When a school fundraising company gives student sellers 'prizes' as an incentive for higher sales volume — and in exchange the school keeps a smaller percentage of sales proceeds than it otherwise would — does the company owe sales tax on its own purchase of those prizes?

Plain-English summary

Institutional Financing Services sells its products through schools, PTAs, and similar "booster" groups running fundraising drives; the school/group keeps a percentage of sales proceeds and remits the rest to the company. One optional feature is an "award incentive program," where students or sponsors earn tiered prizes based on how much they personally sell (e.g., one-to-five items sold earns a Category A prize, six-to-ten earns Category B). Crucially, schools that opt into the incentive program keep a smaller percentage of gross sales proceeds than schools that don't — for example, 50% without prizes versus 30-45% with prizes, depending on the program's richness. The company asked whether it owes sales tax on purchasing these prizes, on the theory the purchase is really "for resale."

The Department agreed the prizes are purchased for resale, applying reasoning from two prior cases involving direct-marketing "reward credits" given to sales reps (House of Lloyd and Popular Club Plan): those cases established that transferring merchandise to people who perform sales services on a company's behalf, in exchange for that value, is a barter — an exchange of property for services — which counts as a taxable "sale" under New York's broad definition, just running in the opposite direction from a typical purchase. Here, the school or school group is effectively "paying" for the prizes by accepting a lower percentage of proceeds than it otherwise would; the Department worked a numeric example showing a 10-percentage-point reduction on $1,000 of sales (from 50% to 40%) equals a $100 "payment" for the prizes. Since the school/group is deemed to be buying the prizes (in exchange for reduced proceeds) and the company is deemed to be selling them, the company's own purchase of the prizes qualifies as a tax-free purchase for resale — and critically, transferring the prizes to the school is a genuine sale, not a "promotional" giveaway that would otherwise make the company's original purchase taxable.

The Department was careful to limit the scope of its answer: it did not address whether the school or school group itself owes tax on receiving/distributing the prizes, nor whether the school is a purchaser or seller of the company's core fundraising products, nor the taxability of the underlying product sales themselves.

What this means for you

Fundraising and incentive-program companies

If your "prize" or "reward" program is structured so that participants effectively give up something of value (like a lower commission or proceeds share) in exchange for the reward, that trade can be treated as a real barter sale — letting you buy the rewards tax-free for resale rather than paying tax on them as a promotional giveaway.

Businesses running similar reward/incentive structures (direct sales, referral programs, etc.)

The key fact pattern here — reward tied to and funded by a reduction in what the recipient would otherwise be paid/keep — is what converts a "gift" into a taxable barter sale. A reward given with no such quid pro quo (e.g., handed out regardless of any adjustment elsewhere) is more likely to be treated as a nontaxable promotional giveaway, which is taxed differently (to the giver, not as a resale).

Accountants and tax professionals

This opinion is a clean extension of the barter-transaction doctrine from House of Lloyd/Popular Club Plan (direct-marketer reward credits) to a school-fundraising incentive structure — useful precedent for any client running a similar "richer reward = lower cut" program.

Common questions

Q: Are promotional prizes or gifts always taxable to the company giving them away?
A: Generally yes, if they're given away for free or for a token amount — but if the recipient is effectively paying for the prize (here, by accepting a smaller share of proceeds), the transaction is a real sale, and the giver can buy the prize tax-free for resale instead.

Q: Does this ruling say whether the school owes tax on the prizes it receives?
A: No — the Department expressly declined to address that question, along with whether the school is a purchaser/seller of the company's products at all.

Q: What made this a "barter" rather than a gift?
A: The measurable, quantifiable reduction in the percentage of sales proceeds the school/group keeps when it opts into the prize program — that reduction is treated as consideration paid for the prizes.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(3) (receipt), § 1101(b)(4)(i) (retail sale; resale exclusion), § 1101(b)(5) (sale, selling, purchase), § 1101(b)(7) (use, incl. promotional distribution), § 1101(b)(12) (promotional materials definition)
• 20 NYCRR § 526.6(c) (resale exclusion; promotional-item retail-sale rule)
• 20 NYCRR § 526.7(b) (consideration), (d) (barters/exchanges)

Prior rulings referenced:

• Matter of House of Lloyd, Inc., TSB-D-98(14)S
• Matter of Popular Club Plan, Inc., TSB-D-95(23)S
• Matter of J.C. Penney Co. Inc., TSB-D-89(25)S
• Jeffrey J. Coren, CPA, P.C., TSB-A-99(8)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2003.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a03_29s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(29)S
Sales Tax
July 16, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S020708A

