When a bank gives a depositor a 'gift' for buying a CD and builds the gift's value into a lower interest yield, is that a taxable sale?

Plain-English summary

A commercial bank planned a promotional "gift" program. A depositor who bought a certificate of deposit would receive a gift; the depositor chose from value categories tied to the dollar amount and maturity of the CD. All the gifts were tangible personal property and none were nominal in value. Crucially, the bank folded the cost of the gift into the CD's yield — the depositor accepted a somewhat lower interest rate in exchange for the gift, so the two together produced a competitive overall yield.

The bank argued (through Peat Marwick) either that it was simply the retail purchaser of promotional items under 20 NYCRR 526.6(c)(4), or that the gifts lost their character as tangible personal property once transferred (becoming "interest").

The Department held the gift transfers are taxable sales.

• There is real consideration. The promotional-giveaway rule (526.6(c)(4)) applies only where no consideration, or only a nominal amount, is given. Here the bank itself said the gifts were not nominal and that their value was factored into the yield — the depositor gives up interest roughly equal to the gift's value to get it.
• That makes it a "sale." Under § 1101(b)(5), a sale is any transfer of property for a consideration, and consideration (526.7(b)) includes any charge or value the customer must give. Forgoing interest to receive the gift is consideration, so the transfer is a sale.
• A gift doesn't become intangible. The depositor's willingness to accept less interest does not change the gifts from tangible personal property into something intangible.
• Result and mechanics. The transfer is subject to sales and use tax, measured by the amount of interest given up in exchange for the gift. The bank may buy the gifts tax-free for resale (Form ST-120) but must collect tax when it transfers them to depositors.

What this means for you

A "free gift" that the customer actually pays for is a taxable sale. New York's promotional-giveaway rule only shelters items given away for no (or nominal) consideration. If the customer gives up something of value — here, interest — to get the item, you've made a taxable sale.

Look at the economics, not the label. The bank called the items "gifts" and pointed to a regulation about premiums, but the Department followed the money: the gift's value was built into the yield, so it was bargained-for consideration. Structuring a giveaway as part of the pricing can convert it into a sale.

If you're reselling the premium, use a resale certificate — then collect on transfer. When a giveaway is really a sale, buy the items tax-free with Form ST-120 and charge tax when you hand them to the customer, measured by the consideration the customer gives.

Common questions

Q: We give customers a premium for buying our product. Is it taxable?
A: If the premium is genuinely free — no or only nominal consideration — you're the taxable retail buyer and the giveaway isn't a sale to the customer. But if the customer pays for it (even indirectly, like accepting a lower yield), the transfer is a taxable sale.

Q: The gift's value was baked into our pricing. Does that matter?
A: Yes — that's exactly what made it taxable here. Building the item's value into the deal is consideration under § 1101(b)(5), so the transfer is a sale rather than a promotional giveaway.

Q: How is the tax measured?
A: By the consideration the customer gives for the item — here, the amount of interest the depositor forgoes in exchange for the gift.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(5) — defines "sale" as any transfer of title or possession for a consideration
• 20 NYCRR 526.6(c)(4) — property purchased and given away without charge (or for a minimal charge) for promotion is a retail sale to the buyer, not a sale to the recipient; a resale certificate may not be used for such purchases
• 20 NYCRR 526.7(b) — "consideration" includes monetary consideration, exchange, barter, assumption of liabilities, fees, and any other charge the purchaser must pay
• Form ST-120 (Resale Certificate) — lets the bank buy the gifts tax-free where it will collect tax on transfer

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a86_41s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86(41)S
Sales Tax
October 20, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S860528A

