Was a 'free' bar of soap taxable when the customer tendered a manufacturer coupon and the manufacturer reimbursed the grocer?

Plain-English summary

A grocery customer received a bar of soap without paying cash after presenting a coupon issued by the soap manufacturer.

The letter treated the transaction as a sale, not a gift. The manufacturer reimbursed the grocer for the soap, so the coupon represented consideration even though the customer did not pay the product price in cash.

Sales tax therefore applied, and the grocer could collect reimbursement from the customer under the historical treatment described.

What this means for you

“Free” marketing language does not control when a manufacturer or other third party pays the retailer for the product.

Citations and references

• The source letter states the general statutory sale and retailer rules without citing section numbers.
• Consumer's Oct. 18, 1969 letter and Franchise Tax Board referral — transaction and questions recited; letter, referral date, form, attachments, and copies not reproduced in the official PDF
• Manufacturer coupon, grocery-store redemption, soap value, manufacturer reimbursement, penny sales-tax reimbursement, remittance question, and clerk conduct — transaction and concerns recited or treated generally; coupon, receipt, product price, manufacturer program and reimbursement, grocer return and payment, audit record, and complaint evidence not reproduced in the official PDF
• Statewide retailer audit program — general assurance supplied; no audit of the named transaction, remittance finding, or correction record supplied in the official PDF
• Official Annotation 280.0560's manufacturer-coupon, grocer-reimbursement, consideration, tax-measure, and sale-not-gift summary with amendment marker 2005-2 — annotation omits the remittance and conduct questions and supplies no amendment or transaction record
• Possible later store response, audit, remittance correction, refund claim, assessment, payment, appeal, or other agency action — not supplied in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 280.0560
• Original supporting opinion: 280.0560 PDF

Original ruling text

STATE OF CALIFORNIA

280.0560

STATE BOARD OF EQUALIZATION

November 24, 1969

Mr. D--- R. L--XXXX ------ --Dear Mr. L---:
Your letter of October 18, 1969, addressed to the State Franchise Tax Board has been referred to us for reply because the State Board of Equalization administers the Sales and Use Tax Law. Your letter concerns the application of the tax in a transaction in which you received a “free” bar of soap in exchange for a coupon at a grocery store. You question whether the tax should have been collected from you and whether such tax reimbursement was remitted to the state. We appreciate your concern in the matter of proper tax application. The sales tax is imposed upon the retailer for the privilege of making sales at retail in this state. The law defines a sale as the transfer of title or possession of tangible personal property for a consideration. The coupon which you exchanged for the bar of soap constituted a consideration to the grocer for the merchandise and as such, the transaction was a “sale” and not a “gift” of the soap to you by the grocer. Coupons of the type mentioned by you generally are issued by the manufacturer of the soap and distributed to consumers who may exchange them for the manufacturer’s product. The grocer who “redeems” the coupon is reimbursed by the manufacturer for the value of the soap given away. In this way the grocer is receiving a consideration for the soap and is making a “sale” to which the sales tax applies. The law permits the retailer to reimburse himself from the consumer for the tax imposed upon the sale. The penny tax on the sale of the bar of soap to you, therefore, would not appear to be an improper application since grocery stores must pay the tax on their sales of taxable items which include soap and soap products.

Mr. D--- R. L---

-2-

November 24, 1969
280.0560

Retailers are audited by the board of equalization to ascertain that the proper tax has been remitted to the state. You can be assured that any improper tax reporting will be corrected during the course of our statewide audit program. The discourteous conduct of the store clerk, while regrettable, is a matter over which the board has no authority, but which lies in the province of the store management. We hope that the above discussion will assist you in the understanding of the application of tax to the transaction described in your letter. Very truly yours,

T. P. Putnam
Tax Counsel
BY_______
Joseph Manarolla

JM:smb