Rulings of the Tax Commissioner
Document Number: 10-140
Tax Type:Retail Sales and Use Tax
Brief Description:Tax of reward programs operated by a supermarket chain.
Topics:Exemptions; Sale for Resale
Date Issued:07/15/2010

July 15, 2010




Re: Request for Ruling: Retail Sales and Use Tax

Dear *****:

This is in response to your letter submitted on behalf of your client (the "Taxpayer") requesting a ruling on the application of the retail sales and use tax to reward programs offered by the Taxpayer. I apologize for the delay in responding to your letter.

FACTS


The Taxpayer is a retail supermarket chain in the United States with a large number of stores in multiple states. The Taxpayer has three specific reward programs that are currently offered to its customers or are in the planning stages. The Taxpayer requests a ruling regarding the application of the retail sales and use tax to these programs. The Taxpayer also requests a ruling regarding charging a nominal fee for merchandise and in instances where a reward program would include reimbursement or subsidy by a third party manufacturer.

The Taxpayer states that the rewards are funded entirely by the Taxpayer. The Taxpayer does not receive any compensation from manufacturers, wholesalers, or other third parties when it offers the rewards to its customers. The Taxpayer contends the reward programs can be likened to the Taxpayer providing its customers with a retailer's coupon under Title 23 of the Virginia Administrative Code (VAC) 10-210-430. The Taxpayer contends (1) the reward or coupon should be treated as a nontaxable reduction in the sales price of the products purchased by the customer; (2) it should make no difference how the customer earns the rewards; and (3) because the merchandise provided at a reduced cost or no cost is part of a larger sales transaction, the purchase of such merchandise should enjoy the resale exemption just like other merchandise sold by the Taxpayer.

RULING


Reward Program I

This program rewards the Taxpayer's customer with an additional item of merchandise after the customer has purchased a specific number of items. The customer receives a sticker for each purchase of a specific item. The stickers are accumulated over multiple shopping trips within the program's promotional period. Once the required number of stickers is accumulated, the customer can redeem the stickers for an additional item of merchandise at no additional charge. The Taxpayer contends that providing merchandise at no additional charge after the purchase of a specific number of items would be the economic equivalent of a volume discount. The Taxpayer states the customer would be given an overall discount on the merchandise and that this represents a reduction in sales price.

Pursuant to Va. Code 58.1-603, the sales tax is imposed upon the "gross sales price of each item or article of tangible personal property when sold at retail or distributed in this Commonwealth."

In this instance, the Taxpayer's customer would have purchased a specific number of items before being rewarded with an additional item of merchandise at no additional cost. The cost of the free item is included in the sales price when the qualifying items are purchased. The sales tax on the free item is collected when the qualifying purchases are made. Accordingly, the Taxpayer is not required to collect the sales tax when the free item is redeemed, and the Taxpayer is not liable for the use tax on the item.

Reward Program II

This program requires a customer to spend a specific dollar amount or shop a certain number of times during a specified interval of time to receive an advertised incentive. The incentive is a specific dollar reduction on a future purchase. The Taxpayer provides that once the customer meets the requirements specified in the program, a "ticket" (similar to a retailer's coupon) is issued to the customer during the checkout process. The ticket identifies the incentive the customer has earned. The customer must surrender the ticket or combination of tickets in order to claim or receive the benefit in the current or subsequent transaction. The incentive earned may reduce the selling price of a specific item to zero or exceed the price of the item.

Title 23 VAC 10-210-430 B states, "The value of a retailer's coupon is not included in the sales price of the advertised merchandise. For example, when a retailer accepts $.80 in cash and a retailer's coupon valued at $.20 for a product, the tax is computed on $.80. This coupon has no value to the retailer and is an advertisement of a discount."

In Public Document (P.D.) 04-68 (8/24/04), the taxpayer owned and operated hotels. The taxpayer had a point redemption program designed to reward clients who frequently stayed at its hotel. The points could be redeemed for complimentary accommodations, a discounted room, or a free room upgrade. The points had no dollar value, and the recipient could not resell the points on the open market. Additionally, the points could not be exchanged at one of the taxpayer's hotels for money. In this instance, the taxpayer's point redemption program was deemed to be analogous to a retailer's coupon as addressed in Title 23 VAC 10-210-430. In some instances, the taxpayer's customers would redeem reward points for a complimentary room at the taxpayer's hotel. Because there was no charge for the room, the taxpayer, was not required to charge or collect any sales tax on the complimentary room transaction.

