memo or note to cover prompt payment discount, volume discount and/or other special or confidential discount; "b) Credit for price adjustments due to factory defects; "c) Credits for price adjustments to correct billing or invoicing errors; "d) Credits for sales returns; and "e) Credits for allowances to cover rollback in prices and other price adjustments." In reply, I have the honor to inform you that the second paragraph of Section 5(b) of Revenue Regulations No. 8-78 provides as follows: "In computing the base of the tax, discounts may be allowed as a deduction from the gross selling price provided said discounts are given at the time of the sale and are expressly indicated in the sales invoice." Under the regulations, only bona-fide discounts which are given to purchasers as a consideration in the sales contract and which are ascertainable and definitely agreed upon by the vendor and the vendee at the time of sale are deductible from the gross selling price for the purposes of the sales tax. Such discounts must be expressly indicated in the invoice. Thus, credits given to customer by way of credit memo or note to cover prompt payment discount, volume discount and/or other special or confidential discounts which although granted to the vendee at the time of sale but are not expressly indicated in the sales invoice are not deductible from gross sales in determining the sales tax due on the finished products. Likewise, credits for allowances to cover rollback in prices and other price adjustments are not deductible for sales tax purposes. However, credits for price adjustments due/to factory defects and credits for prices adjustments to correct billing or invoicing errors may be deducted since these credits are not actually discounts but credits to reflect the true and correct selling price of the articles sold. The adoption of the tax credit method of computing the sales tax has not changed the previous rule on the deductibility of the value of articles returned by the customer for purposes of the sales tax. The previous rule is where part of the goods delivered is returned by the customer and such goods returned are placed in stock for resale to others, the selling price thereof may be deducted from the gross selling price during the quarter in which the return was made if the said goods are not resold during the said quarter. If the returned goods were also sold during the quarter, then no deduction is made. However, under the present system, in order that sales returns may be deducted from the gross sales of a manufacturer, the original receipt evidencing the sale should be returned by the purchaser and a new invoice issued by the seller to reflect only the actual sales and the tax billed as a separate item in the new receipt. Very truly yours, RUBEN B. ANCHETA Acting Commissioner