Can a monthly 'recurring credit' on a taxable service contract be subtracted from the amount subject to sales tax?

Plain-English summary

Planetarium Travels, Inc., a New York City travel agency, subscribes to American Airlines' SABRE computer reservation system -- a taxable package of goods and services on which American collects sales tax monthly. The contract gave the agency a $36,600 discount, delivered as sixty monthly "recurring credits" of $610 applied to each invoice. American had been collecting tax on the invoice amount after subtracting the credit. The agency asked whether the "recurring credits" are subject to sales tax.

The Department said the credit cannot be subtracted -- tax is due on the full charge:

• The credit wasn't a true discount. The agency earned the $610 credit only if it hit a booking target -- generating SABRE bookings that obligated third-party participants (airlines, hotels, rental-car companies) to pay booking fees to American. So the credit was really a third party paying part of the agency's obligation to American, not a price reduction.
• The taxable "receipt" includes credited amounts. Tax Law 1101(b)(3) defines the taxable receipt to include "any amount for which credit is allowed by the vendor to the purchaser," with no deduction for such credits. Because the recurring credit is such an amount, it is not deductible in computing the sales tax.

Result: sales tax is due on the full monthly charge, before the recurring credit.

What this means for you

Businesses receiving vendor "credits" or rebates

Not every line item labeled "credit" or "discount" reduces the taxable base. If the credit is funded by someone other than you -- a third party covering part of your bill -- New York generally treats the full amount as the taxable receipt, even though you pay less out of pocket.

Look at who really pays

The key fact here was that the credit flowed from third-party booking fees, not from the vendor simply charging you less. A genuine, unconditional price reduction by the vendor is treated differently from a third party subsidizing your purchase.

Vendors setting up incentive credits

If you build a credit that's contingent on customer activity that generates third-party payments to you, be careful: the Department may treat the pre-credit amount as the taxable receipt under section 1101(b)(3).

Common questions

Q: I actually paid less each month -- why is tax due on the higher amount?
A: Because the credit came from third-party booking fees paid to the vendor, not a true discount. Under section 1101(b)(3), amounts credited by the vendor are still part of the taxable receipt.

Q: What would count as a real discount that reduces tax?
A: An unconditional reduction in the vendor's price to you -- not a credit funded by third parties or contingent on generating payments from others.

Q: Does this mean the agency was undercharged tax before?
A: The opinion concludes tax should be computed on the amount including the recurring credits, i.e., the full charge before the credit.

Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner and the facts described. Treat it as guidance and confirm your own facts.

Citations and references

• Tax Law section 1101(b)(3) (definition of taxable receipt; includes amounts credited by the vendor)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a93_42s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (42)S
Sales Tax
July 13, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S930401C

On April 1, 1993 a Petition for Advisory Opinion was received from Planetarium Travels,
Inc., 108 W. 81st St., New York, New York 10024.
The issue raised by Petitioner, Planetarium Travels, Inc., is whether an item invoiced to
Petitioner as "recurring credits" is subject to sales tax.
Petitioner is engaged in the business of operating a travel agency in New York City. In order
to operate in the most efficient manner the Petitioner subscribes to a computer reservations system,
operated by American Airlines, Inc., (hereinafter American) through its SABRE Travel Information
Network division. SABRE allows a travel agency to sell tickets on a wide variety of airlines, cruise
ships and railroads and make reservations for hotel accommodations and rental cars around the
world. The Petitioner and American have entered into a written contract to supply a number of
goods and services, collectively referred to herein as SABRE, upon which State and local sales tax
is collected and remitted on a monthly basis.
The contract, in part, provides for a $36,600 discount of the sales price of the SABRE to
which the Petitioner subscribes. The discount is divided into sixty equal monthly "recurring credits"
of $610 each which are applied to the monthly invoice. American has collected and remitted sales
tax upon an invoice base which does not include the "recurring credits." Petitioner has paid in full
all invoices, including sales tax, from American for the SABRE package of goods and services.
Petitioner's contract with American described the credits' arrangement as follows:
American agrees to provide Customer a fixed monthly credit to such total
Monthly Charges if customer meets all the terms and conditions of this agreement
including without limitation processing SABRE Bookings equal to the amount of the
Fixed Monthly Credit Booking Level shown above.
For the purposes of this Schedule A, SABRE Bookings means the number of
airline, hotel, or rental car segments (which obligates a participant to pay a booking
fee to American) created in or processed through SABRE by Customer per video
agent set during any one calendar month. For purposes of this Schedule A,
participant means an air carrier, hotel or rental car company which has an agreement
with American for the sale of its products or services through SABRE. (Emphasis
supplied)

-2­
TSB-A-93 (42)S
Sales Tax
July 13, 1993
Section 1101(b)(3) of the Tax Law defines receipt 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, and also including
any charges by the vendor to the purchaser for shipping or delivery regardless of
whether such charges are separately stated in the written contract, if any, or on the
bill rendered to such purchaser and regardless of whether such shipping or delivery
is provided by such vendor or a third party, but excluding any credit for tangible
personal property accepted in part payment and intended for resale. (Emphasis
supplied)
Petitioner's contract with American specifically provides that Petitioner is not eligible for a
credit unless "SABRE Bookings equal ... the amount of Fixed Monthly Credit Booking level shown
above .... For the purpose of the Schedule A, SABRE Bookings means the number of airline, hotel
or rental care segments (which obligates a participant to pay a booking fee to American)"
Accordingly, Petitioner is not receiving a true discount or a credit but is actually having a
third party pay a part of its obligation to American on its behalf. Consequently, in accordance with
Section 1101(b)(3) of the Tax Law the amount of credit which Petitioner receives from American
is not deductible when computing the sales tax.

DATED: July 13, 1993

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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