Cash Refund and Tax coding


I am trying out Manager and so far it works great. I do have a question on how to deal with cash refunds in relation to the proper tax coding. My use case:
I do the accounting for a small online business. All sales and purchases are going through Paypal. I am not issuing any sales invoices, but instead import my Paypal transactions into Manager. Using the Bank rules, it really works very good to automatically import and assign all transactions. The challenge that I face is with refunds to customers (I am refunding part of the sales amount when customers subscribe to my email list). When I issue a refund, Manager automatically sees that as a purchase, while in my case it should just be a negative sales amount. In the GL sales account it is still showing correct, because I assign the refund to the sales account, but in the Tax report the refund is shown in the purchases column, which is not correct. Am I doing something wrong? If not, is there a workaround or other solution to this? (Maybe adding a selection for Sales\Purchases on entering the refund and the Bank rule setup?)

Many thanks,

You need to provide more information:

  • Are you issuing refunds through PayPal?
  • If so, how are you allocating those when your statement is imported?
  • Are the refunds actually refunds that lower the taxable value of the original sales transaction?
  • Are you designating a tax code on the refund transactions?
  • Why do you consider the refunds a negative sales amount? Why are they not marketing expense?

Depending on your answers, there may be more questions.

Thanks for you fast reply. I will try to answer your questions as good as possible

• Are you issuing refunds through PayPal?
Yes, I issue the refund through Paypal.
• If so, how are you allocating those when your statement is imported?

I have created and downloaded an csv statement from Paypal.
I run a tool to transform the Paypal file so that the description field starts with country code – Sales (I.e. US – Sales) or country code - Refund (I.e. US – Refund).
I also created Bank Rules for importing the Paypal statement. To comply with VAT declaration rules I have created a bank rule per country, so that I can select the proper tax code per country. I am in Europe and we need to split between domestic, EU and non- EU sales and purchases.
This process works amazingly good and fast.
• Are the refunds actually refunds that lower the taxable value of the original sales transaction?
Yes. These can be seen as discounts on the original transaction.
• Are you designating a tax code on the refund transactions?

• Why do you consider the refunds a negative sales amount? Why are they not marketing expense?
Because the refund is actually a discount and should therefore lower the taxable value of the sales. In the webshop (Etsy) I cannot just use a discount option, because before I give a discount I want the customer to signup to my newsletter.

Hope this answers the questions. Thanks again for your help.

Best regards,

It sounds like you are doing everything correctly. Begin with the realization that you want to offset tax paid on outgoing transactions (purchases) against tax collected on incoming transactions (sales). The program knows from your imported statement that the money is flowing out. So, if what you say is correct, it is reducing your income in the Sales account. That’s what you want so you don’t have to pay income tax on the refunded amount.

When it comes to tax reports, the program can only handle a transaction as one of two types: money coming in or money going out. Money coming in is put in the sales category. Money going out is put in the purchases category. That’s just the way the report is set up, rather than dealing with both positive and negative amounts in both categories.

The net result is the same: taxes you have collected from customers and would normally owe to the tax authority is offset by taxes you have paid (or refunded).

Yes, but only if you gave that discount as part of the sales invoice transaction - reduced inventory selling price, but you are giving the “discount” as an incentive to signup for the newsletter so the “discount” (incentive) is a separate transaction from the sales invoice even though it is calculated based on the sales invoice.

In another words, you are paying them for signing up, no signup up no payment (discount) - this is an incentive payment (an expense) not a discount even though you may communicate it that way to your customers. Payments are purchases so they don’t reduce the taxable value of sales.

To be totally correct - your discount/refund/payment should be going to an expense account because if the customer doesn’t signup you aren’t incurring that expense/payment.

@EricS, I agree with @Brucanna based on general accounting principles and practice. My earlier answer was from the perspective of whether what you were doing and seeing was correct based on decisions you had already made to treat the refunds as discounts. I presumed you were concerned that the program had a bug in its tax reports. It does not; what you see is by design.

Whether you stick with your original approach or follow @Brucanna’s advice, the end result will be the same in terms of both taxes paid/owed/collected and taxable income. But your approach is unusual and might attract criticism should you be lucky enough to undergo an audit.

Thanks for the clear and prompt answers Tut and Brucanna, really appreciate it.

I actually never thought of these refunds as expenses. But now you mention it and clearly explain the reason, it does make senses to me. I have to re-think how I would need deal with this going forward. The refund after the purchase has been made by my customer is more because of the shortcomings on the webportal through which I am selling my products. I would like to give some customers a discount, but the portal doesn’t provide flexible enough tools to do so and therefore I am refunding a specific percentage.

For now I will just book the refunds as expenses. Thanks again!


Regardless of the webportal being able to provide an “instant” discount or not, the refund remains an expense - if the “discount” relates to the signing up to the newsletter, not the reduction in an inventory item’s selling price.

If you want to give the “discounts” as rewards based on loyalty, bulk buys, buying over x amount etc, then I would still consider them as “marketing” expenses - a cost of obtaining the sale.

A discount is generally when the product is marked down and the buyer only has to pay the reduced price regardless of any other offer/incentive.