Smarthealth, Inc. - Page 4




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          Overpayments, Refunds, and Credit Balances                                  
               Some of petitioner’s customers remitted payment in excess of           
          the amounts they actually owed.  In certain instances, the                  
          customer would duplicate the required payment by first paying               
          pursuant to the product invoice and subsequently making payment             
          according to a monthly statement issued by petitioner prior to              
          the receipt of the customer’s initial payment.1  All overpayments           
          were applied to the customer’s account, generally producing a               
          credit balance in favor of the customer.                                    
               Petitioner’s marketing materials and shipping invoices                 
          contained a statement of its return policy.  The policy allowed             
          customers to return any item with which the customer was not                
          satisfied, for any reason, within 60 days of receipt.2  The                 
          customer had the option of selecting a replacement, a full                  
          refund, or a credit to his account.  Product returns during the             
          1995 taxable year totaled $1,154,395, which amounted to                     


               1  In their arguments, the parties distinguish between                 
          overpayments and duplicate payments.  We, however, see no                   
          principled reason for distinguishing between the two.                       
          Accordingly, in our opinion we shall refer only to customer                 
          overpayments, which include overpayments of any amount.                     
               2  In certain instances in which the customer was not                  
          completely satisfied with the delivered product but nonetheless             
          intended to use it, petitioner would negotiate with the customer            
          an adjustment to the amount billed.  Where the customer had                 
          previously paid the full invoice amount, this adjustment would              
          result in a credit in favor of the customer.  For purposes of               
          this opinion, we shall consider invoice adjustments as part of              
          customer returns.                                                           





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Last modified: May 25, 2011