Were refunds paid to customers who returned promotional register receipts deductible cash discounts?

Plain-English summary

A nonprofit student store gave specially colored receipts during its Spring Bonus Program. At the end of the program, any customer could return qualifying receipts and receive a predetermined percentage of the recorded purchases, including sales-tax reimbursement.

The hearing officer treated those payments as deductible cash discounts rather than nondeductible cooperative patronage dividends. The key fact was that the refund was available to any customer who submitted the receipts, whether or not the customer belonged to the cooperative.

The recommendation did not grant an unverified amount. An auditor still had to examine the records, and a refund could be allowed only to the extent the discounts related to taxable sales rather than the store's nontaxable sales.

Citations and references

• California Revenue and Taxation Code section 6012(c)(1) (as cited)
• California Corporations Code section 12805 (as cited)
• California Sales and Use Tax Annotation 295.0960 on cooperative patronage dividends (as cited)
• Redacted September 20, 19XX Inglewood hearing on a refund claim for 19XX and 19XY — claim, notice, transcript, exhibits, briefs, and hearing record not reproduced in the official PDF
• Campus-newspaper advertising, program terms, specially colored receipts, customer submissions, sales including tax reimbursement, refunds and claimant's taxable and nontaxable sales — years and amounts redacted; advertisements, receipts, sales, refunds, member status, and accounting records not reproduced in the official PDF
• December 31, 1979 recommendation to initiate an audit and grant only the verified taxable-sale portion — audit-review signature and date blank; no verification audit, final amount, Board action, payment, appeal, or later outcome supplied
• Official Annotation 295.1005's university bookstore, Spring Bonus Program, colored receipts, predetermined refund on sales value including tax reimbursement, all-customer availability, cash-discount versus patronage-dividend classification, and Dec. 31, 1979 date — annotation omits the redacted account, hearing and claim years and amount, nonprofit-unincorporated-association status, general-public sales, advertising, redacted sales and refund figures, nontaxable-sale limitation, required verification audit, blank audit review and final outcome, cited authorities, missing records, and reliance status and supplies no additional proceeding 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/295-1005.pdf

Original ruling text

STATE OF CALIFORNIA
BOARD OF EQUALIZATION

In the Matter of the Claim
for Refund Under the
Sales and Use Tax Law of:

A--- S---, --Claimant

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295.1005

DECISION AND RECOMMENDATION
OF HEARING OFFICER

Account No SR -- XX XXXXXX-001

The above entitled matter came on regularly for hearing on Thursday, September 20, 19XX in Inglewood, California. James E. Mahler, Hearing Officer Appearing for Claimant:

Mr. J--- W--Attorney at Law
Mr. J--- R--Finance Director

Appearing for the Board:

Mr. Jan Ishii
District Principal Auditor

Claim
Claimant seeks a refund of sales tax in the amount of $XX,XXX for the years 19XX and 19XY. Contention The Spring Bonus Program is a cash discount program rather than a patronage dividend program. Summary Claimant is a nonprofit unincorporated association which operates the Student’s Store near the campus of the --- of --- at --- --- (U---). The Student’s Store sells a wide variety of merchandise to the general public as well as to U--- students, faculty and alumni.

In 19XX and 19XY claimant adopted a promotional device called the Spring Bonus Program. The program was initiated in March of each year by heavy advertising in a campus newspaper, the U---. B---. Under the program, all customers who made purchases during a designated period received specially colored cash register receipts. At the end of the program period the customer could return the receipts to claimant. Claimant would then refund to the customer a

A--- S--- --SR --S XX XXXXXX-001

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December 31, 1979
295.1005

predetermined percentage of the total purchases on the receipts, including sales tax reimbursement. According to claimant, total sales during the 19XX program period were $X,XXX,XXX. Customers claimed refunds on sales of $XXX,XXX including tax reimbursement, and
$XX,XXX was refunded. In the 19XY program period total sales were $X,XXX,XXX, refunds were claimed on sales of $XXX,XXX, and $XXX,XXX was refunded. Analysis and Conclusions Revenue and Taxation Code Section 6012 defines “gross receipts”, the measure of sales tax, as the total amount of the sales price. However, subdivision (c)(1) of that section authorizes a deduction from gross receipts for “cash discounts allowed and taken on sales”. The Board has previously ruled that “patronage dividends” given by a retailer cooperative to its members under Corporations Code Section 12805 are not deductible from gross receipts. (Annotation 295.0960.) The theory is that such dividends are not “cash discounts” but are simply a distributions of surplus earnings. In this case, claimant gave a refund to any customer who submitted the proper cash register receipts, regardless of whether or not the customer was a member of the cooperative. Therefore, the refunds were not “patronage dividends” under Corporations Code Section 12805, but instead qualify as cash discounts. Claimant is accordingly entitled to a refund of sales tax. However, it will be necessary to have an auditor examine claimant’s records to verify the amount of the refund. It appears that claimant made some nontaxable sales and a refund can be allowed only to the extent the discounts related to taxable sales. Recommendation
--- --- --- is to initiate an audit to verify the amount of the refund. Grant the refund claim to the extent it is verified.

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James E. Mahler, Hearing Officer

12/31/79
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Date

Reviewed for Audit:

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Principal Tax Auditor

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Date