When an auction house gives a winning 'irrevocable bidder' a negotiated fee that reduces what they pay, does that reduce the sales tax due on the item?

Plain-English summary

An auction house sometimes guarantees a consignor a minimum sale price, then lines up an "irrevocable bidder" (IB) — a third party who agrees in advance to buy the item at a set amount if no one bids higher. As an incentive, the auction house pays the IB a negotiated "Fee." When the IB wins, the auction house applies that fee to reduce what the IB has to pay. The auction house asked: does that fee reduce the sales tax on the item? The Department said no.

Sales tax is imposed on the "receipt" from a retail sale (Tax Law § 1105(a)), and "receipt" is defined as the full sale price "without any deduction for expenses or early payment discounts," including "any amount for which credit is allowed by the vendor to the purchaser" (Tax Law § 1101(b)(3)). For an auctioned item, the receipt is the hammer price plus the buyer's and overhead premiums.

The key point: the IB's fee is the auction house's own expense — an incentive it pays out of pocket to secure a backstop bid. The auction house does not reduce the hammer price, does not reduce what it pays the consignor/owner, and gets no reimbursement from the owner; it simply absorbs the cost of the fee and credits it against the IB's bill. Because the taxable receipt can't be reduced by the vendor's own expenses or by credits the vendor extends to the buyer (Tax Law § 1101(b)(3); 20 NYCRR 526.5(e)), the fee is not excludable. Sales tax is due on the full price the IB agreed to pay (the "Total Purchase Price"), before the fee credit.

What this means for you

Auction houses and auctioneers

A rebate, incentive, or fee that you fund and credit against a buyer's bill does not shrink the sales-tax base. Tax is on the full hammer price plus your premiums. This is true even when you call it a "payment reduction" — what matters is that it's your cost, not a genuine reduction in the agreed sale price. Auctioneers and consignees are vendors and must collect tax on the full receipt (20 NYCRR 526.10(a)(1)(i)).

Sellers offering buyer incentives generally

The principle reaches beyond auctions: vendor-funded credits, incentives, and most discounts the seller absorbs are not deductible from the taxable receipt. A true price reduction agreed between buyer and seller (reflected in a lower sale price) is different from the seller paying a cost and crediting it to the buyer — only the former changes the price. Early-payment discounts are expressly non-deductible.

Accountants and tax professionals

The analysis is a straight application of the § 1101(b)(3) "receipt" definition: no deduction for the vendor's expenses or for credit the vendor allows the purchaser. The IB fee is a Petitioner expense (20 NYCRR 526.5(e)), so the taxable base is the Total Purchase Price (hammer + buyer's + overhead premiums) without reduction. Note the consignment/agency framing (TSB-A-20(39)S; TSB-H-81(27)S) establishing the auctioneer as the vendor.

Common questions

Q: If a buyer pays less, why is tax calculated on more?
A: Because the "less" comes from the auction house crediting its own incentive fee against the bill, not from a lower sale price. Sales tax is on the full receipt (hammer price plus premiums), and the law allows no deduction for the vendor's expenses or for credit it extends to the buyer.

Q: Are auction buyer's premiums taxable?
A: Yes. The buyer's premium and overhead premium are part of the receipt — the sales price of the item — and are included in the taxable amount.

Q: Is any discount deductible from sales tax?
A: A genuine reduction in the agreed sale price between buyer and seller lowers the price the tax applies to. But discounts/credits the vendor funds and absorbs, and early-payment discounts, are not deductible from the taxable receipt.

Q: Can my auction business rely on this opinion?
A: Not as binding. A TSB-A advisory opinion binds the Department only as to the petitioner and the exact facts described. It shows the Department's reasoning; confirm against your own facts.

Citations and references

New York Tax Law and regulations:
- Tax Law § 1105(a) — sales tax on receipts from retail sales of tangible personal property
- Tax Law § 1101(b)(3) — definition of "receipt": full sale price, no deduction for expenses or early-payment discounts, includes credit allowed by the vendor
- 20 NYCRR 526.5(e) — a vendor's own expense is not a reduction in taxable receipt
- 20 NYCRR 526.10(a)(1)(i) — auctioneers/consignees are vendors

Prior guidance cited:
- TSB-A-20(39)S, quoting TSB-H-81(27)S — consignment as an agency relationship making the auctioneer the vendor

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao.htm
• Opinion: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales/24-5s.htm
• Printer-friendly PDF: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a24-5s.pdf

Original ruling text

Sales Tax
June 27, 2024
Office of Counsel

The Department of Taxation and Finance received a Petition for Advisory Opinion from [ redacted ] (“Petitioner”). Petitioner asks whether a payment reduction granted by an auction house to a purchaser placing a successful irrevocable bid on an item is excludable from the item’s sale price for sales tax purposes. We conclude that the payment reduction offered by Petitioner to an irrevocable bidder is not excludable from the receipt subject to sales tax.

