Were credits earned on earlier dealer purchases treated as discounts on those purchases or on later equipment bought with at least 70% of the dealer's own funds?

Plain-English summary

Dealers earned credits from earlier merchandise purchases, but could use those credits only on later purchases of automotive repair equipment. To use a credit, a dealer had to pay at least 70% of the equipment's regular price from its own funds.

The memorandum treated the credit as a discount on the later equipment purchase rather than on the original merchandise sale. The dealer's right was wholly contingent until the later purchase occurred and the dealer supplied the required cash portion.

The memorandum distinguished the arrangement from the Regulation 1671(e) pattern where indicia alone acquire a premium. In that pattern, the seller's premium expense arises only when the premium is delivered, and the discount is applied back to the original merchandise sale. Here, the substantial later cash purchase made it logical to apply the credit directly against the equipment price.

What this means for you

Dealers, equipment sellers, loyalty-program operators, and tax professionals

Identify when the customer obtains an enforceable benefit, whether indicia alone buy the premium, and how much new money the customer must pay. Those facts can determine which sale receives the discount.

Common questions

Q: When did the dealer's credit become usable?

A: Only when the dealer later bought repair equipment and paid at least 70% of regular price from its own funds.

Q: Which transaction received the discount?

A: The later equipment purchase, not the earlier merchandise purchase that generated the credit.

Q: Why did the memorandum distinguish Regulation 1671(e)?

A: That rule contemplated indicia alone acquiring the premium, while this program required a substantial new cash payment.

Citations and references

• California Sales and Use Tax Regulation 1671(e)
• Business Taxes Law Guide Annotations 295.0920, 280.0740, and 280.1100, as discussed in the memorandum

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 555.0021
• Original supporting opinion: 555.0021 PDF

Original ruling text

State of California

Board of Equalization

555.0021

Memorandum
To:

Mr. Robert Nunes

From:

T. P. Putnam

Subject:

REDACTED TEXT

Date:

January 30, 1973

You have received a copy of a memorandum from REDACTED TEXT to me regarding REDACTED TEXT. He has concluded that a discount should be allowed in the amount of the “credits” on REDACTED TEXT purchases but that contract to REDACTED TEXT letter, the discount should apply to the REDACTED TEXT purchases rather than to the purchases of automotive repair equipment in connection with which the credits were used. Although this would appear to be in line with Regulation 1671, I believe there is a distinction that justifies the REDACTED TEXT approach. Section (e) of Regulation 1671 describes a situation that is somewhat parallel to that before us, i.e., a two-party situation in which the seller incurs the expense in relation to the premium when he delivers the premium to his customer. The regulation, however, contemplates a situation in which the indicia alone are used to acquire the premium. Also, the right of the customer to use the indicia is not contingent upon his paying a substantial part of the price of the premium with his own funds. Since the seller incurs no expense until the indicia are used to acquire the premium and also since the expense can be measured only by the seller’s cost of the premium, the discount accrues when the premium is delivered. The discount, however, is applied against the original sale of merchandise. This is the only way the discount can reasonably be handled under the circumstances where indicia alone are used to acquire the premium. There is no similar necessity for applying the discount to the original sale of the REDACTED TEXT in REDACTED TEXT’s case. The credit that a dealer gets when he buys REDACTED TEXT represents a wholly contingent right; contingent upon his making a subsequent purchase of automotive repair equipment using at least 70% of his own funds toward the regular price of the equipment. Under these circumstances, it does not seem at all unreasonable to treat the amount of the credit as a discount on the subsequent purchase of automotive repair equipment. Such treatment would be consistent with Annotation 295.0920 and, in view of the particular facts involved, would not be inconsistent with Annotation 280.0740 or 280.1100. The REDACTED TEXT approach strikes me as logical and realistic on the facts in the REDACTED TEXT program. I see no compelling reason to change it. TPP:lb cc:

Mr. Glenn L. Rigby
Mr. Philip R. Dougherty
Mr. Donald J. Hennessy