I have the same question from a client today.

Client charges $1,000 for a product and 10% sales tax for simplicity.  Invoice is $1,100

They offer terms that they can get a 5% discount if paid in 10 days.

 Client takes the $55 discount and pays $1,045

 Client is saying they paid $100 in sales tax to the state in February when invoiced at $1,000 and 10% sales tax of $100.

 Client is also saying they should get a credit back from the state in March when the invoice was paid due to the discount on the invoice.

5% discount on $1,000 is $50 so net invoice was $950 times 10% sales tax is now $95 so the client is saying they should get a refund from the state for $5.

Tax law is what it is.  These questions should be directed at a CPA.

Question asked of Sage, Avalara and clients CPA.  No replies to date.....

This is a good definition that most states go by: 

Early payment discounts

An early payment discount is different from trade or volume discounts. When you offer an early payment discount, you still sell the goods for the established price. Customers are only allowed to reduce the amount owed to you if they pay within a specified time period; otherwise, the total amount due remains the same. The early payment discount is an optional discount that customers can take if they choose and does not represent a discount in the actual selling price of the product. The early payment discount is not subtracted from the amount of the invoice that is subject to sales tax.

Example:  Using the facts in the example above, you sell the same 10 cases of copy paper for $35 a case. However, on the invoice you state that a 10% early payment discount is available to customers who pay their invoices in full within 10 days of the date of delivery. The invoice shows the purchase price of $35 per case, and the sales tax is calculated on the $350 for the 10 cases.

Steve, see my response below for the position most states tax on the matter

Thank you. Since the client asked about California specifically, I will need to look into California sales tax law regarding early payment discount impact on sales tax.

www.cpapracticeadvisor.com/.../

California sales tax:

https://www.boe.ca.gov/formspubs/pub113/

Prompt payment cash discounts

As a retailer, your total taxable sales are reduced by the amount of cash discounts you offer your customers for prompt payment by that customer. If the customer does not make prompt payment, your taxable sales are the amount billed.