CCA 1128024: IRS addresses points and bundled services under the indoor tanning excise tax

Plain-English summary

Chief Counsel Advice addressed whether reward points, bonus credits, and similar devices are subject to the 10 percent indoor tanning services excise tax under IRC § 5000B. The memorandum concludes that redeeming points alone for tanning services does not involve an amount paid, so the tax does not apply, while cash paid in addition to points is taxable. It also concludes that the ratio method in Treas. Reg. § 49.5000B-1T(d)(3) for bundled services is permissive, so other reasonable methods may be available. The memorandum leaves the administration of any alternative method to examination using actual facts.

Ruling snapshot

• Question: Are redeemed reward points taxable payments for indoor tanning services, and is the regulatory ratio method mandatory for bundled services?
• Outcome: advice given
• Key authorities: IRC § 5000B; Treas. Reg. §§ 49.5000B-1T(b)(1), 49.5000B-1T(d)(1), and 49.5000B-1T(d)(3); Rev. Ruls. 54-3321, 72-245, and 84-12

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201128024
       Release Date: 7/15/2011
       CC:PSI:B07:MHBeker                      Third Party Communication: None
       PRENO-116089-11                         Date of Communication: Not Applicable

UILC: 5000B.00-00

date: June 1, 2011

 to:   Holly L. McCann
       Chief, Excise Tax

from: Frank K. Boland
Chief, Branch 7
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

subject: Indoor tanning services

       This Chief Counsel Advice responds to your request for assistance dated April 13,
       2011. This advice may not be used or cited as precedent.


       ISSUES

       Issue 1

       Are “bonus bucks,” reward points, coupons, or similar devices (points) issued to a
       customer as a reward for purchases, subject to the indoor tanning services excise tax
       imposed by § 5000B of the Internal Revenue Code (Code) when the points are
       redeemed by the customer for indoor tanning services in the following circumstances?

          1. If the points are earned for purchasing indoor tanning services.

          2. If the points are earned for purchasing indoor tanning services and other, non-
             tanning goods or services and redeemed exclusively for indoor tanning services.

          3. If a customer uses a combination of points and cash to obtain indoor tanning
             services.

       Issue 2

PRENO-116089-11 2

Whether there are permissible methods to calculate the taxable portion of bundled
services other than the ratio method described in § 49.5000B-1T(d)(3) of the Facilities
and Services Excise Tax Regulations (regulations).

CONCLUSIONS

Issue 1

The points redeemed by a customer in exchange for indoor tanning services are not
subject to the indoor tanning services excise tax. To the extent that any cash is paid in
addition to points in exchange for indoor tanning services, the indoor tanning services
excise tax applies only to the cash paid for those services.

Issue 2

There may be permissible methods to calculate the taxable portion of bundled services
other than the ratio method described in § 49.5000B-1T(d)(3).

FACTS

An indoor tanning services provider runs a promotion during which a customer is
awarded points for each dollar that the customer spends at the tanning salon.
Customers accumulate points, which the customer uses like cash to obtain indoor
tanning services or other goods and services such as tanning lotions or salon services.
When the customer redeems points, the customer is able to receive the goods and
services for free, or purchase them with cash at a reduced price, depending on the
amount of points redeemed.

LAW AND ANALYSIS

Section 5000B(a) of the Code imposes a tax (indoor tanning services excise tax) on any
indoor tanning service equal to 10 percent of the amount paid for such service whether
paid by insurance or otherwise. Section 5000B(c)(1) provides that the tax imposed by
§ 5000B(a) shall be paid by the individual on whom the service is performed. Section
5000B(c)(2) provides that every person receiving a payment for services on which a tax
is imposed under § 5000B(a) shall collect the amount of the tax from the individual on
whom the service is performed and remit such tax quarterly to the Secretary of the
Treasury (Secretary) at such time and in such manner as provided by the Secretary.

Section 49.5000B-1T(b)(1) of the regulations provides that the indoor tanning services
excise tax is imposed at the time of payment for any indoor tanning services. Thus, the
event that triggers the tax is the payment for indoor tanning services. Section
49.5000B-1T(d)(1) provides that the tax is imposed on the total amount paid for indoor
tanning services, including any amount paid by insurance. Thus, for purposes of the
PRENO-116089-11 3

indoor tanning services excise tax, the total amount paid for indoor tanning services
forms the tax base to which the tax applies.

Section 49.5000B-1T(d)(3) provides that if an indoor tanning services provider offers
indoor tanning services (whether of a specified or unlimited amount, including “free” or
reduced-rate indoor tanning services) bundled with other goods and services, the
payment for the bundled services includes an amount paid for indoor tanning services.
The tax applies to that portion of the amount paid to the provider that is reasonably
attributable to indoor tanning services. The amount reasonably attributable to indoor
tanning services may be determined by applying to the total amount paid a ratio
determined by comparing--

   (i) The provider’s charge for indoor tanning services not in bundled services or, in
   the event the provider only charges for other goods and services as part of
   bundled services, the fair market value of similar services (based on the amount
   charged by comparable providers in the same geographic area); to

   (ii) The charge determined in § 49.5000B-1T(d)(3)(i) plus the provider’s charge
   for the other goods and services in the bundled services or, in the event the
   provider only charges for other goods and services as part of bundled services,
   the fair market value of similar goods and services (based on the amount
   charged by comparable providers in the same geographic area).

