When a direct-sales company gives a party hostess 'hostess dollars' to apply against her purchases, and charges separately stated shipping, are those amounts included in the price on which Colorado sales tax is computed?

Plain-English summary

A direct-sales company sells goods through independent distributors who recruit hostesses to hold home parties. A hostess earns "hostess dollars" based on the size of the orders taken at her party, and she can apply those dollars against her own purchases. The dollars expire if unused, can't be transferred, and can't be used to pay sales tax or shipping. The company also charges a separately stated shipping fee (a percentage of the order, with a minimum), shipping by common carrier to the distributor or hostess, who delivers to customers. The company asked two questions: are hostess dollars part of the price on which sales tax is figured, and is the shipping charge?

1. Hostess dollars — yes, taxed on the full price. Colorado's taxable "purchase price" includes amounts received in cash and credit and any consideration valued in money (Regulation (39-)26-102.7(a)). The Department drew the key line between a discount and a credit:

• A discount is a unilateral price reduction with no quid pro quo — like a grocery coupon anyone can use. Tax is computed on the reduced price.
• A credit reflects value the retailer receives — money, a service, or other consideration. A credit is added back into the price before tax.

Hostess dollars are credits: the hostess gets them only because she agrees to open her home as a marketing forum and works to generate sales — a quid pro quo, much like a sales commission paid in store credit instead of cash. The restrictions (no assignment, expiration) don't change that. The Department distinguished Burger King v. Director (N.J.), where two-for-one coupons available to everyone were true discounts, because here the dollars are available only to someone who gives the company valuable consideration.

2. Shipping — taxable on these facts. The purchase price includes all costs the retailer incurs in making a sale; post-sale services are generally not taxed (A.D. Stores, 19 P.3d 680). Under Special Regulation Sales 18, transportation is presumed nontaxable only if it is both separable from the sale and separately stated. Separately stating it isn't enough by itself. Here the Department assumed the customer has no realistic alternative to the company's shipping (no option to pick up or use another carrier), so the charge is not separable and is included in the taxable price. If that assumption is wrong — if customers really could choose another option — the shipping would not be taxable.

What this means for you

Direct-sales / party-plan companies

Rewards you give in exchange for selling effort — "hostess dollars," party credits, rewards points earned by generating sales — are credits, and Colorado wants tax computed on the full price before they're applied. Think of it as paying a commission in store credit: had you paid cash and required it be spent on your goods, the full price would plainly be taxed. Routing it through a credit doesn't shrink the tax base.

The discount-vs-credit test is the whole ballgame

Ask whether the customer had to give you something (effort, a service, other consideration) to get the price break. If yes, it's a credit — tax the full price. If it's a no-strings markdown open to anyone (a coupon, a sale price), it's a discount — tax the reduced price.

Shipping: build in a real alternative if you want it untaxed

To keep separately stated shipping nontaxable in Colorado, the customer needs a genuine option to avoid your transportation — pickup or a third-party carrier. If your model forces everyone to use (and pay for) your shipping, the charge is not "separable" and rides into the taxable base even when it's listed on its own line.

Common questions

Q: Are loyalty or hostess credits taxable in Colorado?
A: When the customer earned the credit by giving the seller something of value (like generating sales), it's a credit and tax is computed on the full price before the credit is applied. A no-strings discount open to everyone is taxed on the reduced price.

Q: We list shipping on a separate line — isn't it automatically exempt?
A: No. Separately stating it is necessary but not sufficient. It must also be separable — the customer must have a realistic option not to use your transportation. Here customers had none, so the shipping was taxable.

Q: What's the difference between a coupon and a credit?
A: A coupon/discount is unilateral with no quid pro quo (anyone can use it). A credit reflects value the retailer received in return. Coupons reduce the taxable price; credits don't.

Q: Can we rely on this letter?
A: No. It's a General Information Letter — general guidance, not binding on the Department, and the Executive Director did not formally review it.

Citations and references

Regulations and cases:
- Department Regulation (39-)26-102.7(a) — purchase price includes cash, credit, and consideration valued in money
- Department Special Regulation Sales 18 — transportation charges nontaxable only if both separable from the sale and separately stated
- A.D. Stores Co. v. Department of Revenue, 19 P.3d 680 (Colo. 2001) — costs of making a sale are in the base; post-sale services generally are not

Out-of-state authority the Department discussed:
- Illinois GILs ST 97-0446-GIL and ST 96-0061-GIL (hostess dollars added to price); New York Popular Club Plan (810667/810668); Texas Comptroller's Decisions 18,266 and 10,572; California Counsel Rulings 295.0940.175, 280.0970 (cf. Cal. Code Regs. 1671.1) — generally in accord
- Contrasted: Burger King v. Director, 9 N.J. Tax 251 (1987) (two-for-one coupons were true discounts); Columbus Southern Lumber Co. v. Peck, 113 N.E.2d 1 (Ohio 1953)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-08-011.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-2008-11

