Does a rewards-program operator owe Georgia tax on the tokens it sells to businesses, and on the machines, prizes, and tokens it buys out of state?

Plain-English summary

A company runs a rewards-program business. It places a machine full of toys and prizes at a participating business (a "Location"). The Location buys tokens from the company and hands them out to patrons (patients or students) for good behavior; patrons redeem tokens for prizes. The company owns the machine and prizes, maintains them, and buys the machine, tokens, and prizes from out-of-state sellers who deliver to it in Georgia without charging Georgia sales tax. It asked two things: (1) are its token "sales" to Locations taxable, and (2) does it owe use tax on the out-of-state purchases?

The Department's answers:

• Token "sales" are not taxable. The company is really providing a nontaxable service — a rewards program — and the tokens are part of delivering that service. So it does not collect sales tax on the tokens it provides to Locations.
• The out-of-state purchases are subject to use tax. Because it is a service provider, the company is the end user and consumer of the machines, prizes, and tokens it buys to run the program. When it buys those items out of state with no Georgia sales tax and brings them into Georgia, it owes Georgia state and local use tax on their cost.

The ruling also spells out how the local use tax works: it is due where the company first receives and stores the items, and if the items are later used in a county with a higher local rate, the company owes the difference. A credit is available for like taxes already paid to another state or local jurisdiction.

What this means for you

Rewards-program, amusement, and vending operators

Providing a rewards or game program can be a nontaxable service, so you may not need to charge sales tax on tokens or credits that are part of that service. But you generally cannot buy your machines, prizes, and supplies tax-free — as the consumer, you owe use tax on out-of-state purchases you bring into Georgia, including the local tax for the county where you first store them.

Businesses buying out of state

Buying tangible property from an out-of-state seller who charges no Georgia tax does not make it tax-free. Georgia use tax is due on the first use, storage, or distribution of that property in the state, at the state rate plus the applicable local rate, with a credit for like tax paid elsewhere.

Accountants and tax professionals

This applies the service-provider-as-consumer rule (Ga. Comp. R. & Regs. r. 560-12-1-.14(7)(d)) alongside the out-of-state use-tax provisions of O.C.G.A. § 48-8-30(c). Note the local-rate mechanics: base local use tax accrues at the county of first receipt/storage, with a top-up if later use occurs in a higher-rate county, and a credit for taxes previously paid to another jurisdiction.

Common questions

Q: Does the operator charge sales tax on the tokens?
A: No. The Department treats the rewards program as a nontaxable service, so the operator does not collect sales tax on the tokens it provides to participating Locations.

Q: Does the operator owe tax on its machines, prizes, and tokens?
A: Yes. As a service provider consuming those items to deliver its service, it owes Georgia use tax on them when purchased out of state and brought into Georgia without Georgia sales tax.

Q: How is the local use tax determined?
A: It accrues at the local rate of the jurisdiction where the operator first receives and stores the items. If the items are later used in a jurisdiction with a higher local rate, the operator owes the additional difference.

Q: Is there any credit for taxes paid elsewhere?
A: Yes. A credit is allowed against Georgia state and local use tax for like taxes previously paid to another state or local jurisdiction.

Q: Can another rewards-program operator rely on this ruling?
A: No. It is binding on the Department only for the taxpayer and facts presented, and no other taxpayer may rely on it.

Citations and references

Statutes and rules:

• O.C.G.A. §§ 48-8-1, 48-8-30 (imposition of sales and use tax)
• O.C.G.A. § 48-8-2(31), (33)(A) (definitions of retail sale and sale)
• O.C.G.A. § 48-8-30(c)(1)-(3) (use tax on property purchased at retail out of state; credit for like taxes paid elsewhere)
• O.C.G.A. § 48-8-77 (sourcing of a sale)
• Ga. Comp. R. & Regs. r. 560-12-1-.14(7)(d) (service provider as consumer of tangible personal property)

Source

• Landing page: Georgia Sales & Use Tax Letter Rulings
• Original PDF: LR SUT-2015-15

