How should a $100,000 financing incentive on a California computer purchase be split between the taxable sales price and nontaxable interest?

Plain-English summary

A purchaser agreed to buy a mainframe computer for a cash price of $4,895,806 and finance it at 10.52 percent. The seller offered a $100,000 "credit" against the first installment if the purchaser used the seller's financing plan.

The Board's legal staff rejected both all-or-nothing positions:

• The $100,000 was not additional taxable consideration, because the seller did not receive an extra $100,000 beyond the contract price.
• But it was also not entirely a cash discount from the taxable computer price, because the contract's stated interest had been calculated on the unreduced $4,895,806 cash price.

Instead, the parties had to recompute the transaction so the combined reduction in principal and the related reduction in interest at 10.52 percent equaled $100,000. Only the portion allocated to the computer's sales price reduced the taxable measure. The portion allocated to interest reduced a charge that was already nontaxable under Regulation 1641(a).

What this means for you

Sellers offering financing incentives

A credit tied to seller financing may affect both principal and interest. Labeling the whole amount a "credit" or "cash discount" does not determine its tax treatment.

Buyers of high-value equipment

Confirm that sales-tax reimbursement is calculated on the properly reduced cash price, not on the total time-sale amount or on a financing incentive that partly reduces interest.

Accountants and tax professionals

Reconcile the incentive with the stated annual percentage rate. Here, deducting the full $100,000 from principal while leaving the original interest calculation intact would not match the parties' 10.52 percent agreement.

Common questions

Q: Was the $100,000 credit taxable as extra consideration?
A: No. The seller did not receive that amount in addition to the stated price.

Q: Could the purchaser subtract the full $100,000 from taxable sales price?
A: No. Part of the credit necessarily reduced interest because interest had been calculated on the unreduced cash price.

Q: Who had to calculate the exact principal reduction?
A: The opinion left the recomputation to the parties, using the 10.52 percent contract rate so the principal and interest reductions totaled $100,000.

Q: Is stated interest subject to sales or use tax?
A: No, the opinion says the stated interest charge was excluded under Regulation 1641(a).

Citations and references

• Cal. Rev. & Tax. Code § 6596 (request for written advice)
• Cal. Rev. & Tax. Code § 6012(b)(2)-(3) (credits and other consideration)
• Cal. Rev. & Tax. Code § 6012(c)(1) (cash discounts allowed and taken)
• Cal. Code Regs. tit. 18, § 1641(a) (interest and finance charges; regulation copy listed as enclosed but not included in the official PDF)
• Requester's August 2, 1989 letter to Senior Tax Counsel Les Sorensen and Exhibits 1 through 3 — letter quoted and exhibits described; separate materials not reproduced in the official PDF
• Reference Agreement and Installment Payment Agreement — number redacted; terms described but complete agreements not reproduced in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 200.0108
• Original supporting opinion: 200.0108 PDF

Original ruling text

200.0108

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
916-445-6493
September 27, 1989

Gross Receipts – cash discount in financing transaction

Dear REDACTED TEXT:
In your August 2, 1989 letter to Mr. Les Sorensen, Senior Tax Counsel, you request an opinion of the Board’s legal staff pursuant to Revenue and Taxation Code Section 6596 (taxpayer reliance on written advice) regarding the sales tax consequences of a certain transaction between REDACTED TEXT and REDACTED TEXT. Your position is that the transaction includes a cash discount under Revenue and Taxation Code Section 6012 (c) (1) which is not a part of the purchase price subject to sales tax. You describe the transaction as follows: “REDACTED TEXT (‘Taxpayer’) entered into an agreement with REDACTED TEXT (‘Seller’) to purchase a mainframe computer for a cash price of $4,895,806 (a copy of the agreement marked Exhibit 1). As indicated in the Agreement, a $100,000 reduction of the cash price (labeled ‘credit’) towards the ‘first IPA (‘Installment Payment Agreement’) invoice was a part of the transaction. This reduction was an incentive for the taxpayer to use the seller’s financing plan to fund this deal at a negotiated interest rate. (See seller’s letter of June 12, 1989 marked Exhibit 2). The seller has taken the position that this is not a reduction of the purchase price in the form of a cash discount but instead a credit to the financing arrangement. The taxpayer finds the seller’s interpretation to be an artificial distinction since the overall cash outlay has been reduced by $100,000. In addition, the taxpayer has indicated to the seller that it believed the
$100,000 was a reduction of the purchase price (see taxpayer’s letter of June 22, 1989 marked Exhibit 3). Since the seller is responsible for collection of the sales tax, it has requested assurance from the SBE that the taxpayer’s position in this matter is correct; lest on a future audit, this transaction may be questioned as taxable and penalties be imposed.”

REDACTED TEXT

2

September 27, 1989
200.0108

You enclosed with your letter an installment payment agreement which is part of the sales agreement between the parties (Reference Agreement No. REDACTED TEXT. The installment payment agreement shows a finance charge (interest) of $238,432 computed on the $4.895 million cash price at an annual percentage rate of 10.52%, for a total price, including finance charges, of $5.134 million. You also enclosed a June 12, 1989 letter from Mr. REDACTED TEXT Marketing Manager to Mr. REDACTED TEXT Manager, Contracts and Leasing REDACTED TEXT which states as follows: “By choosing REDACTED TEXT Financing for the REDACTED TEXT, an additional $100,000 ‘Market Basket’ credit will be offered to REDACTED TEXT. This credit will be applied to the first invoice, reducing the payment due by $100,000.” Finally, you enclosed Mr. REDACTED TEXT‘s June 22, 1989 letter to Mr. REDACTED TEXT Marketing Division, REDACTED TEXT in which Mr. REDACTED TEXT contends the amount subject to California sales tax “should be $4,795,806, which is net of the cash discount of $100,000.” Opinion Under the Sales and use Tax Law, if a seller receives consideration from the purchaser in the form of “credits” in addition to cash or other consideration, the amount of the credit is included in the measure of the sales tax. (Rev. & Tax. Cods §6012 (b) (2) and (3)). By contrast, the measure of the sales tax does not include “cash discounts allowed and taken on sales,” under Revenue and Taxation Code Section 6012 (c) (1). Although REDACTED TEXT refers to the $100,000 as a “credit,” it is not the type of credit referred to in Section 6012 as part of the taxable measure, since REDACTED TEXT did not receive additional consideration of $100,000 from REDACTED TEXT over and above the sales price for the property purchased. Instead, REDACTED TEXT deducted the amount due on the first installment payment by $100,000. However, we also do not agree that the entire $100,000 constitutes as a nontaxable cash discount allowed and taken on the sale. If the entire $100,000 were deducted from the cash price of $4.895 million, then the computation of interest as the agreed rate of 10.52% would necessarily be less that the $238,432 agreed on between the parties. In that case, the reduction of the total contract price would not be exactly $100,000, but would be an amount is excess of $100,000. Since REDACTED TEXT has not allocated the $100,000 discount between the cash price and the interest charged in the total time sale price of $5.134 million, but the installment payment agreement states an annual percentage rate of 10.52%, it is our opinion that REDACTED TEXT must reduce the sales price subject to tax by an amount which, when added to a reduction in the interest (finance charge) computed at the 10.52% annual percentage rate, totals $100,000. We leave the recomputation of this amount to the parties. Of course, neither the stated interest charge is subject to sales or use tax. (Reg. 1641 (a)).

REDACTED TEXT

3

September 27, 1989
200.0108

I enclose Regulation 1641 for your information. Please feel free to contact me if you have any further questions or comments about this letter. Sincerely,

John Abbott
Senior Tax Counsel