XXXXXXXXXXX
Attn: XXXXXXXX
XXXXXXXXXXX
XXXXXXXXXXX
February 28, 2008

Re: hostess dollars
Dear XXXXXXX,
This letter is in response to two letters, both dated January 17, 2008, sent by you to the Colorado
Department of Revenue.
Issue
1. Is a credit (hostess dollar) included in the purchase price when computing sales tax?
2. Is a transportation charge included in the purchase price when computing sales tax?
Background
The company is a direct sales company that markets goods exclusively through independent
distributors. Distributors recruit hostesses to hold parties at her home and for the purpose of
marketing and selling the company’s product to prospective customers. Hostesses can earn “hostess
dollars,” the value of which is determined by the amount of sale order taken at the party. Hostess
dollars are credited against the purchase price of product purchased by the hostess. Hostess dollars
become worthless if not used, cannot be assigned to another person, and cannot be used to pay
applicable sales taxes or shipping charges. The hostess orders may include one or more customers
and contain promotional items for the hostess (these promotional items are the hostess dollars and/or
hostess free gifts). Distributors submit to the company the sales tax for remittance to the state.
The company charges a fee for shipping goods. The fee is computed as a percentage of the total
purchase price and there is a minimum shipping charge of [dollar value]. The shipping charge is
separately stated on the customer’s invoice. Goods are typically shipped by the company either to
the distributor or to the hostess, who then delivers the goods to customers. Goods are shipped by
common carrier and the sales contract does not specify where title to the goods passes. If goods are
lost in transit, the company will replace the goods and seek reimbursement from the carrier.

Discussion
1. Hostess dollars are included in the price upon which tax is computed.
The purchase price upon which tax is computed includes amounts received in cash and credit and
any consideration valued in money. Department Regulation (39-)26-102.7(a). For example, a
consumer who pays for a $5 item by paying $2 in cash and applying a $3 credit owed by the retailer
to a consumer because of an overpayment by the consumer on a prior purchase, must pay sales tax
on the $5 purchase price, not the purchase price reduced by the $3 credit.
A discount, however, is a reduction in the purchase price and tax is computed on the reduced
purchase price. Grocery store coupons are typical of such discounts. In general, discounts are
unilateral in the sense that there is not a quid pro quo exchange of consideration in order for the
consumer to receive the discount. For example, a purchaser does not have to pay money or provide
a service to the retailer in order to receive the discount.
Credits, on the other hand, reflect value received by the retailer, either in the form of money or
performance by a purchaser or from third parties, or by some other valuable consideration received
by the retailer. Credits are included in the purchase price. For example, if a retailer and buyer agree
that the retailer will reduce the price of its goods in exchange for a buyer’s agreement to provide the
retailer some valuable service or goods, the credit is added to the reduced sales price in order to
compute the sales tax.
In the case you describe, the hostess dollars are credits, not discounts. The company issues hostess
dollars to the hostess in compensation for the hostess’ agreement to open her home for the company
as a forum to market it products and the hostess’ efforts to generate sales for the company. The
hostess is not entitled to the hostess dollars in the absence of her agreement to perform in the
manner specified by the company. The fact that the company restricts the hostess’s ability to assign
the dollars or restrict when the dollars can be redeemed is not relevant. Clearly, such restrictions are
likely matters taken into consideration by the hostess when evaluating her willingness to enter into an
agreement with the company, but it remains the case that the hostess dollars are a quid pro quo
exchange of consideration for the hostess’ agreement to provide the company with valuable services.
The retailer agrees to give a credit to the hostess goods in exchange for the hostess’ successful
efforts to garner sales for the company.
Other states that have considered similar circumstances have reached similar conclusions. See, e.g.,
Illinois Dept. of Rev. General Information Letter ST 97-0446-GIL, 08/15/1997; Illinois Dept. of Rev.
General Information Letter ST 96-0061-GIL, 02/13/1996 (hostess dollars must be added to purchase
price when computing tax); In the Matter of the Petition of POPULAR CLUB PLAN, INC. for Revision
of a Determination or for Refund of Sales and Use Taxes under Articles 28 and 29 of the Tax Law for
the Period July 15, 1988 through
, 810667 ; 810668, 01/27/1994 (reward credits given to sales
representatives were includable in purchase price). See, also, Texas Comptroller's Decision No.
18,266, 12/09/1986; Texas Comptroller's Decision No. 10,572, 06/18/1980; California Sales Tax
Counsel Rulings Nos. 295.0940.175 and 280.0970; but, see, Cal. Code Regs. 1671.1(c)(A)(3). Not
all states agree with this reasoning. See, e.g., Columbus Southern Lumber Company v. Peck, 113
NE2nd 1 (Ohio 1953) (tax correctly computed on subsequent downward price adjustment which could
only be determined after purchaser reached agreed-on sales volume).
Finally, you cite the New Jersey case of Burger King v Director, Division of Taxation, 9 N.J. Tax 251
(Tax Ct. 1987, aff’d 224 N.J. Super 628 (App. Div. 1988) in support of your position that the hostess
dollars are not added to the purchase price when computing the sales tax. In that case, the retailer
provided customers with two-for-one coupons. The coupons had no value other than as a discount
for meals. The court held that the coupons represented a discount and that tax is computed on the
discounted price.