Issue 1

The first issue for which you requested our advice is essentially whether the redemption
of points for indoor tanning services is a taxable event for purposes of the indoor
tanning services excise tax. Under § 49.5000B-1T(b)(1), a taxable event occurs when
an amount is paid for indoor tanning services. Thus, our analysis of the first issue turns
on whether the redemption of points constitutes an “amount paid” for purposes of
§ 5000B.

The Internal Revenue Service (Service) has not issued guidance directly addressing the
definition of the phrase “amount paid” for purposes of the indoor tanning services excise
tax. However, the concept of an “amount paid” is well developed under other sections
of the facilities and services excise taxes (collected excise taxes). Rev. Rul. 54-3321,
1954-2 C.B. 417, holds that where a telephone company furnishes telephone service to
certain employees free of charge, no tax attaches. The revenue ruling further holds that
where telephone service is furnished to employees at a reduced rate, the tax applies to
the amount actually paid for such services. Although the communications services
excise tax is not at issue in this case, further IRS guidance in the collected excise taxes
area is consistent with this ruling.

1
Issued under § 3465 of the Internal Revenue Code of 1954, the predecessor statute to § 4251 of the
Code.
PRENO-116089-11 4

Rev. Rul. 72-245, 1972-1 C.B. 347, for example, holds that where an airline furnishes
an employee the use of its international air travel facilities entirely free of charge, the $3
tax imposed by § 4261(c) (use of international travel facilities) does not apply because
there is no amount paid for transportation within the meaning of § 4261(c).

Also, Rev. Rul. 84-12, 1984-1 C.B. 211, holds that the tax imposed by § 4261(a)
(taxable transportation of persons by air) does not apply to free bonus tickets issued by
an airline company to customers who have already satisfied all requirements to qualify
for the bonus; however, the tax applies to any amount the customer subsequently pays
because of not fully qualifying for the free bonus ticket. Rev. Rul. 84-12 reasons that if
no amount is paid, the tax does not apply. If payment is made at a reduced rate,
however, then the reduced amount is an amount paid for air transportation within the
meaning of § 4261(a), because the amount subject to tax is the actual amount paid for
taxable transportation.

Thus, to the extent an indoor tanning services provider provides indoor tanning services
for free, no amount is paid and, therefore, no tax arises as a result of the transaction.
Similarly, no amount is paid with respect to any indoor tanning services obtained by the
customer entirely with the redemption of points and, therefore, no tax arises as a result
of the transaction. It is irrelevant to this analysis how the customer acquired the points.
Therefore, we reach the same conclusion regardless of whether the redeemed points
were earned for purchasing indoor tanning services or if the points are earned for
purchasing indoor tanning services and other, non-tanning goods or services. However,
if a customer uses points and cash to purchase indoor tanning services, the indoor
tanning excise tax applies to the amount of cash paid.

Issue 2

The second issue for which you requested our advice relates to the ratio provided by
§ 49.5000B-1T(d)(3) that is used to calculate the amount attributable to indoor tanning
services that are provided as part of a bundle of taxable and nontaxable goods and
services. You asked whether there are ways other than the ratio provided in
§ 49.5000B-1T(d)(3) to arrive at the taxable portion of the bundle. In addition, you
provided a hypothetical method whereby an indoor tanning services provider relies on
its detailed historical records to determine the amount of the bundle attributable to
indoor tanning services. You asked whether such a method is permissible under the
regulations.

Section 49.5000B-1T(d)(3) provides that the indoor tanning services excise tax applies
to that portion of the amount paid to the indoor tanning services provider that is
reasonably attributable to indoor tanning services. The amount reasonably attributable
to indoor tanning services may (emphasis added) be determined by applying to the total
amount paid a ratio determined by comparing the amounts calculated in § 49.5000B-
1T(d)(3)(i) and (ii).
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We interpret regulatory terms, when otherwise not defined in the Code or regulations,
using the common, everyday meaning of the word. The regulations do not contain any
alternative methods, but also do not contain any language that restricts indoor tanning
services providers from using alternative methods. The word “may” expresses
opportunity or permission. Read in light of the regulatory framework, and applying the
common, everyday meaning of the word, the word “may” in § 49.5000B-1T(d)(3) is
permissive, rather than mandatory. Thus, we conclude that there may be permissible
methods of calculating the taxable portion of bundled services other than the ratio
method described in § 49.5000B-1T(d)(3).

We believe that determining whether any method other than the ratio method described
in § 49.5000B-1T(d)(3) results in the calculation of an amount reasonably attributable to
indoor tanning services is a tax administration issue rather than a legal issue. Thus, we
believe that such a determination is best developed during the examination process
using real facts rather than using hypotheticals.

Please call Michael Beker at (202) 622-3130 if you have any further questions.