How did California treat a hybrid trading-stamp plan where any participating retailer accepted a filled book worth $3 and received $2.75 reimbursement?

Plain-English summary

Under a hybrid trading-stamp plan, a retailer bought stamps to distribute to customers. A filled book was worth $3 toward merchandise or services at any participating retailer, and a retailer that redeemed a book received $2.75 through a designated depository.

Because stamps issued by one retailer would often be redeemed by another, the Board placed the plan under the proposed ruling's multi-retailer category. The retailer distributing stamps received its cash-discount deduction when it bought the stamps.

A retailer accepting a filled book had $3 of additional gross receipts. Taxability followed the merchandise or service supplied, exactly as if the customer had paid $3 in cash.

For grocers, the cash-discount deduction on stamp purchases had to be adjusted to eliminate any deduction attributable to exempt-item sales. A grocer operating a different cash-register-tape plan and furnishing its own premiums received the discount only when delivering the premiums, again adjusted for exempt sales.

What this means for you

Retailers, loyalty-program operators, grocers, and tax professionals

Determine whether rewards can be redeemed across multiple retailers or only with the issuer, when the program incurs its cost, the face value accepted at redemption, and whether underlying sales include exempt items.

Common questions

Q: When did the issuing retailer take the discount?

A: When it bought the trading stamps.

Q: What gross receipts did the redeeming retailer report?

A: An additional $3 for each filled book accepted.

Q: Was the entire $3 always taxable?

A: No. Taxability depended on the merchandise or service furnished, just as with a $3 cash payment.

Q: How was a retailer's own cash-register-tape premium plan different?

A: The discount arose when that retailer delivered its own premiums, not when it issued the purchase evidence.

Citations and references

• Proposed California Sales Tax Ruling 72.5, as discussed in the opinion

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 555.0060
• Original supporting opinion: 555.0060 PDF

Original ruling text

555.0060

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
January 13, 1961
Gentlemen:
In your letter of December 15, 1960, to Mr. Dickson, you inquired concerning the application of proposed Ruling 72.5 to a trading stamp plan of the type conducted by REDACTED TEXT. Under this plan, a retailer purchases stamps for distribution to his customers. A consumer may redeem a filled book at the store of any retailer who handles that kind of stamp. The filled book is worth $3.00 toward the purchase of any merchandise or service offered by the retailers cooperating in the plan. A retailer redeeming a filled book receives $2.75 through a designated depository. The question is whether this hybrid type of plan would fall under B-(1) or B-(2) of proposed Ruling 72.5. Inasmuch as the stamps are furnished at many stores, more of the stamps distributed by single retailer would be redeemed by some other retailer. Accordingly, it is our opinion that a plan of the type conducted by Alameda Merchants falls under B-(1) of proposed Ruling 72.5. Thus the retailer would be entitled to his cash discount deduction as of the time he buys the stamps. A retailer who redeems a filled book would have additional gross receipts of
$3.00 and the taxability of the $3.00 would depend on the type of merchandise or service furnished to the customer, that is, the taxability would be identical to a situation in which the customer had paid $3.00 in cash for the same merchandise or service. You also ask for “layman’s analysis” of the proposed Ruling. This is not really possible, but we can say that as far as a grocer is concerned, he will be allowed the cash discount deduction as of the time he buys trading stamps. The deduction is the amount he pays for the stamps as adjusted to eliminate a cash discount deduction on sales of exempt items. The grocer who operates a cash register tape plan and furnishes his own premiums to his customer will be allowed a cash discount deduction as of the time he delivers the premiums to his customers. Again, his cash discount deduction will be adjusted to eliminate any deduction on sales of exempt items. Very truly yours, E. H. Stetson Tax Counsel EHS/gg [at]