My mind is blown! - Partial refunds don't reduce the correct sales tax?! What!?

Accounting & Taxes
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Hi there, my mind is blown that the below doesn’t seem possible.

In e-commerce, it’s extremely common for customers to forget their coupon codes and then ask the merchant to add their code to their previous purchase. There should be an easy way where the seller can apply the coupon code on the previously paid order. This would issue a partial refund and reflect the CORRECT amount in gross sale and sales tax. This would also expire the code so they couldn’t use it again. Since technically you can’t remove emails from coupon codes so this circumvents the system by allowing them to still use their coupon code.

But the biggest problem isn’t that the coupon code is able to be used twice, it’s that partial refunds only reduce the dollar amount from the gross sale, and they don’t correctly reduce the sales tax!! This means that financial data reports is incorrect, and the sales receipt is also wrong.

For example, a customer orders a $100 product that has 12% sales tax, totaling $112. If I refund the 15% coupon code which is $16.80. The reporting on Shopify would still show $12 sales tax and the gross amount would be minus $16.80. But that is not correct…

The refund should be -$15 to gross -$1.80 to sales tax.

Not -$16.80 to gross without subtracting sales tax.

Now financial data is completely skewed by understating gross revenue and overstating sales tax collected, at scale this is a huge discrepancy!

Basically what this means is that any merchant issuing partial refunds now has wrong financial information on Shopify. Period.

It’s also common for customers to be exempt from sales tax and notify the merchant after they have purchased for a refund of this sales tax. The merchant can’t even isolate the sales tax amount, you can only refund the gross amount for a partial refund. So now this tax amount is still floating in Shopify reports even though it was refunded. And the customer who is exempt from sales tax has this amount still on their receipt.

This also pushes incorrect data into accounting software which adds more administrative burden for merchants who now have to manually adjust partial refunds to have the correct tax reduced.

I feel that many small merchants don’t even realize this. If they are remitting the sales tax just based on Shopify tax reports, they are overpaying sales tax if they issued any partial refunds on Shopify.

I look forward to someone shedding light on this situation. If there is a way to handle the above please let me know.

Thank you

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The only “solution” I have found for a customer that belatedly provides their tax exempt certificate for a fulfilled order is to 1) flag the account as tax exempt 2) pretend the order is an RMA and go through the entire “Return” process 3) add the products back into the same order and they should come in w/o the sales tax being added. Ridiculous, I know, but that is the only workaround I’ve found.

All software has quirks, but this one seems a little silly, along with the coupon/discount refund issue. The only way I’ve seen the sales tax is reduced, after an order is placed, is if one of the products is removed using the Edit function. This must be done before an order is fulfilled and archived.

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Hi @dwebs , Thanks for your idea. This would work to remove the sales tax but the problem with editing orders like this is that you’re re-adding the products again, and because of this gross sales will be x2 and now returns are doubled because you didn’t really return a product but this simulate a full return in the reports which inflates this number greatly. If a customer has a 1,000 product in the cart and I edit the order, remove the product, and re-add it. Now Gross sales will be $2,000 for this order and returns will be $1000. Basically changing one problem for two other problems unfortunately.

I don’t think Shopify or 99% of the merchants know this is happening when editing orders and issuing partial refunds. I made a video showing how bad it really is. I hope Shopify will watch it.

https://www.loom.com/share/bffc884184f140d69513171cc7e9fae2

Anyways thanks for the help though @dwebs .

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Great video! One of the reasons that we moved to Shopify was to utilize the excellent reporting functions…which are completely messed up by this issue. I really hope Shopify addresses this basic and important accounting/tax issue.

Also, I ordered my bad “solution” incorrectly above. I found my notes: Can’t add new products after fully returned, but can add products after its fulfilled and BEFORE returning original products. Flag customer as tax exempt, add the same products to the order, do a return for the original items, return them to stock, fulfill the newly added products with the same tracking number, then collect payment on the new untaxed total.

Shopify does not add sales tax to additional products added to an order after the customer is flagged as tax exempt…even though the order predated the flagging of the customer.

This is an admittedly poor method but let’s you keep the products and tracking number under the original fulfilled order number and provide an invoice to the customer that shows no sales tax. It doesn’t really solve all problems…and should not be necessary.

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So this has bothered me for 3 years! I found an app that calculates it. It’s not perfect, ie. you have to manually look up the order and it wont work from my phone yet, but it does this exact thing. Saves me an hour out of my day. They also just updated their video on what the app does using my store which is pretty cool. They asked after my review of their app. Anyway. I like it. I hope they continue to make it better. It would be helpful if it worked with gorgias.