When a home-party hostess redeems earned credits for a direct-sales company's merchandise, is that a taxable sale even though no cash changes hands?

Plain-English summary

Petra Fashions, Inc., a direct-sales company that operates home parties, gave its hostesses credits — redeemable only for Petra's own line of merchandise — as an incentive to host a party. It asked whether merchandise a hostess obtains by redeeming those credits is subject to sales tax.

The Department held that it is a taxable retail sale:

• A "sale" doesn't require cash. Under § 1101(b)(5), a sale is "any transfer of title or possession… exchange or barter… for a consideration." The credit is the mechanism, and the hostess's consideration is conducting the party at which Petra's products are sold.
• The taxable "receipt" can be value received other than in money. Under § 1101(b)(3), a receipt is "the amount of the sale price of any property… valued in money, whether received in money or otherwise." So the absence of a cash payment does not remove the transaction from tax.
• It is a retail sale of tangible personal property. Transferring the merchandise for that consideration is a retail sale under § 1101(b)(4), taxed under § 1105(a).
• Timing — tax is due when the credit is used. Sales tax is a "transaction tax"; liability arises at the time of the transaction, so the tax "becomes due at the time of transfer of property" — i.e., when the hostess uses the credit to obtain the merchandise, not when she earns it.
• The Department relied on its prior rulings New York Air Brake, TSB-H-80(104)S, and Peat, Marwick, Mitchell & Co., TSB-A-86(41)S.

What this means for you

"Free" merchandise earned through a rewards or hostess program is generally taxable

If a customer or host obtains goods by redeeming credits, points, or rewards they earned by doing something of value (hosting a party, generating sales), New York treats that as a barter sale for consideration — a taxable retail sale — even though no money changes hands. Direct-sales and party-plan companies should collect (or account for) tax on hostess-reward merchandise.

The tax attaches when the reward is redeemed, not when it is earned

Because sales tax is a transaction tax, the taxable event is the transfer of the merchandise. Track and account for tax at redemption.

Value the sale in money even when paid in kind

The taxable base is the sale price valued in money, whether or not money is actually received. Practically, that means measuring the merchandise's price and applying tax to it, rather than treating a non-cash transaction as tax-free.

Common questions

Q: A hostess earns credits and swaps them for our products. Is that taxable if she pays no cash?
A: Yes. It is a barter sale for consideration (hosting the party). Under §§ 1101(b)(3)–(5) and 1105(a) it is a taxable retail sale.

Q: When is the tax due?
A: When the hostess uses the credit to obtain the merchandise — sales tax is a transaction tax and attaches at the transfer of property.

Q: How do we value the sale for tax purposes?
A: By the sale price of the merchandise valued in money, whether or not the consideration is received in money (§ 1101(b)(3)).

Citations and references

Statutes and prior opinions:

• Tax Law § 1105(a) — tax on receipts from every retail sale of tangible personal property
• Tax Law § 1101(b)(3) — "receipt" is the sale price valued in money, whether received in money or otherwise
• Tax Law § 1101(b)(4) — definition of "retail sale"
• Tax Law § 1101(b)(5) — "sale" includes transfer, exchange, or barter for a consideration
• New York Air Brake, TSB-H-80(104)S; Peat, Marwick, Mitchell & Co., TSB-A-86(41)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a91_51s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (51)S
Sales Tax
July 22, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S910416A

On April 16, 1991 a Petition for Advisory Opinion was received from Petra Fashions, Inc.,
35 Cherry Hill Park, Danvers, MA 01923.
The issue raised by Petitioner, Petra Fashions, Inc., is whether merchandise that is obtained
through credits that are given to individuals that hold home merchandise parties are subject to sales
tax.
Petitioner is a direct sales company that operates home parties. As an incentive to hold a
party, Petitioner offers credits to its hostesses that can only be used to obtain Petitioner's line of
merchandise.
Section 1101(b)(3) of the Tax Law refers to a receipt as "The amount of the sale price of any
property. . .valued in money, whether received in money or otherwise. . . ."
Section 1101(b)(4) defines a retail sale as "A sale of tangible personal property to any person
for any purpose, other than (A) for resale. . . ."
Section 1101(b)(5) defines a sale as "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. . ."
Section 1105(a) imposes a sales tax on "The receipts from every retail sale of tangible
personal property, except as otherwise provided in this article."
The transfer of a credit to obtain merchandise for a consideration is a sale of tangible personal
property within the meaning of the above noted sections of the Tax Law. Section 1105(a) of the Tax
Law imposes a tax on sales at retail of tangible personal property. The amount subject to the tax is
the receipt as defined in Section 1101(b)(3) of the Tax Law. The sales tax is a "transaction tax",
liability for the tax occurring at the time of the transaction. The tax therefore becomes due at the time
of transfer of property.
Accordingly, the transfer of a credit to obtain merchandise from Petitioner to one of its
hostesses for conducting a home party at which Petitioner's products are sold, is a retail sale within
the meaning and intent of Sections 1101(b)(3), 1101(b)(4) and 1101(b)(5) of the Tax Law. The use
of the credit is subject to the sales tax at the time the hostess uses the credit to obtain

-2­
TSB-A-91 (51)S
Sales Tax
July 22, 1991

merchandise. New York Air Brake, Adv Op, St Tx Comm, June 12, 1980 TSB-H-80(104)S; Peat
Marwick, Mitchell Co , Adv Op, St Tx Comm, October 20, 1986, TSB-A-86(41)S.

DATED: July 22, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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