I never realized until working in retail that this was a common practice.
In my store, items tend to fall into three different categories based on cost - Do Not Repair, Remanufacture, and Repair. If somebody returns something defective, we do one of the three - cheap stuff is not repaired (destroyed and removed from inventory), Mid-range stuff is basically sold back to the manufacturer and refurbished for resale at outlet stores, and repair items are high-end pieces that it's less expensive to ship out, have rebuilt and get back.
As an associate, I can only be thorough with the items I return. My store manager doesn't like for us to scrap inventory, though, because it comes out of his profit and thus bonus money. There are lots of items in our store that were returned for one reason or another, and he's elected to mark problems on the box and try to sell the item at a discount rather than getting rid of it. Not a problem, except for the fact that if a customer grabs the box to buy an item themself, I might not see the comments written. Customer then gets to return the item, wasting their time to bring it back..
Now, not all returns are actually defective, either - we have people "rent" items all the time, buying a product to work on a specific project and returning it when they're done. And some buyers are idiots, who return items simply because they're not smart enough to use an item properly.
Long story short - knowing that any item in a retail store could potentially be a returned item, I shop a lot more cautiously than I used to. Stores are generally easy-going about exchanges, but I don't want to take any more of a chance than I have to..