Original ruling text

Date Issued: September 9, 2015
Georgia Letter Ruling: LR SUT-2015-15
Topic: Service Provider - Rewards
This letter is in response to your letter ruling request regarding the application of Georgia sales and use tax to certain
transactions entered into by Taxpayer.
Facts as presented by Taxpayer
Taxpayer owns and operates a rewards program business in Georgia. The rewards program is designed for various
businesses (“Locations”) to reward patrons of the Locations for good behavior. Taxpayer places a machine, with toys
and other prizes inside, at the participating Location. The Location purchases special tokens from Taxpayer and gives
the tokens out to patients or students, who can then use the tokens to obtain prizes.
Taxpayer purchases the machine, tokens, and prizes from out-of-state sellers. The items are delivered to Taxpayer in
Georgia. Taxpayer pays for shipping but does not pay sales tax on the items at the time of purchase. Taxpayer provides
the machine and prizes to the Locations at no cost. The machine and prizes remain the property of Taxpayer, and
Taxpayer is responsible for maintaining and repairing the machine. The only items that Taxpayer “sells” to the
Locations are the tokens.
Once the Location’s supply of tokens depletes, Taxpayer makes a service visit to the Location to collect the used
tokens, restock the prizes, and sell more tokens to the Location. Used tokens collected out of the machine are resold
to the Locations. When Taxpayer or a Location terminates the Agreement, Taxpayer removes the machine and
remaining prizes from the Location and collects any unused tokens. The Location receives prizes from the machine in
exchange for the unused tokens. The Location does not receive a cash refund of the amounts it paid for the unused
tokens.
Issues
1) Are Taxpayer’s sales of tokens subject to sales and use tax?
2) Does Taxpayer owe use tax on the machine, tokens, and/or prizes it purchases out of state?
Analysis
Georgia levies and imposes a tax (subject to certain specific exemptions) on the retail purchase, retail sale, rental,
storage, use, or consumption of tangible personal property and on certain enumerated services. 1 A retail sale is “any
sale, lease, or rental for any purpose other than for resale.” 2 A sale is “any transfer of title and [/or] possession,
exchange, barter, lease, or rental, conditional or otherwise, in any manner or by any means of any kind of tangible
personal property for a consideration.”3 The dealer making the taxable sale must collect the tax from the purchaser
and remit such tax to the Department.4 A sale is sourced to the location where the purchaser takes possession of the
tangible personal property.5
Georgia also imposes a tax on the use, consumption, distribution, or storage in Georgia of tangible personal property
purchased at retail outside Georgia.6 O.C.G.A. § 48-8-30(c)(1) provides that “[u]pon the first instance of use,
consumption, distribution, or storage within this state of tangible personal property purchased at retail outside this
state, the owner or user of the property shall . . . be liable for a tax at the rate of 4 percent of the cost price” plus any

1

O.C.G.A. §§ 48-8-1, -30.
O.C.G.A. § 48-8-2(31).
3
O.C.G.A. § 48-8-2(33)(A).
4
O.C.G.A. § 48-8-30.
5
O.C.G.A. § 48-8-77.
6
O.C.G.A. §§ 48-8-1, -30(c).
2

Date Issued: September 9, 2015
Georgia Letter Ruling: LR SUT-2015-15
Topic: Service Provider - Rewards
Page 2 of 2

applicable local taxes.7 A credit is allowed against the tax owed for like taxes previously paid in another state.8
In addition, local use tax is due upon the first instance of use, consumption, distribution, or storage of tangible personal
property in a local jurisdiction. Because local tax rates vary by county, the local county tax rate is dependent upon in
which county the tangible personal property is used, consumed, distributed, or stored.9 Thus, when a person purchases
tangible personal property outside Georgia and subsequently brings the property into Georgia, that person is liable for
Georgia state and local use tax. The credit allowed for like taxes previously paid in another state is similarly allowed
against local taxes due for like taxes previously paid to another local jurisdiction.10
Unlike sales of tangible personal property, which are generally presumed taxable, sales of services are not subject to
tax unless specifically designated as taxable. However, service providers must pay the tax on tangible personal
property used in providing their services. A service provider is deemed the end user and consumer of tangible personal
property used or consumed during the provision of a service if the service provider does not separately charge for the
property.11 The service provider is liable for the tax on the purchase price of such tangible personal property.
Here, Taxpayer provides the Locations with a reward program, and, as such, the Department considers Taxpayer to
be providing a nontaxable service. Taxpayer is not required to collect sales tax on its charges for tokens; however,
Taxpayer must pay tax on its purchases of tangible personal property to be used in providing its services. Taxpayer
owes use tax on the machines, prizes, and tokens purchased from out of state sellers and used in Georgia. Taxpayer
owes local taxes at the rate of the local jurisdiction where Taxpayer first receives and stores the items. If the items are
subsequently used in a local jurisdiction with a higher local tax rate, Taxpayer will owe additional use tax based on
the difference between the local tax rates.
Rulings
1) Taxpayer is a provider of a nontaxable service and is not required to collect sales tax on the “sale” of the tokens
to the Locations.
2) Taxpayer owes tax on its purchases of tangible personal property used in providing its services, including the
machine, tokens, and prizes. When such property is purchased from an out-of-state without payment of Georgia
sales tax, Taxpayer owes Georgia use tax when the property is delivered to and stored by Taxpayer in Georgia.
The opinions expressed in this ruling are based upon the information contained in your request and limited to the
specific transactions, facts, circumstances, and taxpayer in question. Should the circumstances regarding the
transactions change or differ materially from those represented, this ruling may become invalid. In addition,
subsequent statutory or administrative rule changes or judicial interpretations of the statutes or rules upon which this
ruling is based may subject similar future transactions to different tax treatment than that expressed in this ruling.

7

If the item was purchased outside Georgia and used outside Georgia for more than six months, the owner of the
property is then liable for tax at the rate of four percent of the cost price or fair market value of the property, whichever
is less. O.C.G.A. § 48-8-30(c)(2).
8
O.C.G.A. § 48-8-30(c)(3).
9
O.C.G.A. §§ 48-8-1, -80, -100, -110, -140, -200, -240.
10
O.C.G.A. §§ 48-8-30(c)(3).
11
Ga. Comp. R. & Regs. 560-12-1-.14(7)(d).