On July 8, 2002, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Institutional Financing Services, 5100 Park Road, Benicia, CA 94510. Petitioner,
Institutional Financing Services, provided additional information pertaining to the Petition on
July 23, 2002.
The issue raised by Petitioner is whether its purchases of prizes included as part of its
fund-raising incentive programs qualify for exemption from sales and compensating use taxes as
purchases for resale.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner sells its products through schools, school or student groups (such as parent-teacher
associations), or booster groups (hereinafter “school or school groups”). The schools or school
groups participate in these sales for fund-raising purposes. The schools or school groups keep a
percentage of the sales proceeds and remit the balance to Petitioner. One of the options Petitioner
offers the schools or school groups is the option to provide prizes to the students or sponsors as part
of an “award incentive program.” The prizes are the incentives that are expected to increase sales
and, therefore, revenues for the school or school group. The prizes are provided to the students or
sponsors based on the quantity of their sales. For example, students who sell one-to-five items
might choose prizes from category A, while students who sell six-to-ten items would choose from
category B, etc.
Petitioner adjusts the cost of its programs to schools or school groups based on the desired
profit level of the school or school group. The percentage of sales proceeds that a school or school
group is entitled to keep is lower for a school or school group who chooses the award incentive
program than for a school or school group choosing no award incentive program. The higher the
percentage of sales proceeds that a school or school group chooses to keep, the lower the award
incentive program, i.e., number and value of prizes the school or school group receives. For
example, a school or school group may be allowed to keep 50 percent of gross sales, with the
remaining 50 percent going to Petitioner, if it does not participate in the award incentive program,
or may be allowed to keep 30, 35, 40, or 45 percent of gross sales in accord with a suitable award
incentive program.
Applicable Law and Regulations
Section 1101(b) of the Tax Law provides, in part:

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When used in this article for the purposes of the taxes imposed by
subdivisions (a), (b), (c) and (d) of section eleven hundred five and by section eleven
hundred ten, the following terms shall mean:
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(3) Receipt. The amount of the sale price of any property and the charge for
any service taxable under this article . . . valued in money, whether received in
money or otherwise, including any amount for which credit is allowed by the vendor
to the purchaser, without any deduction for expenses or early payment discounts and
also including any charges by the vendor to the purchaser for shipping or
delivery. . . . (Emphasis added)
(4) Retail sale. (i) A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such. . . .
(5) Sale, selling or purchase. Any transfer of title or possession or both,
exchange or barter, rental, lease or license to use or consume . . . conditional or
otherwise, in any manner or by any means whatsoever for a consideration, or any
agreement therefor, including the rendering of any service, taxable under this article,
for a consideration or any agreement therefor.
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(7) Use. The exercise of any right or power over tangible personal property
or over any of the services which are subject to tax under section eleven hundred ten
of this article or pursuant to the authority of article twenty-nine of this chapter, by
the purchaser thereof, and includes, but is not limited to . . . any consumption of such
property or of any such service subject to tax under such section eleven hundred ten
or pursuant to the authority of such article twenty-nine. Without limiting the
foregoing, use also shall include the distribution of only tangible personal property,
such as promotional materials, or of any such service subject to tax under such
section eleven hundred ten or pursuant to the authority of such article twenty-nine.
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(12) Promotional materials. Any advertising literature, other related tangible
personal property (whether or not personalized by the recipient’s name or other
information uniquely related to such person) and envelopes used exclusively to
deliver the same. Such other related tangible personal property includes, but is not
limited to, free gifts, complimentary maps or other items given to travel club
members, applications, order forms and return envelopes with respect to such

