Did factory reimbursement for a coupon offering a free oil filter enter the dealer's taxable gross receipts?

Plain-English summary

A factory issued coupons that customers could redeem at an automobile dealer for a “free” oil filter with an oil change. The factory reimbursed the dealer for the filter.

The Board treated the dealer as the retailer of the filter and the customer—not the factory—as the purchaser. The amount the dealer was entitled to receive from the factory entered the dealer's taxable gross receipts.

The dealer could contractually collect sales-tax reimbursement from the customer on the filter sale. If it intended to do so, the letter recommended stating on the coupon that the customer had to pay applicable sales tax on the filter.

Citations and references

• California Revenue and Taxation Code section 6051 (as cited)
• California Civil Code section 1656.1 (as cited)
• California Sales and Use Tax Annotation 295.0430 (as cited)
• February 1, 1993 memorandum faxed to the Board asking how sales tax applied to factory coupons for a free filter with an oil change — memorandum and attachments, if any, not reproduced in the official PDF
• Manufacturer-issued coupons, customer oil-change transactions, factory cost reimbursements, and any sales-tax-reimbursement contract — coupon terms, transaction amounts, invoices, reimbursement records, and contract not reproduced in the official PDF
• March 11, 1993 tax-counsel response applying the cited authorities under stated assumptions — no audit, assessment, refund claim, appeal, agency adoption, taxpayer response, or later outcome supplied
• Official Annotation 295.1045's manufacturer reimbursement, retailer gross-receipts, contractual tax-reimbursement conclusion, cross-reference to Annotation 295.0430, and March 11, 1993 date — annotation omits the redacted parties, February 1 memorandum, oil-change price assumption, separate-entity and no-charge assumptions, coupon notice recommendation, underlying records, later outcome, 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/295-1045.pdf

Original ruling text

295.1045

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

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

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

March 11, 1993

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento
────────

Ms. T--- P--S--- Dodge/BMW
XXX East --- Street
---, CA XXXXX

BURTON W. OLIVER
Executive Director

Dear Ms. P---:
This is in response to your memorandum faxed to the Board on February 1, 1993. According to your memorandum, a factory issues to its customers coupons which the customers may bring to your business to receive a "free" filter with an oil change. We assume that a customer who redeems the coupon with your business pays an amount that is less than the amount you normally charge for an oil change. You are reimbursed the cost of the filter by the factory. You ask about the application of sales tax to these transactions. In answering your inquiry, we assume that the factory is a separate entity from S--- Dodge and that the factory does not charge its customers for the coupons. 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. Although the sales tax is imposed upon the retailer, the retailer may collect sales tax reimbursement (usually itemized on the invoice as "sales tax") from the purchaser if the contract of sale so provides. Civ. Code
§ 1656.1.
Sales and Use Tax Annotation 295.0430 provides:
"Redemption of Coupons. Amounts paid by a manufacturer to a retailer in redemption of coupons pursuant to an agreement permitting the retailer to publish the coupons in newspapers and handbill advertisements to be used by the retailer's customers in purchasing the product of the manufacturer, are includable in the retailer's gross receipts. 5/9/73." This annotation also applies where the manufacturer issues the coupons.

Ms. T--- P---

-2-

March 11, 1993
295.1045

In the instant case, S--- Dodge is the retailer of the filters, and therefore S--- Dodge must pay tax measured by the amount it is entitled to from the factory as reimbursement for the filters. The customer, not the factory, is regarded as the purchaser. S--- Dodge may, by contract, charge the customer sales tax reimbursement on the sale of the oil filter. If S--- Dodge intends to charge sales tax reimbursement on the filters, the coupons should indicate that the customers will be required to pay applicable sales tax on the filters. 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