1. (1) Exclusion from return. Where a contract of sale has been cancelled or the property returned within the reporting period in which the sale was made, a vendor of tangible personal property or services, a recipient of amusement charges or an operator of a hotel (as defined in section 1101 of the Tax Law) may exclude such receipts, charges, or rents from his sales and use tax return.

2. (2) Credit where tax previously remitted. Where a contract of sale has been cancelled or the property returned and the tax collected thereon refunded to the customer, and such tax had been paid and reported on a return by the vendor of tangible personal property or services, a recipient of amusement charges or an operator of a hotel (as defined in section 1101 of the Tax Law), an application for refund or credit for the tax paid upon such receipt, charge, or rent shall be filed with the Department of Taxation and Finance within three years from the date when the tax was payable by such person to the Department of Taxation and Finance. The applicant may, as part of the application for credit, take the credit on the return which is due coincident with or immediately subsequent to the time such application is filed. The application for refund or credit shall be subject to the provisions of subdivisions (a), (b) and (c) of section 1139 of the Tax Law and section 534.2 of this Part.

   (b) Allowance for defective merchandise.

3. (1) Allowance of credit. Where an allowance is made for defective merchandise, the purchaser is required to pay the tax upon the amount due after subtracting the allowance from the sales price. Where the tax has been paid on the full selling price, and the vendor refunds to the customer the tax attributable to the allowance which tax had been paid to the Department of Taxation and Finance, a credit or refund of the tax attributable to the allowance may be taken by the vendor in accordance with the procedure described in paragraph (a)(2) of this section.

4. (2) Exchange of merchandise. If a purchaser returns defective merchandise to his vendor, and in connection with such return, new merchandise is furnished, the purchaser is required to pay the tax only on the cost of the new article less the allowance for merchandise returned.

   (c) Interest.

   Any credit or refund of taxes paid attributable to cancelled sales and returned or defective merchandise will be made without interest.

Tax Law, §§ 1132(e), 1139(e)

(a) Cancelled sales and returned merchandise.