Did frequent-buyer dollars earned on prior taxable purchases enter the taxable measure when redeemed on later merchandise?

Plain-English summary

A model-train manufacturer awarded “frequent buyer dollars” based on customers' prior cash purchases. Customers could combine cash and credits to buy designated slow-moving merchandise from authorized retailers at reduced prices.

Assuming every prior purchase that generated credits was taxable, the Board treated the credits as trade discounts and excluded them from the taxable measure of the later redemption sale. Tax was measured by the cash selling price.

The program operated on the honor system. If a customer lacked sufficient credits and was later rebilled at the higher price, the retailer had to include the additional cash or credit in taxable receipts when it was received from the manufacturer.

Citations and references

• California Revenue and Taxation Code sections 6011(b)(2), 6012(a), 6012(b)(3), 6012(c)(1), and 6051 (as cited)
• California Sales and Use Tax Annotation 295.0920 (as cited)
• August 30, 1991 request and enclosed information describing the frequent-buyer's program — letter and enclosures not separately reproduced beyond the response's summary
• Program application and card, $5 family cards, 500 sign-up credits, earning ratios and special promotions, triplicate retailer forms, designated merchandise, honor-system balances, dealer-only redemption, rebilling and six-month termination notice — program documents and transaction records not reproduced in the official PDF
• PRR Coach example of $50 and 100 credits, and prospective manufacturer-retailer-customer example reducing wholesale price from $200 to $100 and using a $110 cash retail price — examples only; product, pricing, invoices, credits, and payments not supplied
• Official Annotation 295.0950's manufacturer products, retailer-earned frequent-buyer credits, slow-moving merchandise, reduced wholesale price, specified cash plus credits, trade-discount treatment, and Dec. 11, 1991 date — annotation omits the request and enclosure provenance, model-train account, cards and fees, sign-up and earning rules, triplicate forms, honor system, examples, dealer-only limit, six-month notice, all-prior-purchases-taxable assumption, insufficient-credit rebilling and later cash-or-credit rule, cited statutes and Annotation 295.0920, 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/295-0950.pdf

Original ruling text

295.0950

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-8208

December 11, 1991

Mr. J--- W--- R--L--- of A---, Inc.
XXXX --- --- Drive
--- ---, California XXXXX
Re:

Measure of Sales Tax
On Merchandise Redeemed with L--- Dollars
SR -- XX-XXXXXX

Dear Mr. R---:
By letter dated August 30, 1991, you requested an opinion from the Board concerning the measure of sales tax for L--- merchandise purchased with “L--- Dollars” under the frequent buyer’s program. According to your letter and the information you enclosed, the facts are as follows: L--- sells large scale model trains and equipment to authorized L--- wholesalers and retailers. As an incentive to retail customers to purchase certain slow moving merchandise, L--initiated the frequent buyer’s program. Under this program, persons who have previously purchased L--- products may obtain a frequent buyer’s card from L--- by filling out an application. The card is free to the applicant, but additional cards for family members of the applicant cost $5.00 apiece. In order to use the card, the cardholder must earn L--- dollars. Under the current promotion, a cardholder receives 500 L--- dollars just for applying. In addition, each time the cardholder purchases an L--- product, he or she is credited with at least one L--- dollar for each two dollars spent. (The ration varies sometimes during special promotions.) Credits are given on items purchased with cash only and on purchases made with cash and L--- dollars. For the latter purchases, the credits are measured by the cash amount only. L--- credits must be used on future purchases, not on the purchase which earns the credits. To receive the credits, the cardholder presents at the time of purchase the frequent buyer’s card which the retailer imprints on a triplicate form similar to those used for credit card purchases. The customer receives one copy, L--- another, and the retailer retains the third.

Mr. J--- W--- R---

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December 11, 1991
295.0950

Only designated merchandise, generally the slower moving items, may be purchased by a customer with cash and L--- dollars. At present, the program is operated on the honor system. The customer must keep account of the total number of L--- dollars earned and may receive the lower price by presenting his or her card and representing that he or she as at least the number of credits necessary to obtain the item at the lower cost. For example, the customer may purchase a PRR Coach, Tuscan Red for $50.00 cash and 100 L--- dollars. If L--- subsequently learns that a customer making a redemption purchase did not have sufficient L--- dollars, the customer will be rebilled at the manufacturer’s suggested retail price. It appears that L--- will do the rebilling and will forward any funds collected in this manner to the retailer which made the transaction. L--- plans to sell the products in the program to its retailers at a price below that initially offered for those products. For example, a product for which L--- might have charged its retailers
$200 is now sold to the retailer for $100. The retailer sells the item to the retail customer for $110 cash if the customer redeems a certain number of L--- dollars. The cardholders may only redeem at authorized dealers, not through telephone orders. The program can terminate at any time after six months advance notice to the cardholders. Your question is whether the measure of tax on items purchased with L--- dollars is the full price, including the amount of L--- dollars, or only the amount paid in cash. Revenue and Taxation Code section 6051 imposes a sales tax on all retailers measured by their gross receipts from retail sales of tangible personal property. “Gross receipts” is defined in Revenue and Taxation Code section 6012(a) as the total amount of the sale price of the retail sales of retailers, valued in money, whether received in money or otherwise. The total amount of the sale price includes any amount for which credit is allowed by the seller to the purchaser. Rev. & Tax. Code § 6012(b)(3). See also Rev. & Tax Code § 6011(b)(2). A cash discount, however, is not included in the measure of tax. (Rev. & Tax. Code § 6012(c)(1). The board’s staff has issued and published an opinion on a question similar to yours in the Sales and Use Tax Annotations of the Business Taxes Law Guide. In Annotation 295.0920 a retailer had a Christmas Club Plan in which customers received a discount upon the purchase of merchandise between December 1 and December 24 in the amount of 2.5% of the aggregate sales slips presented by the customer for purchases between January 1 and November 30 of the current year. The staff determined that the discount should be treated as a trade discount. L---’s frequent buyer’s program is similar to the Christmas Club Plan described in Annotation 295.0920. Assuming that all prior purchases for which customers earned L--- dollars were taxable, we conclude that the L--- dollars should not be included in the measure of tax. However, for those sales in which a customer is rebilled because he or she did not have sufficient L-- dollars, the retailer must include the additional amount paid by the customer in the retailer’s measure of tax as soon as the retailer receives cash or credit from L---.

Mr. J--- W--- R---

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December 11, 1991
295.0950

If you have further questions regarding sales and use tax law, please do not hesitate to write again. Sincerely,

Elizabeth Abreu
Tax Counsel

EA:cl