Was a drug store's sale of an Entertainment Book containing restaurant, theater, sports, and store discount coupons subject to sales tax?

Plain-English summary

A retail drug-store chain asked whether it should collect sales tax when customers bought Entertainment Books containing coupons for restaurants, movie theaters, sporting events, and stores.

Senior tax counsel concluded that selling the coupon book was not a sale of tangible personal property.

The coupons merely recorded intangible rights to obtain services or tangible property at reduced prices. The physical book documented those rights rather than being the taxable object of the transaction.

The letter compared the result to earlier guidance involving restaurant coupon books, grocery coupon certificate books, free-service station coupon booklets, and gift certificates.

What this means for you

Coupon-book retailers

The source treated the book as evidence of discount rights, not as taxable merchandise in its own right.

Participating businesses

This letter addressed the sale of the coupon book. It did not decide the tax result for each later discounted service or product transaction.

Accountants and tax professionals

Separate the customer's purchase of an intangible discount right from the later redemption transaction at a restaurant, theater, store, or other establishment.

Common questions

Q: Did the paper format make the Entertainment Book taxable?

A: No. The letter treated the coupons as evidence of intangible rights.

Q: What rights did the coupons provide?

A: Reduced prices for services or tangible personal property at participating establishments.

Q: Did the letter analyze every coupon redemption?

A: No. It answered whether the drug store's sale of the book itself was taxable.

Q: What similar instruments did counsel cite?

A: Other coupon books, grocery coupon certificate books, service-station coupon booklets, and gift certificates.

Citations and references

• California Revenue and Taxation Code §§ 6012(a) and 6051
• California Civil Code § 1656.1
• California Sales and Use Tax Regulation 1700
• California Sales and Use Tax Annotations 280.0580, 295.0941, 540.0175, and 540.0180
• Requester's Mar. 29, 2004 letter — question quoted; letter, Entertainment Book, coupons, and attachments not reproduced in the official PDF
• Restaurants, movie theaters, sporting events, assumed stores, reduced-price services or property, customer book sales, and reimbursement invoicing — categories and general practice supplied; participating-establishment agreements, book price, sales records, invoices, receipts, redemptions, and tax records not reproduced in the official PDF
• Official Annotation 280.0523's coupon collection, intangible-right, reduced-price, and nontaxable-book-sale summary with amendment marker 2005-2 — annotation supplies no amendment record, book, coupon, transaction, or redemption evidence
• Possible later book sale, coupon redemption, return filing, audit, assessment, payment, refund claim, appeal, or other agency action — not supplied in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 280.0523
• Original supporting opinion: 280.0523 PDF

Original ruling text

280.0523
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

CAROLE MIGDEN
First District, San Francisco

450 N STREET, SACRAMENTO, CALIFORNIA
PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082
TELEPHONE (916) 324-2642
FAX (916) 323-3387

BILL LEONARD
Second District, Ontario

www.cdtfa.ca.gov

CLAUDE PARRISH
Third District, Long Beach
JOHN CHIANG
Fourth District, Los Angeles
STEVE WESTLY
State Controller, Sacramento

June 30, 2004

RAMON J. HIRSIG
Executive Director

REDACTED TEXT
Re:
REDACTED TEXT
SR Y OH REDACTED TEXT
Dear Ms. REDACTED TEXT:
This is in response to your letter dated March 29, 2004, 1 requesting information on how sales tax applies to your client. You write: “The REDACTED TEXT Company, a retail drug store chain, requests a written opinion regarding the sales taxability to our customers on the purchase of Entertainment Coupon Books.[ 2] These books only contain coupons. These coupons allow discounts for restaurant, theaters, sporting events, etc.” Discussion As a matter of introduction, California imposes a sales tax on retailers measured by a retailer's gross receipts from the retail sale of tangible personal property in this state, unless an exemption applies. (Rev. & Tax. Code, § 6051.) "Gross receipts" means the total amount of the retail sale price for which the property is sold without any deduction on account of the cost of the property sold or any other expense. (Rev. & Tax. Code, § 6012(a).). Sales tax is imposed on a retailer who may collect reimbursement from its customers if its contract so provides. (Civ.. Code,
§ 1656.1; California Code of Regulations, title 18, section (hereinafter "Regulation") 1700.) 3 When a retailer collects such sales tax reimbursement from its customers, the amount is usually itemized simply as "sales tax" on the invoice or cash register receipt.

For your information, Mr. Sorensen has retired as the Executive Director of the agency. Mr. Ramon J. Hirsig is now the Board's Executive Director. Further, your inquiries regarding California Sales and Use Tax Law can be sent directly to the attention of Ms. Janice Thurston, the Assistant Chief Counsel of the Business Taxes Division of the Legal Department, if you so desire. 2 Hereinafter referred to as "entertainment books" in this letter. 3 All references to regulations are to sections of the California Code of Regulations, title 18. 1

Ms. REDACTED TEXT

-2-

June 30, 2004
280.0523

The entertainment books in question are a collection of coupons to various establishments, such as restaurants, movie theaters, sporting events, and, we assume, stores. We do not regard the sales of such coupon books by REDACTED TEXT to be sales of tangible personal property. The coupons in question are merely evidence of an intangible right - a record or indicia of the right to services or tangible personal property at a reduced price. (Sales and Use Tax Annots. 295.0941 (3/13/96) (sales of coupon books by a restaurant are not sales of tangible personal property); 540.0175 (10/18/95) (sales of grocery coupon certificate books entitling holders to obtain coupons with each certificate are not sales of tangible personal property) ; 540.0180 (10/22/56) (sales of service station booklets containing coupons entitling purchasers to various services at no charge are not sales of tangible personal property).) (See, also Sales and Use Tax Annot. 280.0580 (1/25/61) (a gift certificate is evidence of an intangible right and its sale is not subject to sales tax).) As such, the sales of entertainment books by REDACTED TEXT to its customers, like coupon books, are not subject to sales tax. I hope this answers your question. If you have any further questions after reviewing this letter, please write again. Sincerely,

Anthony S. Epolite
Senior Tax Counsel
ASE: ds
cc:

Out of State District Administrator (OH)