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advertising literature, annual reports, prospectuses, promotional displays and
Cheshire labels but does not include invoices, statements and the like. . . .
Section 1105(a) of the Tax Law imposes a tax on “[t]he receipts from every retail sale of
tangible personal property, except as otherwise provided in this article.”
Section 1110(a) of the Tax Law provides, in part:
Except to the extent that property or services have already been or will be
subject to the sales tax under this article, there is hereby imposed on every person a
use tax for the use within this state . . . except as otherwise exempted under this
article, (A) of any tangible personal property purchased at retail. . . .
Section 526.6(c) of the Sales and Use Tax Regulations provides, in part:
Resale exclusion. (1) Where a person, in the course of his business
operations, purchases tangible personal property or services which he intends to sell,
either in the form in which purchased, or as a component part of other property or
services, the property or services which he has purchased will be considered as
purchased for resale, and therefore not subject to tax until he has transferred the
property to his customer.
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(2) A sale for resale will be recognized only if the vendor receives a properly
completed resale certificate. . . .
(3) Receipts from the sale of property purchased under a resale certificate are
not subject to tax at the time of purchase by the person who will resell the property.
The receipts are subject to tax at the time of the retail sale.
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(4) (i) Tangible personal property which is purchased and given away without
charge, for promotion or advertising purposes is not purchased for resale. It is a
retail sale to the purchaser thereof, and is not a sale to the recipient of the property.
(ii) Tangible personal property which is purchased for promotional or
advertising purposes and sold for a minimal charge which does not reflect its true
cost, or which is not ordinarily sold by that person in the operation of his business,
is a retail sale to the purchaser thereof, and not a sale to the recipient of the property.
Section 526.7 of the Sales and Use Tax Regulations provides, in part:

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(b) Consideration. The term consideration includes monetary consideration,
exchange, barter, the rendering of any service, or any agreement therefor. Monetary
consideration includes assumption of liabilities, fees, rentals, royalties or any other
charge that a purchaser, lessee or licensee is required to pay.
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(d) Barters or exchanges. The transfer of tangible personal property or
services to a person in consideration for tangible personal property or services
received is a “sale” under the Tax Law.
Opinion
In Matter of House of Lloyd, Inc., Dec Tx App Trib, November 13, 1998, TSB-D-98(14)S
and Matter of Popular Club Plan, Inc., Dec Tx App Trib, May 11, 1995, TSB-D-95(23)S, it was
determined that the transfer of merchandise by direct marketing companies to “direct sellers” who
made the companies’ products available for sale to customers through parties and catalogs was an
exchange of tangible personal property for specific services performed, and constituted a barter
within the meaning of section 1101(b)(5) of the Tax Law. The issuance of the reward credits
(redeemable for merchandise) by the companies was a noncash form of compensation in exchange
for the direct sellers’ services rendered on the companies’ behalf.
Although Popular Club Plan, Inc., supra, involved a two-stage transaction where the reward
credits were first earned and later redeemed for merchandise, the essence of the transaction is the
same as the award incentive program Petitioner offers to schools or school groups. The schools or
school groups earn prizes by making sales. They solicit customers, transmit orders, collect money,
and submit payment to Petitioner. The prizes are items of value given to the schools or school
groups in exchange for these services. The consideration received by Petitioner for the prizes is an
amount equal to the reduction in the percentage of sales proceeds that goes to the school or school
group. The reduction in this percentage of sales proceeds is the equivalent of a payment by the
school or school group to Petitioner. For example, assume a school or school group would keep 50
percent of the proceeds from sales of Petitioner’s products if the school or school group did not
choose to receive prizes from Petitioner under an award incentive program, but the school or school
group would keep 40 percent of the proceeds if it chose to receive prizes from Petitioner. Assuming
that the school or school group sold $1,000 of Petitioner’s products, the reduction in the amount of
sales proceeds kept by the school or school group under the award incentive program would be $100
(i.e., the difference between $500 and $400). Petitioner in such case would be considered to have
sold the prizes to the school or school group for an amount of $100.
Accordingly, to the extent that the schools or school groups are bartering a part of the sales
proceeds to which they might otherwise have been entitled in exchange for receipt of the prizes, the

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schools or school groups are deemed to be purchasing and Petitioner is deemed to be selling the
prizes. Therefore, Petitioner is purchasing the prizes for resale and does not owe sales tax on such
purchases. See section 1101(b)(4)(i)(A) of the Tax Law.
The transfer of the prizes to the school or school group is a sale and does not constitute a
promotional use of such items within New York State by Petitioner. See Matter of J.C. Penney Co.
Inc., Dec Tx App Trib, April 27, 1989, TSB-D-89(25)S; Jeffrey J. Coren, CPA, P.C., Adv Op Comm
T&F, January 28, 1999, TSB-A-99(8)S.
This Opinion only addresses the taxability of Petitioner’s purchases of prizes as described
above, and makes no determination whether the purchases of the prizes by the schools or school
groups are subject to sales tax. This Opinion also does not address whether the schools or school
groups are purchasers or sellers of Petitioner’s products, or whether sales of the products by
Petitioner are to the actual consumer, and makes no determination whether sales of Petitioner’s
products are subject to tax.

DATED: July 16, 2003

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.