How was tax measured when a company bought $2.50 coupons and gave customers free video rentals normally priced at $3?

Plain-English summary

A video corporation proposed selling sponsor 25,000 coupons at $2.50 each ($62,500 total). Sponsor would give them to customers, who could redeem a coupon at California or Arizona store before Dec. 31, 1995 for a video rental typically priced at $3 in California. No executed agreement or completed transaction appears.

Counsel treated coupon as record of intangible free-rental right. Neither corporation's coupon sale nor sponsor's customer gift was taxable transfer of tangible property. Cited 280.0580 analogized cash-purchased gift certificate to intangible evidence, but its backup involves merchandise/charge accounts, not rentals.

Redemption was different. A private-use video rental without license, broadcast, exhibit or reproduction right was continuing sale/purchase under listed statutes and Regulation 1660(d)(2). Use tax was imposed on lessee and lessor had to collect/remit when rentals were paid.

Counsel contrasted traditional manufacturer coupon, where third party reimburses retailer, with store coupon, where unreimbursed discount is not gross receipts. Cited 295.0430's backup included manufacturer's 14¢ reimbursement but excluded 3¢ handling payment; referenced agreement is absent. By analogy, sponsor's $2.50 compensation was rental receipts when corresponding coupon was redeemed in California. Lessee presenting free coupon owed tax; lessor had to collect/remit it. Collection mechanism is not shown.

California tax did not apply to $2.50 for Arizona rental or coupons never redeemed in California or Arizona.

Live Annotation 330.3078 preserves intangible-right and California-redemption result, third-party compensation, lessee tax/lessor duty and unredeemed exclusion. It omits proposed status, $3 ordinary price, Arizona/expiration, statutory gross-receipts analysis, store/manufacturer comparison, cited annotations' limits and absence of results.

No sponsor agreement, coupon terms/artifact, purchase/payment, customer distribution, video/license terms, redemption count/location/date, customer tax collection, return, audit, assessment, appeal or later outcome appears.

What this means for you

Map each funding stream to redemption: sponsor payment, customer payment, handling fee and unreimbursed discount. Retain agreement, coupon terms, redemption state/date, rental rights and evidence of customer tax collection; a free label does not erase third-party receipts.

Common questions

Was coupon sale taxable?

No. The coupon recorded an intangible rental right.

What amount was taxable at California redemption?

The $2.50 the sponsoring company had paid for that coupon.

Was usual $3 price measure?

No. The opinion used the actual third-party reimbursement of $2.50.

Who owed and collected tax?

Lessee presenting coupon owed use tax, and video lessor had to collect/remit it. Letter does not explain collection mechanics for free rental.

What about Arizona or no redemption?

No California tax on $2.50 corresponding to Arizona rental or coupon never redeemed in either state.

Did cited rulings decide this program?

No. 280.0580 involved gift certificates; 295.0430 involved manufacturer's 14¢ coupon reimbursement plus excluded 3¢ handling. Counsel used them by analogy.

Was agreement implemented?

Not shown. Facts say company desires to enter agreement; no execution, redemption, filing, audit or outcome record appears.

Citations and references

• Sections 6051/6012 — retail-sale gross receipts and cash discount
• Sections 6006/6010 provisions — private video rental as continuing sale/purchase
• Regulation 1660(c)(1)/(d)(2); section 6203 — lessee tax/lessor collection
• Sections 6011(c)(1)/6012(c)(1) — unreimbursed store discount
• Annotation 280.0580 PDF — gift-certificate analogy
• Annotation 295.0430 PDF — 14¢ manufacturer reimbursement; agreement absent
• Live Annotation 330.3078 — abridged current rule
• Every program, redemption, tax and later-outcome record — absent

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.3078
• Original supporting opinion: 330.3078 PDF

Original ruling text

330.3078
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 324-2637
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento

August 17, 1995

────────
BURTON W. OLIVER
Executive Director

Ms. P--- A. D--B--- E--- Corporation
--- --- Plaza
--- ---, FL XXXXX-XXXX
Re:

