Is a timely-delivery bonus a manufacturer receives from the end customer taxable when the customer bought the goods from a separate dealer?

Plain-English summary

A furniture buyer (I.N.A.) ordered a large amount of furniture from Bestype Office Furniture, Inc., a franchised dealer of the manufacturer Helikon Furniture Co., Inc. Worried about timely delivery, I.N.A. made a separate deal directly with Helikon: Helikon would pay I.N.A. a penalty (20% of the designer cost) for a late delivery, or receive an equal bonus from I.N.A. for an on-time delivery. Delivery was on time and Helikon collected the 20% bonus. Helikon asked whether that bonus is subject to sales tax.

The Department held the bonus is not a taxable receipt.

• The dealer — not the manufacturer — was the "vendor." Under § 1101(b)(8)(i), Bestype was the vendor of the furniture to I.N.A. The price I.N.A. agreed to and paid Bestype is the receipt subject to sales tax under § 1105(a). Helikon was not the vendor to I.N.A., and no sale of property occurred between Helikon and I.N.A.
• The bonus didn't change the taxable receipt. Although the bonus in a sense increased I.N.A.'s overall cost of the furniture, it did not increase the taxable receipts received by Bestype. The Department noted the mirror image: a late-delivery penalty would not have reduced Bestype's taxable receipts either (citing Future Motors v. State Tax Commission).
• Result. Because the bonus was not part of any sale between Helikon and I.N.A. and didn't alter the dealer's taxable receipts, the bonus is not subject to sales tax.

What this means for you

Sales tax attaches to the sale between the vendor and its customer — side payments to third parties aren't automatically part of it. Here the taxable transaction was the dealer's sale to the buyer. A separate performance incentive the buyer paid to the manufacturer — who wasn't selling anything to the buyer — sits outside that taxed sale.

A bonus or penalty tied to delivery timing generally doesn't move the taxable receipt. Just as an on-time bonus paid to a non-vendor isn't a taxable receipt, a late-delivery penalty wouldn't shrink the vendor's taxable receipts. The tax follows the agreed price of the actual sale, not later adjustments made outside it.

Identify who the "vendor" is before deciding what's taxable. When goods move through a manufacturer, a dealer, and an end customer, the vendor is the party actually selling to the customer. Payments flowing to or from other parties in the chain need their own analysis and are not presumed to be taxable receipts of that sale.

Common questions

Q: We're a manufacturer and got a bonus from the end customer for delivering on time to our dealer. Is it taxable?
A: On facts like these, no. The dealer — not you — was the vendor to the customer, and no sale happened between you and the customer, so the bonus isn't a taxable receipt.

Q: Did the bonus increase the sales tax the customer owed on the furniture?
A: No. It increased the customer's total outlay but didn't increase the dealer's taxable receipts, which are measured by the price the customer paid the dealer.

Q: Would a late-delivery penalty have reduced the tax?
A: No. The Department said a penalty likewise would not have reduced the vendor's taxable receipts — the tax follows the agreed sale price, not these separate adjustments.

Citations and references

Statutes:

• Tax Law § 1105(a) — tax on receipts from retail sales of tangible personal property
• Tax Law § 1101(b)(8)(i) — definition of "vendor"

Other authorities referenced:

• Future Motors v. State Tax Commission, Sup. Ct., Spec. Term, Albany County, Nov. 27, 1978

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a83_39s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-83(39)S
Sales Tax
October 11, 1983

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S830324A

On March 24, 1983 a Petition for Advisory Opinion was received from Helikon Furniture
Co., Inc., 607 Norwich Avenue, Taftville, Connecticut 06380.
The issue is whether a bonus paid to a wholesaler by a retail customer for prompt delivery
to the intermediary retailer is subject to sales tax.
An order for a substantial amount of furniture was placed by the Insurance Company of North
America (hereinafter "I.N.A.") with Bestype Office Furniture, Inc., a franchised dealer for Petitioner.
The details of the order and the price for the furniture were agreed upon by I.N.A. and Bestype.
I.N.A., concerned about timely delivery of the merchandise, contacted Petitioner (Helikon),
which was Bestype's supplier. A separate agreement was negotiated directly between I.N.A. and
Helikon whereby a penalty of 20% of the designer cost of the furniture would be paid to I.N.A. by
Helikon in the event the merchandise was not delivered to Bestype on a timely basis. An equivalent
bonus was payable by I.N.A. to Helikon if delivery was made on time. The merchandise was in fact
delivered on time and Petitioner received the 20% bonus from I.N.A.
Based on the information submitted, Bestype Office Furniture, Inc. was the vendor of the
furniture, within the meaning of section 1101(b)(8)(i) of the Tax Law, with respect to I.N.A., and
the price of the furniture agreed upon between I.N.A. and Bestype, and actually paid by the former
to the latter, constituted the receipts subject to the sales tax imposed under section 1105(a) of the Tax
Law. Petitioner, on the other hand, was not the vendor with respect to I.N.A., and no sale of property
occurred between the former and the latter.
Although the bonus paid by I.N.A. to Petitioner did in a sense increase the cost of the
furniture to I.N.A., it did not increase the taxable receipts received by Bestype. A similar conclusion
would have applied had the merchandise not been delivered on time. That is, the penalty payment
would not have reduced the receipts subject to tax. See Future Motors v. State Tax Commission,
Sup. Ct., Spec. Term, Albany County, November 27, 1978. Accordingly, the bonus paid by I.N.A.
to Petitioner did not constitute a receipt subject to tax.

DATED: September 13, 1983

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

s/FRANK J. PUCCIA
Director
Technical Services Bureau

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR