Was additional tax due when cigarette-package coupons were redeemed for merchandise available only from the manufacturer?

Plain-English summary

A cigarette manufacturer put coupons in cigarette packages that consumers could redeem for merchandise available only from the manufacturer.

The 1973 memorandum considered two possible historical premium rules but selected a practical treatment: regard the merchandise premium as sold together with the cigarettes. The state had already received tax measured by the customer's total consideration for the cigarettes and premium.

On that basis, the memorandum advised against imposing additional tax at redemption or on the manufacturer's premium purchase. It also avoided requiring cigarette retailers to calculate and document a premium-related cash discount.

The author expressly recommended that the opinion not be used as precedent because it was a practical solution to those facts. Promotions involving nontaxable goods or a mix of taxable and nontaxable items could require another method.

In 1996, the Legal Division reviewed the non-attorney memorandum and agreed with its stated conclusion.

What this means for you

Manufacturers running coupon programs

The approved result depended on premiums available only from the manufacturer and tax already collected on the combined customer consideration.

Retailers

The memorandum avoided a retailer-level allocation and discount process for this specific cigarette promotion.

Accountants and tax professionals

Do not generalize the result to premiums bundled with exempt goods or mixed taxable and nontaxable transactions; the source itself warns those facts may differ.

Common questions

Q: Was tax imposed again when the consumer redeemed the coupons?

A: No, under the conclusion approved for this program.

Q: Was additional tax due on the manufacturer's purchase of premiums?

A: The 1996 summary says no additional tax was due.

Q: Why did the 1973 author reject precedent value?

A: He described the treatment as a practical solution and noted that other factual settings could require modification.

Q: Did Legal Division later review the result?

A: Yes. The May 29, 1996 memorandum stated agreement with the conclusion.

Citations and references

• California Sales and Use Tax Regulation 1670(c)
• California Sales and Use Tax Regulation 1671(B)(1), discussed as an alternative analogy
• Out-of-State Auditing's Nov. 9 request — question referenced; year, letter, attachments, and referral record not reproduced in the official PDF
• Cigarette-package coupons, manufacturer-only premium availability, taxed combined consideration, possible retailer cash discount, recordkeeping and audit burdens, premium redemption, and nontaxable or mixed-item alternatives — facts and analysis supplied; program terms, cigarette packages and coupons, premium catalog, purchases, consumer redemptions, manufacturer and retailer records, allocations, tax returns, and audit evidence not reproduced in the official PDF
• Gary Jugum's May 29, 1996 Non-Attorney Opinions memorandum reviewing and approving Robert Nunes's Jan. 16, 1973 conclusion — review supplied; referral, review criteria, underlying file, and separate editorial record not reproduced in the official PDF
• Official Annotation 280.0791's coupon, manufacturer-only premium, sold-with-cigarettes, and no-additional-tax summary dated Jan. 16, 1973 and May 29, 1996 — annotation omits the nonprecedential warning and alternatives and supplies no additional program or implementation record
• Possible later premium purchase or redemption, retailer discount, 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 280.0791
• Original supporting opinion: 280.0791 PDF

Original ruling text

State of California

Board of Equalization

Memorandum
To:

Out-of-State – Auditing

From:

R. Nunes

Subject:

B--- & W--- T--- Corp.

280.0791
January 16, 1973

SS --- XX XXXXXX

Your letter of November 9 to tax counsel concerning the application of sales tax to premiums issued by B--- & W--- T--- Corporation has been referred to me for response. The premium plan employed by B & W is not specifically covered in either Regulation 1670 or 1671. An analogy can be made with either Plan (B)(1) of Regulation 1671 or part (c) of Regulation 1670. If we were to treat the plan as we do under (B)(1) of Regulation 1671, it would follow that the retailer of the cigarettes would be entitled to a cash discount on that portion of the total purchase price of the cigarettes and premium which is fairly allocable to his purchase of the premium. The difficulty of the retailer ascertaining this amount and keeping records to substantiate the deduction is fairly obvious. Likewise, such a procedure places a substantial burden on our audit staff to verify such a deduction. As a practical matter the State has received tax measured by the total consideration paid by the customer who purchased the cigarettes and the premium. Since tax has been paid on the total consideration, I do not believe that it is advisable to assert tax on the redemption of the premiums and allow the retailer a cash discount. In this particular case, I believe that it would be best for all concerned to treat the transaction as most closely analogous to part (c) of Regulation 1670. There may be other factual considerations in other cases which would require a modification of this view and therefore I would recommend that you not use this opinion as precedent but rather as a practical solution to this particular problem. For example, if the premium was delivered with a non-taxable item or delivered with both taxable and non-taxable items, a different solution would be necessary. Our prime concern should be one of a procedure that is as simple as possible and yet results in the State receiving the proper amount of tax on these transactions. If you have any questions regarding this matter, please let me know.

RNunes
RN:nt
cc:
Mr. G. L. Rigby
MR. D. J. Hennessy

R. Nunes

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum
280.0791

To:

Mr. Glenn Bystrom

From:

Gary Jugum

Subject:

Non-Attorney Opinions

Date:

May 29, 1996

I have reviewed Robert Nunes’ memorandum of January 16, 1973 to Out-of-State Auditing. We are in agreement with his conclusion, as follows:

Premiums. A cigarette manufacturer included coupons redeemable for merchandise in the cigarette packages. The premiums were available only from the manufacturer. In this situation, the premiums are regarded as being sold with the cigarettes. There is no additional tax due on the purchase of premiums by the manufacturer on the redemption of the premiums by the consumer. 1/16/73.