Pursuant to P.D. 04-68, the tickets are analogous to retailer's coupons. The sales price for the incentive merchandise will be the listed price less the amount of the reward earned through the program. The sales tax for the incentive merchandise will be based on this reduced sales price. As a retail supermarket, the Taxpayer is entitled to purchase this merchandise exempt of the tax under the resale exemption as it would other merchandise purchased for sale in its stores.

Reward Program III

The customer participates in the program by spending a specific dollar amount in the store to receive points, which may be accumulated and redeemed to reduce the price of specially marked items. The customer must meet a certain level of purchases before an advertised incentive is awarded. Once points are accumulated, customers are able to redeem such points by applying them to specially marked items to reduce the selling price.

Pursuant to P.D. 04-68, the points are analogous to retailer's coupons. The sales price for the incentive merchandise will be the listed price less the amount of the reward earned through the program. The sales tax for the incentive merchandise will be based on this reduced sales price. As a retail supermarket, the Taxpayer is entitled to purchase this merchandise exempt of the tax under the resale exemption as it would other merchandise purchased for sale in its stores.

Nominal Pricing for Products

In this instance, the Taxpayer's customer would be required to pay a nominal fee for merchandise instead of receiving it totally free of charge. The Taxpayer states that the price reduction would be funded entirely by the Taxpayer and not by a third party.

In P.D. 95-298 (11/21/95), the taxpayer requested a ruling regarding the application of the retail sales and use tax in instances where it would charge a sales price of $.01 for the advertised item upon presentation of the coupon. It was ruled that the $.01 sales price would constitute a consideration and the coupon would serve as an advertised discount with no value to the retailer and excluded from the sales price.

If the Taxpayer were to charge its customers a nominal fee, the nominal fee would constitute a consideration. The reward earned by its customers through one of its programs would serve as an advertised discount with no value to the Taxpayer and would be excluded from the sales price. Accordingly, the sales tax would be applied based on the amount of the consideration received from the customer, i.e., the nominal fee.

Third Party Consideration

The Taxpayer contends that should its reward programs change to include reimbursement or subsidy by the manufacturer, it would follow the FASB-Emerging Issues Task Force ("EITF") position on the proper accounting of "Sales Incentives Offered to Consumers by Manufacturers". EITF Abstract 03-10 discusses the difference between a true manufacturer's coupon and a store specific coupon and the respective accounting as sales revenue or reduction in the cost of sales. The Taxpayer indicates that the Streamline Sales Tax Project (SSTP) has incorporated the criteria set forth in the abstract into its definitions of "sales price" and "purchase price". The Taxpayer contends that the Department has not defined "manufacturer's coupon". The Taxpayer suggests that the criteria established in the SSTP definitions are a reasonable application to current Virginia statute and regulations and states that the definitions should be adopted as Department policy for determining if a sales incentive is treated as a manufacturer's coupon or a reduction in the retailer's cost of sales.

Title 23 VAC 10-210-430 A, states, "The value of a manufacturer's coupon is included in the sales price of the advertised merchandise. For example, when a retailer accepts $.80 in cash and a manufacturer's coupon valued at $.20 for a product, the tax is computed on $1.00."

Virginia law regarding the application of the retail sales and USE) tax on transactions involving manufacturer's coupons is long-standing and well-established. Title 23 VAC 10210-430 very clearly defines how a manufacturer's coupon is to be treated for Virginia retail sales and use tax purposes. Additionally, numerous rulings have been issued regarding manufacturer's coupons that provide clear guidance to Virginia taxpayers.

While Virginia has not conformed its law to the Streamlined Sales Tax Agreement ("SSUTA") and is not a member state of the Streamlined Sales Tax Governing Board, for the most part Virginia's law is consistent with the SSUTA. In Part I of its Library of Definitions, the SSUTA defines "sales price" to include "consideration received by the seller from third parties if the seller actually receives consideration from a party other than the purchaser and the consideration its directly related to a price reduction or discount on the sale." The Agreement specifically excludes from the definition of sales price "coupons that are not reimbursed by a third party." It is clear from this language that the treatment of manufacturer's coupons is the same under Virginia law and policy as under the SSUTA. The value of a manufacturer's coupon is included in the sales price.

Should the Taxpayer's reward programs change to include reimbursement or subsidy by the manufacturer, the Taxpayer must follow the Department's policy reflected at Title 23 VAC 10-210-430 A and in the Tax Commissioner's published rulings. This policy is consistent with the SSUTA's current treatment of manufacturer's coupons.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.


Craig Burns


AR/1-3326223450.P