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Essentials of Sales Tax Preparedness
How Sales Tax Applies to Discounts, Coupons & Promotions
byNovember 15, 2016
With few exceptions, sales tax applies to the gross receipts received or gross selling price received from the sale of products or taxable services. The specific definition will vary by state but, for example, Georgia sales tax law defines the term “sales price” to be the selling price of the product less any “ discounts, including cash, term, or coupons that are not reimbursed by a third party that are allowed by a seller and taken by a purchaser on a sale.”
In layman’s terms, that means if the original price of something you sell was $100, but you offer a 50% discount, then the taxable price is $50.
Discounts-Percent and Dollar
Because discounts are generally offered directly by the retailer and reduce the amount of the sales price and the cash received by the retailer, the sales tax applies to the price after the discount is applied. For example, your normal selling price is $30 but you are offering a 5 percent discount for first time customers. The tax base is $28.50. The same holds true if you are offering a dollar discount rather than a percentage discount. The normal price is $30.00 but you are offering a $5.00 discount for returning customers. Your tax base (prior to any taxable shipping) is $25.00.
If, however, the discount is sponsored by the manufacturer or the distributor and you will be reimbursed by either of these parties for offering the discount, the sales tax base is the full sales price and not the reduced sales price. As noted below with manufacturer’s coupons, because the tax base is the amount of receipts you receive for selling the product, the states generally don’t distinguish whether the payment comes from the customer or by some third party. As noted above in the Georgia definition, coupons that are reimbursed by a third-party are NOT treated as a sales price adjustment. This rule is pretty uniform across the country.
Coupons: Merchant and Manufacturers
Sales price reductions arising from the use of coupons or coupon codes are treated in the same way that discounts are. We normally refer to these as “store” or “manufacturer’s” coupons. Store coupons are price reductions offered directly by the retailer and are not reimbursed by the manufacturer or distributor. These reductions in the selling price also reduce the amount subject to sales tax.
Manufacturer coupons or promotions, which reimburse the retailer for the discount provided, are not used to reduce the sales tax base. Because the retailer is compensated and receives payment from a third party the amount subject to sales tax is the full sales price of the product.
With any rule, there are certainly exceptions. For example, Texas treats “store” and “manufacturer” coupons in the same way. Following is an excerpt from Texas Rule 3.301:
“When coupons or certificates are accepted by retailers as a part of the selling price of any taxable item, the value of the coupon or certificate is excludable from the tax as a cash discount, regardless of whether the retailer is reimbursed for the amount represented by the coupon or certificate.”
Sales tax can never be simple, can it?
The application of sales tax to special promotions is more complicated. By “special promotions” I’m referring to “Buy One/Get one free,” “Buy one/get one at reduced price,” “Two for the prices of one,” “Buy item ‘X’ and get item ‘Z’ for free,” etc. The list of options and special promotions that can be offered is extensive and the comments below should be used only as general guidance. As with other elements of sales tax, the rules will vary by state.
When it comes to the application of sales tax to promotions, any time the states see the word “free” they think use tax. The state of Texas offers the following example of how it applies sales tax to this type of promotion:
A retailer advertises pants as “buy one, get one free.” The first pair of pants is priced at $120; the second pair of pants is free. Tax is due on $120. Having advertised that the second pair is free, the store cannot ring up each pair of pants for $60 in order for the items to qualify for the exemption. However, if the retailer advertises and sells the pants for 50% off, selling each pair of $120 pants for $60, each pair of pants qualifies for the exemption. Note: When a retailer gives an item away free of charge, the retailer owes sales or use tax on the purchase price the retailer paid for the item. (Texas Administrative Code Rule §3.365)
Economically, a “buy one/get one free” transaction is the same as “buy two and get 50% off the total.” However, the sales tax treatment is quite different.
Because the retailer does not receive compensation for the “free” item offered, it is deemed the consumer of the product given away. While the Texas comment does not specifically state the situs of the use tax due, I would suggest that use tax is due in the state where the property is withdrawn from inventory and not in the state where the property is shipped.
The above rule is offered only as an example and not as the uniform multi-state rule. However, the Texas rule is widely adopted by states and has been the subject of many audits of retailers. This has been an issue in the bedding industry which often makes offers such as “buy a mattress and get the springs free.” Many have changed to “buy a mattress and springs set and get 50% discount off the total.” Same economics but different sales tax treatment.
Two for the Price of One!
In a “two for the price of one” transaction, the retailer is compensated for both items since the word “free” is not included in the promotions. Because the retailer is compensated for the products sold the tax base is the gross receipts received from the sale of both products. In this scenario, no use tax is due since the retailer receives compensation for both items.
When products are sold with a rebate and the rebate is paid directly to the customer by the manufacturer, the sales tax base is normally the full sales price of the product. Because the product is sold for the full retail price the retailer is compensated fully by the customer and the sales tax applies to the amount received. Because the rebate paid to the customer after the sale occurs, there is no sales tax impact caused by the rebate. Instant rebates applied at the point-of-sale are normally treated like manufacturers coupons and are taxed according to the state rules for those.
The rules on how sales tax applies to coupons, discounts, promotions, and rebates can get complicated and can vary widely by state. Sales discounts advertised as “percent off” or “dollar off” seem to have the most consistent treatment across the states with sales tax. When retailers start using unique and special promotions careful research should be pursued to determine what the sales tax rules are in the states where the retailer is registered for sales tax. The misapplication of sale tax to special promotions is a major audit issue for many retailers.
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