Facts

Petitioner operates an auction business that sells various items of tangible personal property by live and/or online bidding. The highest bid for any auctioned item earns the right and obligation to purchase the item. Petitioner handles the resulting sale and transfer of the item and collects the sale proceeds and applicable sales tax. 

Generally, items sold at auction have been consigned to Petitioner. In some cases, Petitioner guarantees the owner that the item will sell for a minimum amount. Petitioner may solicit an undisclosed third-party buyer to submit an “irrevocable order bid” for the item. This third-party buyer, known as an “irrevocable bidder” (IB), enters into an agreement with Petitioner to place an irrevocable bid on the item for a specific amount, and agrees to buy the item for that amount if no higher bid is made at auction. The IB may also bid higher if bidding exceeds the irrevocable bid amount. The existence of an irrevocable bid is announced at the auction, but the bid amount remains secret.

The payment due to Petitioner includes the “hammer price” (the amount of the successful bid) plus a buyer’s premium and overhead premium charged by Petitioner, as well as the applicable sales tax. If the IB is the winning bidder, Petitioner applies a negotiated “Fee” toward the total amount due, either as a flat dollar amount or as a percentage of the amount that the hammer price exceeds the guarantee to the owner. If the IB is not the successful bidder, the IB is still entitled to a fee from Petitioner, which is frequently structured as a percentage of the buyer’s premium, plus a percentage of the amount that the hammer price exceeded the amount guaranteed to the item’s owner. In either situation, Petitioner does not receive any reimbursement or other consideration from the owner of the item to cover Petitioner’s cost of the fee. The fee is intended to be an incentive for the IB to bid on the item. All sales made through Petitioner may be subject to a commission payable by the owner of the consigned item. 

Analysis

Sales tax is imposed on “the receipts from every retail sale of tangible personal property….” Tax Law § 1105(a). “Receipt” is defined as:

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. Tax Law § 1101(b)(3).

Auctioneers are vendors for sales tax purposes. See 20 NYCRR 526.10(a)(1)(i) Example 1. Petitioner is a vendor when it sells property on its own account or auctions items that have been consigned to it for sale. A consignment is the “creation of an agency relationship wherein the consignee becomes the agent of consignor for the purpose of making sales of the consignor’s property, and is obligated to account to the consignor for the proceeds.” TSB-A-20(39)S quoting TSB-H-81(27)S.

When Petitioner sells an item at auction, it collects the hammer price, plus buyer’s and overhead premiums from the winning bidder. The hammer price and any premiums charged to the purchaser are included in receipt subject to sales tax, because they constitute the sales price for the auctioned item. Petitioner then remits the hammer price, minus its commission, to the owner. If the IB is the winning bidder, it agrees to pay Petitioner the hammer price plus the buyer’s and overhead premiums, and any applicable sales or use taxes on those amounts, which the agreement defines as the “Total Purchase Price.” Petitioner does not reduce the Total Purchase Price due from the IB, but instead applies a negotiated “Fee” to reduce the IB’s payment obligation. Petitioner does not reduce the amount paid to the owner, but rather agrees to cover any difference between the amount due to the owner and the IB’s fee in exchange for the IB’s agreement to purchase the item for a specified minimum bid. The IB’s fee is an expense borne by Petitioner and does not represent a reduction in taxable receipt. See 20 NYCRR 526.5(e). Therefore, we conclude that the fee offered by Petitioner to a successful IB is not excludable from the receipt subject to sales tax.

DATED: June 27, 2024

Mary Ellen Ladouceur
Principal Attorney

Note: An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts set forth therein and is binding on the Department only with respect to the person or entity to whom it is issued and only if the person or entity fully and accurately describes all relevant facts. An Advisory Opinion is based on the law, regulations, and Department policies in effect as of the date the Opinion is issued or for the specific time period at issue in the Opinion. The information provided in this document does not cover every situation and is not intended to replace the law or change its meaning.