When a customer uses a $40 federal government coupon toward a converter box, is Colorado sales tax computed on the full price or on the reduced price the customer actually pays?

Plain-English summary

This letter addresses the federal Digital-to-Analog Converter Box Coupon Program, under which the government gave eligible households $40 coupons toward converter boxes. A retailer asked: when a $49.99 converter ends up costing the customer only $9.99 after the coupon, does Colorado sales tax apply to the full $49.99 or to the $9.99 the customer pays?

The Department answered: tax applies to the full $49.99. Colorado's Regulation (39-)26-102.7(a)(3) defines "purchase price" to include "any consideration valued in money, such as trading stamps or coupons whereby the manufacturer or someone else reimburses the retailer for part of the purchase price." Because a third party (the federal government) reimburses the retailer for the $40 coupon, that $40 is gross receipts to the retailer and stays in the taxable base. The customer's out-of-pocket price is lower, but the retailer is made whole by the third party, so the tax is computed on the whole price.

The key dividing line — though the letter states it as a rule rather than spelling out the contrast — is who funds the coupon. A coupon redeemed by any party other than the retailer itself (manufacturer, government, or another third party) is reimbursement that counts as part of the price. A retailer's own store discount, by contrast, simply reduces the price it receives and the tax with it.

What this means for you

Retailers accepting manufacturer, government, or third-party coupons

If someone other than you pays you back for a coupon, charge sales tax on the full pre-coupon price. Manufacturer coupons, federal/state program coupons (like the converter-box coupon, or many instant rebates funded by a manufacturer) are reimbursed third-party consideration — they don't shrink the taxable amount. Collect tax on the sticker price, then apply the coupon.

Your own store discounts are different

A discount you fund yourself — a true store markdown, your own loyalty discount, a price you simply lower — reduces what you receive, so tax is computed on the reduced price. The test is whether a third party reimburses you for the difference.

Practical billing

The cleanest approach: compute tax on the item's full price, then subtract the coupon from the customer's total. The customer pays a smaller cash amount but the correct tax. Getting this backward (taxing only the cash paid) under-collects on third-party-funded coupons.

Common questions

Q: A customer used a $40 government/manufacturer coupon — do I tax the full price or what they pay?
A: The full price. A coupon reimbursed by a third party (manufacturer or government) is part of the taxable purchase price in Colorado, so tax is computed before subtracting the coupon.

Q: What about my own store coupon or discount?
A: If you fund it yourself and no one reimburses you, it reduces the price and the tax. The deciding factor is whether a third party pays you back for the coupon.

Q: Why is the tax on money the customer never paid?
A: Because the retailer still receives that amount — just from the third party (here the federal government) instead of the customer. It's gross receipts to the retailer, so it's in the base.

Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance, not binding on the Department.

Citations and references

Regulation:
- Department Regulation (39-)26-102.7(a)(3) — "purchase price" includes consideration valued in money, such as coupons whereby the manufacturer or someone else reimburses the retailer for part of the purchase price

Related Colorado tax-base letters:
- [[gil-08-011-hostess-dollars]] — credits (value the retailer receives) are in the base, unlike unilateral discounts

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-08-017.pdf

Original ruling text

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

GIL 08-017
April 17, 2008
XXXXXXXXXXX
XXXXXXXXXXX
XXXXXXXXXXX
Re: Federally Funded Coupon Taxability
Dear XXXXXXX:
This letter is in response to your inquiry of April 15, 2008. In your letter, you ask about the tax
treatment regarding the Digital-to-Analog Converter Box Coupon Program.
As I understand your description of the Program, the Federal government offers coupons worth
$40 each to be used towards the purchase of up to two converter boxes per eligible household.
As an example, you indicated that a converter costing $49.99 would only cost $9.99 to the
ultimate purchaser. Your question is whether the coupon reduces the taxable base of the
converter. In other words, in the example, does tax apply to the full $49.99 or to the $9.99?
Under Colorado sales tax law, the tax would apply to the full amount of $49.99. Colorado
Regulation (39-) 26-102.7(a)(3) defines “purchase price” as:
Any consideration valued in money, such as trading stamps or coupons whereby the
manufacturer or someone else reimburses the retailer for part of the purchase price and
other media of exchange. (emphasis added).
Thus coupons redeemed by any party (other than the retailer) would be gross receipts to the
retailer and be included in the tax base for the transaction. In your example, the tax would apply
to the full $49.99 price.
Thank you for your question. Should you require any clarification concerning this opinion,
please contact me at your convenience.
Sincerely,
Office of Tax Policy
Colorado Department of Revenue