Did a $150 vehicle coupon issued in a class-action settlement reduce the taxable selling price in California?

Plain-English summary

A $150 coupon issued to settle a Toyota dealer advertising-rebate class action did not reduce taxable gross receipts when used to buy a vehicle. The Board treated the coupon like third-party consideration because its value came from the settlement rather than a dealer's voluntary price reduction, and the settlement allowed the dealer advertising association to share some or all of the redemption cost.

The same rule applied when part of the coupon was used in a service transaction. Tax applied to the full list price of taxable repair parts on the invoice, although the service portion itself was nontaxable.

The letter contrasted these coupons with ordinary retailer coupons, which can reduce the taxable selling price, and manufacturer coupons, whose face value remains taxable because the retailer receives related third-party payment.

Citations and references

• Wolf v. Toyota Motor Sales, U.S.A., Inc., Action No. C-94-1359-MHP (settlement identified in the letter)
• Third Amended Settlement Agreement paragraph 7.a in Wolf, U.S. District Court for the Northern District of California — described and quoted in part; agreement, complete paragraph, pleadings, approval order, docket, and judgment not reproduced in the official PDF
• Requester's May 13, 1997 letter and telephone discussion with Gary J. Jugum about parts-and-service coupon redemption — facts and questions supplied; letter, attachments, caller identity beyond redaction, and discussion record not reproduced in the official PDF
• Class members, defendants, advertising rebates, coupon issue and redemption terms, vehicle purchases or leases, parts and services, and possible dealer-association cost sharing — facts supplied; class list, rebate records, coupons, mailing records, vehicle and service invoices, parts lists, dealer arrangements, redemption claims, payments, returns, and tax computations not reproduced in the official PDF
• Official Annotation 295.0175's class-action, $150 coupon, vehicle purchase-or-lease, dealer-association redemption, third-party consideration, no-voluntary-price-reduction, cost-sharing, and taxable-gross-receipts summary, dated May 16, 1997 — annotation omits the request and telephone provenance, case number, specific settlement terms, parts-and-service analysis, retailer/manufacturer comparison, missing records, and inconsistent page-header initial and supplies no additional adjudicative or transaction record
• Possible later settlement approval or modification, coupon mailing or redemption, dealer-association payment, sale or lease, service transaction, return filing, audit, assessment, payment, refund claim, appeal, or other court or agency action — not supplied in the official PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-0175.pdf

Original ruling text

295.0175

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
450 N STREET - SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE: (916) 445-3723
FAX: (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
KATHLEEN CONNELL
Controller, Sacramento
_______
JOHN CHIANG
Acting Member
Fourth District, Los Angeles

May 16, 1997

_______
E. L. SORENSEN, JR.
Executive Director

Mr. H--- M. T---, Jr.
T--- & F--Attorneys at Law
XXXX --- Boulevard, Suite XXX
---, CA XXXXX
Dear Mr. T---:
This is in response to your letter of May 13, 1997.
You have asked us to consider the sales and use tax consequences of the Third Amended Settlement Agreement in the matter of Wolf v. Toyota Motor Sales, U.S.A., Inc., Action No. C-94-1359-MHP, in the United States District Court for the Northern District of California. Basically, the collective plaintiffs in this class action are to receive certain discount coupons in satisfaction of their claims against the collective defendants, which included the Northern Toyota Dealers Advertising Association. The action was occasioned with respect to certain advertising rebates paid by the advertising association to individual dealers. Pursuant to paragraph 7.a. of the agreement, each member of the Plaintiff Settlement Class is to be mailed one (1) discount coupon for each Toyota motor vehicle purchase or leased during the settlement class period. Each coupon shall be redeemed for one hundred fifty dollars ($150.00) for vehicle purchase or lease; or, if the person receiving or holding the coupon so elects, fifty dollars ($50.00) may be redeemed for parts or service, leaving the remaining one hundred dollars ($100.00) available for redemption in a vehicle’s purchase or lease. The redemption for parts or services is applicable in any service job costing one hundred twenty dollars ($120.00) or more.

Mr. H--- N. T---, Jr.

-2-

May 16, 1997
295.0175

The coupon is not transferable, except that the coupon may follow ownership of the vehicle. The coupon must be used within one year after the date of mailing. The coupon may be used at any settling dealer, which is a member of the same Toyota dealer advertising association (TDA)to which the plaintiff’s original selling dealer belonged. Paragraph 7.a. closes with a recital that selling dealers within any TDA, among themselves and/or with the TDA, may reach internal arrangements concerning the costs of redemption, including, if desired, an arrangement for the TDA to defray all or part of said cost. When you and I discussed this matter by telephone, we focused on the issue of redemption of the coupon in a transaction involving a sale of parts (taxable) and services (nontaxable). It is apparent to us now, however, that the question is a larger one--how does the tax apply when the coupon is used to purchase a vehicle and a one hundred fifty dollar ($150.00) credit is given? As we discussed by telephone, the State Board of Equalization generally recognizes two classes of coupons--retailer coupons and manufacturer coupons. Where a retailer issues a coupon redeemable at its business location for property sold by it, the coupon amount is treated as a nontaxable reduction to the retail selling price. Where the retailer redeems a manufacturer’s coupon, the coupon is taxed at its face amount, because the retailer receives a payment directly from the manufacturer, which payment is related to the retail sale of the property in question. In the case presently before us, it is our view that the coupons in question are in the nature of third party coupons, notwithstanding the fact that the individual dealer may be a party to the settlement. The coupon derives its value from the settlement agreement and does not reflect a voluntary reduction in the selling price of the property on the part of the retailer. In addition, it is contemplated by the agreement that the cost of redemption may be shared in whole or in part by the TDA. For these reasons, it is our opinion that the coupon represents taxable gross receipts. Tax would apply to the one hundred fifty dollar ($150) amount, if the coupon is used in connection with the purchase of a vehicle. Tax would apply in the service transaction context to the full list price of the parts on the invoice. Very truly yours,

Gary J. Jugum
Assistant Chief Counsel
GJJ:sr