Costco realized that they were being regularly scammed with false returns (a problem for many businesses)and felt that they had to do something to protect themselves from the large amounts of fraud being perpetrated upon them.
You need to know the history behind the process in order to understand how the Costco returns fraud was possible. Wholesale liquidation sources are often contracted by most big stores, like discount or department stores, to take shipments of returns or surplus inventory. Surplus inventory can be attributed to many different factors, ranging from geography to overpricing or lack of customer demand for the item. Surplus inventory is considered when pricing is strategized; it is an accepted part of the retail business.
When it comes to returns, however, the situation changes. Because Costco has a lenient return policy and will take returns on unwanted or damaged merchandise without a receipt, they are very open to Costco returns fraud.
Because wholesale liquidators simply sell overstocks and returns in bulk at drastically reduced prices to the public, there is no way to know if a buyer has purchased at item at the liquidators, gone back to Costco and returned it for a full Costco store credit. While Costco returns fraud costs the company millions of dollars, Costco would prefer to keep their lenient return policy as it currently stands; this unfortunately puts the company in a situation with no apparent solution.
Wholesalers and liquidation contractors actually have an obligation to Costco to remove anything and everything on the packaging of any item they receive from Costco store returns surplus to ensure that Costco returns fraud cannot happen. Label sanitation is when this obligation is fulfilled.
As the wholesale supplier is not allowed to tell you that the products you are purchasing from them are Costco store returns or surplus items, you cannot be certain as to where exactly the liquidation products you are purchasing are originally from.
Removing all of the labels and Costco-specific brand name badges creates a lot of work for the wholesale supplier, but agreeing to take the time to do this extra work is why they are able to buy the items at such low prices from Costco stores to begin with.
Sourcing your products by this process is a way that you, as a retailer, can get great discounts on products to on sell in your store. Costco items can often still be identified even after you remove all of the identifying markings, which can assure your customers that the items they are purchasing from you are of high quality and originally from a trusted store.
Some electronics and similar items from Costco store returns and surplus will arrive at the store of the contracted wholesale supplier with markings indicating that they are salvage items on the packaging. This is to ensure that Costco returns fraud is unlikely, not an indication that the quality of the item is low. Most people these days are doing all that they can to get as good a deal for their money as possible; this means that the small tag will not be considered important enough to deter them from making what they will know to be a great purchase.