Could a restaurant deduct amounts retained by Diners' Club and similar organizations as cash discounts?

Plain-English summary

A restaurant allowed Diners' Club and similar organizations to retain part of the meal charges they billed and collected from their members. The restaurant characterized those amounts as cash discounts.

The Board rejected that treatment. A cash discount reduced gross receipts only when the consumer received its benefit. Here, the organizations kept the amounts as compensation for handling customer accounts.

Because the payments were seller expenses for billing and collection services, they could not be deducted from taxable gross receipts.

Citations and references

• California Revenue and Taxation Code section 6012 (as cited)
• January 24, 1958 letter asserting sales tax had been paid erroneously on amounts retained by Diners' Club and similar organizations — letter not separately reproduced beyond the response's summary
• Restaurant charges, member accounts, organizational billing and collection, retained compensation, claimed discounts, and tax paid — organization agreements, member and customer terms, meal bills, statements, collections, retained amounts, returns, payments, and tax computations not reproduced in the official PDF
• Conditional refusal to authorize a deduction unless the Board misunderstood the proposed deduction — no clarification, refund claim, audit, determination, hearing, Board action, refund, appeal, or later outcome supplied
• Official Annotation 295.0880's customer-benefit requirement, restaurant, member organizations, billing and collection compensation, no cash discount, and Jan. 31, 1958 date — annotation omits the request provenance, claimed erroneous tax payment, Diners' Club name, section 6012 quotations and broader expense examples, conditional misunderstanding caveat, missing records, reliance status, and later outcome and supplies no additional transaction record

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/295-0880.pdf

Original ruling text

295.0880

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

January 31, 1958

Gentlemen:
This is in reply to your letter of January 24 in which you express the opinion that you have paid sales tax erroneously upon amounts which you allow to the Diners’ Club and similar organizations as compensation for their services in billing and collecting from their members charges for meals which you charge to the organizations. You speak of this compensation as a cash discount. Section 6012 of the Sales and Use Tax Law excludes from the definition of gross receipts the following: “Cash discounts allowed and taken on sales”. As we interpret this provision, the consumer is the party who must receive the benefit of the discount in order for the retailer to exclude it from his gross receipts. What you regard as a discount in your letter appears to us to be just what you state it to be, namely, compensation to certain organizations for their services in connection with handling your accounts with customers. The customers do not receive the benefit of the so-called discount as we understand it but this is retained by the organizations and is, therefore, an expense of doing business which is not deductible from gross receipts under section 6012. This section also provides that “gross receipts” means the total amount of the sale price without and deduction on account of “the cost of materials used, labor or service costs, interest paid, losses, or any other expense”. (underscoring added) Retailers cannot deduct commissions or other selling expenses; they cannot deduct wages or amounts paid to accountants or other persons rendering assistance in the operation of their business. Unless we are under a misapprehension as to what you propose to deduct as a cash discount, we must inform you that we cannot authorize any such deduction from your gross receipts for sales tax purposes. Vty EHS: ds