On May 28, 1986, a Petition for Advisory Opinion was received from Peat, Marwick,
Mitchell Co., 74 North Pearl Street, Albany, New York 12207.
The issue raised is whether a bank or its depositors are liable for sales tax on certain
promotional items.
Petitioner describes the bank's transactions as follows:
A commercial bank is contemplating a promotional "gift" program. Under such program, depositors
investing in certificates of deposit will receive a gift shortly after depositing funds. The gifts will
be chosen by the depositor from various distinct categories. Within each category, all the gifts will
be of relatively equal monetary value. The categories will consist of a range of gift values, e.g. gifts
in the lowest value category will be of relatively less value than gifts in the highest category. The
category of gifts from which the depositor might choose will be dependent upon both the dollar value
of the certificate of deposit and the maturity date of the deposit. For purposes of example only,
deposits of $1,000 with a maturity of three years (here presumed to be the lowest dollar amount and
shortest maturity period) would receive gifts from the lowest monetary value category while deposits
of $100,000 with a maturity of seven years (here presumed to be the highest dollar amount and
longest maturity period) would receive gifts from the highest monetary value category. Deposits
between those dollar amounts and maturity dates would receive gifts from categories falling between
the highest and lowest.
All of the gifts are tangible personal property. Further, none of the gifts under this program are
considered to be nominal in value.
In determining the yield to depositors on such certificates of deposits, the bank will look at two
elements. First, the value of the gifts (i.e., the bank's purchase price) will be factored into the yield
calculation. Second, the actual cash interest earned on the certificate will be added to the value of
the gift. These two elements, in combination, will represent the overall yield on the instrument. The
bank will adjust its interest rate offered on the certificate so that the overall yield will be competitive
in its geographic area.
For purposes of Federal income tax (and therefore for the Article 32 NYS Franchise Tax) the value
of the gifts will be treated as prepaid interest under Internal Revenue Code 461(g). As such, the
purchase price of the gift will not be deductible in full in the year in which it is transferred to the
depositor. Rather, the cost of the gift will be capitalized and amortized over the life of the deposit
and treated as interest expense. It is contemplated that should the depositor cash-in the certificate
of deposit before its maturity date, that depositor will forfeit accrued but unpaid interest and possibly
principal (if accrued but unpaid interest is insufficient) for the applicable prorated portion of the
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

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

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Sales Tax
October 20, 1986
bank's cost of the gift. This pro rata portion would decrease over the life of the certificate.
The proposed program will be administered with the assistance of an unrelated, third-party vendor.
The vendor will provide certain necessary support services relative to the administration of the
program including supplying the gifts, shipping gifts to the depositors, etc. In exchange for services
and product received the bank will pay to the vendor a price closely approximating the retail value
of the items. There is not expected to be any discount available to the bank.
Petitioner asserts that the bank should be considered the retail purchaser of the gift items.
In support of its assertion, Petitioner relies on Sales Tax Regulation 526.6(c)(4)(i) and Example 2
of such regulation. In the alternative, Petitioner contends that the "gifts" lose their classification as
tangible personal property upon transfer to the depositor since the "gift" is interest income to the
depositor and interest expense to the bank.
Law and Regulations
Section 526.6(c)(4) of the regulations of the State Tax Commission provides:
(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.

(iii)

A resale certificate may not be used by the person making the
purchases described in subparagraphs (i) and (ii) of this paragraph for
such purchases:

Example 2:

A bank has purchased premiums which will be given to
depositors upon the opening of an account in a new branch.
As the bank is not in the business of selling such items, and
as it in fact does not sell such items to its customers, the sale
to the bank of such items of tangible personal property is a
retail sale which is taxable at the time of purchase. The bank
has not purchased these items for resale. 20 NYCRR 526.6.

Section 1101(b)(5) of the Tax Law provides:

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Sales Tax
October 20, 1986
(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.

Section 526.7(b) of the regulations of the State Tax Commission provides:
(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. 20 NYCRR 526.7.
Conclusions

Regulation section 526.6(c)(4) is intended to show the effect of the Tax Law upon
transactions where either no consideration is given or a minimal amount of consideration (not
reflective of the value of the item) is given in return for a specified item. Such is not the case here.
Petitioner states that "[n]one of the gifts under this program are considered nominal in value"; "the
value of the gifts will be factored into the yield calculation," and "the value of the gift, will be added
to the actual cash interest earned on the certificate". Petitioner also indicates that the value of the
gifts have a relationship to the amount deposited and its maturity value.
Petitioner's reliance on regulation 526.6(c)(4) and Example 2 of that regulation is misplaced.
Example 2 does not address the situations where interest is forgiven in an amount approximately
equal to the value of the gift. Rather, the example addresses the simple situation where a gift is
given without consideration (other than the opening of the bank account) and there is no reduction
in the amount of interest that a depositor earns.
Petitioner states that all gifts are tangible personal property. The fact that the depositor will
accept a reduced amount of interest in exchange for a gift cannot change the character of tangible
personal property to that of an intangible.
Accordingly, the transfer of a "gift" in exchange for the forbearance of interest is a sale within
the meaning and intent of 1101(b)(5) of the Tax Law and is subject to sales and use tax. The amount
subject to tax is the actual amount of interest given in exchange for the "gift". It should be noted that

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Sales Tax
October 20, 1986
the bank may purchase the "gifts" without payment of sales tax by providing to its supplier a properly
completed resale certificate (form ST-120). However, the bank must collect sales and use tax upon
transferring the "gifts" to its customers.

DATED: October 20, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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