The case is not dispositive. Unlike the present case, the two-for-one coupons were available to all
consumers and customers were not required to provide the company with valuable consideration in
exchange for the coupons. The discount was similar to the grocery store discount coupon which
entitles the consumer to buy two apples for the price of one.
In contrast, the hostess dollars at issue here are available only when a person agrees to open their
home to the company and consumers and give the company a forum in which to sell its product.
Hostess dollars create an incentive for the hostess to actively (and successfully) engage in the
promotion of the company’s product. In many respects, the hostess dollars are similar to sales
commissions, but are paid not in real dollars but as a credit toward the purchase price of goods sold
by the company. Had the company paid the hostess real dollars instead of hostess dollars, but
required the hostess’ to use the money only for buying the company’s goods, the sales tax would
clearly be computed on the full purchase price. The company has simply made the transaction more
efficient by issuing hostess dollars (which presumably are not issued as tangible medium at all, but,
rather, as a credit memo against any purchase).
2. Transportation costs are includable in the calculation of the sales tax.
The purchase price on which sales tax is computed includes all costs incurred by the retailer in
making a sale. Services that occur after the sale are generally not taxable. A.D Stores v Department
of Revenue, 19 P3d 680 (Colo. 2001). The department has promulgated a regulation that governs
the taxability of transportation charges (Department Special Regulation Sales 18), which provides as
follows:
1) The transportation of tangible personal property between a retailer and purchaser is a
service presumed to be not subject to sales or use tax. Transportation charges are not taxable
if they are both (1) separable from the sales transaction, and (2) stated separately on a written
invoice or contract.
a) "Transportation charges" include carrying, handling, delivery, mileage, freight,
postage, shipping, trip charges, stand-by, and other similar charges or fees.
b) Separable charges. Transportation charges are separable from the sales
transaction if they are performed after the taxable property or service is offered for sale and
the seller allows the purchaser the option either to use the seller’s transportation services or
use alternative transportation services (including but not limited to the purchaser picking up
the property at the seller’s location). The fact that transportation charges are stated separately
does not, in and of itself, mean the charges are a separable charge.
c) Stated Separately. Transportation charges will be regarded as "separately stated"
only if they are set forth separately in a written sales contract, retailer's invoice, or other
written document issued in connection with the sale.
d) Intermediate or "Freight in" charges. Transportation charges incurred in connection
with transporting tangible personal property from the place of production or the manufacturer
to the seller or to the seller's agent or representative, or to anyone else acting in the seller's
behalf, either directly or through a chain of wholesalers or jobbers or other middlemen, are
deemed "freight -in" charges and are not a transportation charge exempt from tax.
e) Overstated Transportation Charges. The amount of transportation charges excluded
from the calculation of tax shall be the amount of transportation charges separately stated in
accordance with subparagraph (c), provided that such separate statement is not to avoid the
tax upon the actual sales price of tangible personal property.
From the information presented by you, it appears that the transportation charges must be included in
the calculation of the sales tax. Goods are shipped from your warehouse which is located out-ofstate to either the distributor or the hostess. Crucial to this determination is the assumption that the
customer does not have any realistic alternative to the transportation services provided by the

company. That is, the customer does not have a realistic option to pick up the merchandise or to
acquire other transportation service. If that assumption is incorrect, the transportation charges would
not be taxable.
Finally, the Department makes a good faith effort to provide accurate and complete answers to
questions posed to it by taxpayers. However, the information and answers provided here are not
binding on the Colorado Department of Revenue, nor do they replace, alter, or supersede Colorado
law and regulations. The Executive Director, who by statute is the only person having authority to
bind the Department, has not formally reviewed and/or approved this response.
Respectfully,

Office of Tax Policy
Colorado Department of Revenue