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approximately 2.89 percent of gross sales. With respect to the
1996 taxable year, product returns totaled $1,251,401,
approximately 2.82 percent of gross sales.
With regard to client credit balances resulting from
overpayments or returns, petitioner’s customers had the option of
(1) applying any or all of the credit balance to a subsequent
purchase, (2) causing a refund check to be issued, (3) having the
amount credited back to the customer’s credit card, or (4)
retaining the credit balance in the customer’s account with
petitioner. Petitioner did not routinely contact customers
having a credit balance in their accounts due to the large number
of orders, the relatively small amount of the credit balance, and
the likelihood that the credit would be applied toward future
purchases. Nonetheless, it was the practice of petitioner’s
customer service personnel to inform the customer of any credit
balance on his or her account when the customer called to place
an order. In addition, petitioner had a sales force of around 70
employees who were dedicated to serving those customers who
purchased petitioner’s infection control products (approximately
one-third of petitioner’s total customers). The sales personnel
were paid a commission on the amount of goods ordered. Given
that the existence of the credit balance made additional sales
more likely (since the customer did not have to come out of
pocket to the extent of the credit), the sales personnel had an
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