SY --- XX-XXXXXX

Dear Ms. D---:
This is in response to your letter dated June 26, 1995 regarding the application of tax on video rental coupons redeemed at your company's stores. You state: "B--- V---, Inc. (BVI) is in the business of renting and selling video tapes. BVI desires to enter into an agreement with ABC Co. to sell them 25,000 coupons for a free video rental at a discounted price of $2.50 each. ABC Co. will distribute these coupons as a gift to its customers. The typical rental price for one video in California is $3.00. These coupons may be redeemed in any BVI store in California and Arizona prior to December 31, 1995." We understand you to ask how California sales or use tax applies to this transaction. Discussion California imposes a sales tax on a retailer's gross receipts from the retail sale of tangible personal property inside this state unless the sale is specifically exempted from taxation by statute. (Rev. & Tax. Code § 6051.) Taxable gross receipts include all amounts received with respect to the sale, with no deduction for the cost of materials, service, or other expense of the retailer passed on to the purchaser unless there is a specific statutory exclusion. (Rev. & Tax. Code § 6012(a).) Taxable gross receipts do not include cash discounts allowed and taken on sales. (Rev. & Tax. Code § 6012(c)(1).)

Ms. P--- A. D---

-2-

August 17, 1995
330.3078

We understand that BVI will sell the ABC Co. 25,000 coupons at a total price of $62,500 (25,000 coupons at $2.50 each). These coupons entitle the holder to a free video cassette rental at any BVI store in California or Arizona and will be distributed at no charge by ABC Co. to its customers. Under these facts, we regard BVI as selling nontaxable rights to free video cassette rentals. The actual coupons are a record of the rights to the free rentals and do not constitute the sale of tangible personal property. (See e.g., Business Taxes Law Guide Annot. 280.0580 (1/25/61) (a gift certificate is evidence of an intangible right and is not subject to tax).) We also regard ABC Co.'s distribution of these coupons to its customers as the use of intangible property. As such, no tax applies on either BVI's sale of these coupons or on ABC Co.'s gift of these coupons to its customers. ABC Co.'s customers will then present these coupons at a BVI store for the rental of a video cassette. The rental or lease of video cassettes, video tapes, and video discs for private use under which the lessee or renter does not obtain or acquire the right to license, broadcast, exhibit, or reproduce the video cassette, video tape, or video disc is a continuing sale and purchase and tax applies measured by rental receipts. (Rev. & Tax. Code §§ 6006(g)(7), 6006.1, 6010(e)(7), 6010.1; Reg. 1660(d)(2).) The tax imposed on this type of lease is generally a use tax on the lessee. (Reg. 1660(c)(1).) Thus, BVI, as lessor of the video tapes, is responsible to collect the tax from the lessee at the time rentals are paid by the lessee and remit that tax to this Board. (Rev. & Tax. Code § 6203; Reg. 1660(c)(1).) Thus, the remaining issue is what is the measure of tax, if any, on BVI's lease of video cassettes to ABC Co.'s customers presenting a free rental coupon. The application of tax in this situation is based on the nature of the coupon presented by ABC Co.'s customers. With a traditional manufacturer's coupon, the retailer is reimbursed the face amount of the coupon by the coupon issuer and must include in its measure of taxable gross receipts all amounts received from the manufacturer and customer on the sale of the property subject to that coupon. (Business Taxes Law Guide Annot. 295.0430 (5/9/73).) With a store coupon (i.e., a coupon in which the retailer receives no reimbursement from any third party), the retailer accepts a reduced amount plus a coupon towards the sale of property subject to that coupon. Since the retailer does not receive the amount of the discount, the discounted amount is not part of the retailer's taxable gross receipts. (Rev. & Tax. Code §§ 6011(c)(1), 6012(c)(1).) In this case, BVI is renting video cassette tapes to customers who present a coupon for a "free" rental. We regard this coupon like that of a manufacturer's coupon since BVI will have received compensation from a third party (the ABC Co.) for the rental of its video tapes via amounts paid by ABC Co. for the coupons. Thus, the rental receipts from the lease of BVI's video tapes in California will consist of the $2.50 amount received from the ABC Co. for that customer's coupon. Tax on this amount is imposed on the lessee (the person presenting the coupon) of the video cassette tape and BVI is required to collect this tax and remit it to this Board. California tax does not apply on the $2.50 amount received for leases of video tapes (via

Ms. P--- A. D---

-3-

August 17, 1995
330.3078

coupon) in Arizona or on the amounts BVI received on its sale of "free coupons" which will not be redeemed for a free video rental in either California or Arizona. We hope this answers your questions. If you have any further questions, please write again. Sincerely,

Warren L. Astleford
Staff Counsel
WLA:cl

cc: Out-of-State District Administrator