Does an offered prompt-payment discount reduce taxable gross receipts when the customer does not take it?

Plain-English summary

A retailer offered a two-percent discount when an invoice was paid within ten days. One customer paid promptly and paid $98 on a $100 invoice; another waited 30 days and paid the full $100.

The Board explained that the statute excluded cash discounts only when they were both allowed and taken. The prompt-paying customer's taxable measure was therefore $98. The late-paying customer's taxable measure remained $100 because that customer did not qualify for and take the discount.

The letter also corrected an earlier staff response that had imprecisely referred to discounts “allowed or taken.” The operative rule was “allowed and taken.”

Practical examples from the letter

• Customer A paid within ten days and took the $2 discount: taxable gross receipts were $98.
• Customer B paid after 30 days and forfeited the discount: taxable gross receipts were $100.

Citations and references

• California Revenue and Taxation Code section 6012(c)(1) (as cited)
• Earlier requester letter and May 4, 1994 response by Staff Counsel Pat Hildebrand stating the rule correctly as “allowed and taken” but later summarizing it incorrectly as “allowed or taken” — letters not reproduced beyond the later response's account
• May 9, 1994 fax presenting a hypothetical with two $100 invoices, two-percent ten-day discounts, one ten-day payment, one 30-day payment, an assumed ten-percent tax rate, and proposed $9.80 tax for both — fax not separately reproduced beyond the response's quotation
• Hypothetical invoices and payments only — no actual customer, contract, invoice, discount, payment, return, or tax record supplied
• Official Annotation 295.0888's prompt-payment offer, discount taken or forfeited, billed-less-discount versus full-bill gross receipts, allowed-and-taken rule, and May 13, 1994 date — annotation omits the earlier correspondence and Pat Hildebrand provenance, “and” versus “or” correction, exact $100, two-percent, ten-day, 30-day and ten-percent hypothetical, missing actual 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/295-0888.pdf

Original ruling text

295.0888

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento
────────

May 13, 1994

BURTON W. OLIVER
Executive Director

Mr. S--- H--E--- A---, Inc.
XX --- Drive
--- ---, NY XXXXX-XXXX
Dear Mr. H---:
This is response to your fax transmittal of May 9, 1994 regarding the application of tax to discounts. You had written previously, and Staff Counsel Pat Hildebrand responded in a letter dated May 4, 1994. You now ask a follow up question. Ms. Hildebrand explained that a retailer's taxable gross receipts do not include "cash discounts allowed and taken on sales." Later in her letter, Ms. Hildebrand stated, in summary, that "gross receipts do not include cash discounts allowed or taken on sales." She cited the same statutory provision for these statements. (Rev. & Tax. Code § 6012(c)(1).) You now ask about the following scenario: "Suppose a retailer mails an invoice to two different customers. Each invoice has a purchase price of $100.00. In each case a 2% cash discount is offered if full payment is made within 10 days. Customer 'A' pays within 10 days and takes the discount. Customer 'B' waits 30 days before paying and forfeits the discount. Assuming a sales tax rate of 10%, both customers should be charged $9.80 (.10 x ($100 - $2)) in sales tax." The conclusion in your hypothetical scenario is incorrect. The first statement of the rule in Ms. Hildebrand's letter is the correct one. That is, the statute states that discounts allowed and taken are excludable from a retailer's gross receipts. In your example, Customer "A" was allowed a discount and took it. The measure of tax is therefore $98 because the $2 discount is excludable from the retailer's gross receipts. Customer "B" was allowed a discount, but did not

Mr. S--- H---

-2-

May 13, 1994
295.0888

take it because Customer "B" did not qualify for it. The measure of tax on the sale to Customer "B" is $100. Since the discount was not taken, it is not excludable from the retailer's gross receipts. We apologize for any confusion. If you have further questions, feel free to write again. Sincerely,

David H. Levine
Supervising Staff Counsel
DHL:cl

cc:

Out-of-State District Administrator
Ms. Pat Hildebrand