Did loyalty-point Merchandise Certificates reduce the taxable selling price as discounts when customers redeemed them for store purchases?

Plain-English summary

A retailer's credit-card loyalty program awarded points and issued Merchandise Certificates in multiples of $20. Customers could use them for merchandise or services in the retailer's stores, combine them with other discounts, apply them to tax and fees, exchange them for gift certificates, and receive cash back when the certificate exceeded the purchase total.

The retailer recorded merchandise at full price, collected and remitted tax on that full price, and treated the certificate as tender. It asked whether the certificate instead should be treated as a rebate or discount reducing the taxable amount.

Tax counsel concluded that the certificate was a credit memorandum like a gift certificate, not a rebate or cash or trade discount. Its practical cash-like features—including cash back, payment of tax, and exchange for gift certificates—showed that the retailer and customer treated it as stored value.

When a customer used a certificate as consideration for taxable tangible property, the value used remained included in the measure of tax.

What this means for you

Retail loyalty programs

How a reward instrument functions matters. Cash back, broad redemption, and tax-payment features can make it operate like tender rather than a price reduction.

Retail accounting teams

Document whether rewards reduce the stated selling price or instead pay that price as a credit memorandum.

Accountants and tax professionals

Review redemption practice, not only the program's label. This source distinguished gift-certificate consideration from discounts and rebates.

Common questions

Q: Did earning the certificate through points make it a discount?

A: No. The letter focused on how the certificate functioned when redeemed.

Q: Why did cash back matter?

A: It indicated that the retailer and customer treated the instrument as stored value or credit.

Q: Could the certificate pay sales tax and fees?

A: Yes, under the program facts described.

Q: What amount entered the tax measure?

A: The certificate value actually used as consideration for the taxable retail purchase.

Citations and references

• California Revenue and Taxation Code §§ 6011, 6012, 6051, and 6201
• California Civil Code §§ 1656.1, 1749.5, and 1749.6(a)
• California Sales and Use Tax Annotations 280.0350, 280.0580, 280.0828, and 295.1070
• Retailer's Apr. 15, 2003 letter — program facts and ruling question quoted; letter, certificate, card agreements, program terms, attachments, and legal or accounting analysis not reproduced in the official PDF
• 1999–2003 points formulas, $20 increments, certificates over $1,000, 90-day expiration, store-only redemption, merchandise and service uses, other discounts, tax and fee payment, cash back, returns, and shifting subsidiary cost recognition — facts supplied; points ledgers, certificates, transactions, receipts, returns, cash payments, subsidiary agreements, journal entries, and returns not reproduced in the official PDF
• Official Annotation 280.0585's program, tender, cash-back, intangible-right, credit-memorandum, and taxable-measure summary with amendment marker 2004-2 — annotation supplies no amendment, certificate, transaction, accounting, or implementation record
• Possible later certificate issuance or redemption, accounting change, 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 280.0585
• Original supporting opinion: 280.0585 PDF

Original ruling text

280.0585

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) 324-2646
FAX (916) 323-3387

BILL LEONARD
Second District, Ontario
CLAUDE PARRISH
Third District, Long Beach

www.boe.ca.gov

JOHN CHIANG
Fourth District, Los Angeles
STEVE WESTLY
State Controller, Sacramento

August 4, 2003

TIMOTHY W. BOYER
Interim Executive Director

Mr. [T]
Director, Excise Tax
[N]
P.O. Box XXXX
---, -- XXXXX-XXXX
Re:

[N]
S- -- XX-XXXXXX

Dear Mr. [T]:
This is in response to your letter dated April 15, 2003 inquiring as to how tax applies to
[N] Merchandise Certificates.
You state:
“[B] fsb (The Bank), a wholly owned subsidiary of [N], Inc., ([N]) began a promotion for its [N] credit cardholders and [N] Visa card holders in 1999 which has continued to the present. The promotion rewards cardholders with points for purchases made on their credit card. [N] Merchandise Certificates (Certificates) are issued to the cardholder for points. Certificates are redeemable at [N] stores. The value of the Certificates is applied against the total purchase price, including any applicable taxes and fees. They are not redeemable online and cannot be used as payment on a [N] credit card account. The Certificates are given a 90-day expiration date. “Certificates issued to a single customer can amount to $1,000’s of dollars depending on their use of the credit card. The Certificates can be used for any merchandise or service sold in a [N] store including restaurants, spa services, alterations and the purchase of gift certificates or gift cards. Certificates can also be used in conjunction with other discount promotions including sales, markdowns and employee discounts.

Mr. [T]

-2-

August 4, 2003
280.0585

“The reward promotion in place today is:
“[N] Classic Visa, [N] Credit Card and [N] --- Credit Card – Two points are earned for every $1 in net [N] purchases; a $20 Merchandise Certificate is issued for every 2,000 points. The certificates come in multiples of $20, and a single certificate can be over $1,000. “[N] Platinum Visa – Two points are earned for every $1 in net [N] purchases and one point for every $1 in net purchases made outside of [N]; a $20 Merchandise Certificate is issued for every 2,000 points. “[N] Platinum Credit Card and [N] Platinum --- Credit Card – Three points are earned for $1 in net [N] purchases; a $20 Merchandise Certificate is issued for every 2,000 points. “When the customer redeems the Certificate at a [N] store, they are able to apply it to all or part of any [N] purchase. [N] records the sale at full price, collecting sales tax reimbursement on the full sales price and remitting it to the State. The Certificate is treated as tender. If the purchase price plus sales tax is less than the amount of the Certificate(s), the customer receives cash back. If the purchase price plus sales tax is more than the Certificate(s), the customer pays the difference. If the customer returns the merchandise, the full purchase price plus the sales tax is refunded to the customer. “The sale is recorded at the full purchase price on [N]’s books. Until recently, the cost of the Certificate was not incurred by [N] but was incurred by
[N]’s financing subsidiaries. The Bank incurred the cost of the Certificates in fiscal year ended January 31, 2000. [N] C---, Inc. (C---), a wholly owned subsidiary of [N], Inc. incurred the cost of the Certificates in fiscal years ended January 31, 2001 and 2002. [N] recorded the cost of the Certificates on its books in fiscal year ended January 31, 2003.” Based on the above facts, you conclude that a Certificate is not a cash discount but instead is a rebate. In order to confirm your conclusion, you request “a ruling on whether the Certificate is treated as a discount reducing the selling price for the calculation of sales tax or is treated as a rebate and is fully subject to sales tax.”

Mr. [T]

-3-

August 4, 2003
280.0585

DISCUSSION
As a starting point some background on California Sales and Use Tax Law may be helpful. Sales tax is imposed on all retailers measured by their gross receipts from the retail sale of tangible personal property in this state, unless some exemption applies. (Rev. & Tax. Code, § 6051.) Even though sales tax is imposed on the retailer, the retailer may, by agreement with the purchaser, collect sales tax reimbursement from the purchaser. (Civ. Code, § 1656.1.) When sales tax does not apply, use tax applies to the storage, use or other consumption of tangible personal property purchased from any retailer for the storage, use or other consumption in this state, measured by a percentage of the sales price, unless that use is specifically exempt by statute. (Rev. & Tax. Code, § 6201.) “Gross receipts” (for purposes of the sales tax) and “sales price” (for purposes of the use tax) generally include all amounts received with respect to the sale or use of tangible personal property, with no deduction for the cost of materials used, labor or service costs, or other expenses of the retailer, unless there is a specific statutory exclusion. (Rev. & Tax. Code, §§ 6011, 6012.) A gift certificate can be purchased with cash or other tender or it can be issued pursuant to some form of awards, loyalty, or promotional program. (Cf., Civ. Code § 1749.5.) Civil Code section 1749.6, subdivision (a) states that “a gift certificate constitutes value held in trust by the issuer of the gift certificate on behalf of the beneficiary of the gift certificate.” For sales and use tax purposes, we have held that gift certificates are a species of credit memorandum and as such the value of the certificate is included in the measure of tax when used as consideration for the purchase of tangible personal property at retail. (See Sales and Use Tax Annotations 280.0350
[12/19/78], 280.0580 [01/25/61].) In other words, a gift certificate is considered to be the same as cash when used to purchase tangible personal property. (See Sales and Use Tax Annotations 280.0828 [05/25/75], 295.1070 [05/26/76].) In determining whether an instrument is a gift certificate, if in practice the retailer refunds the customer cash or credit when the customer uses the instrument to purchase merchandise of lesser value than the instrument’s assigned value, this is a clear indication that the retailer and the customer consider the instrument to be some form of credit memorandum. Under those circumstances, we would probably conclude that the instrument is a gift certificate. Here, you state that [N] treats the Certificates as cash. To that extent, [N]’s policy is to refund any difference between the purchase price of merchandise and the Certificate’s assigned value to the customer. You also state that the customer can use Certificates to pay any applicable tax on the merchandise, and the customer can exchange Certificates for gift certificates. Based on your description of how [N] treats these Certificates, we would consider them to be a form of credit memorandum like other gift certificates and not a rebate or a cash or trade discount. Thus, for sales and use tax purposes, when the Certificates are used as consideration in the sale of tangible personal property at retail the Certificate’s value that is used as consideration will be included in the measure of tax. I hope that the foregoing answers your specific questions. If you have any additional questions do not hesitate to write again.

Mr. [T]

-4-

Sincerely,

Chris A. Schutz
Tax Counsel
CAS/ef
cc:

--- District Administrator (--)

August 4, 2003
280.0585