Does a company running a manufacturer's sales-incentive rewards program need to register as a sales tax vendor, and is its own purchase of the reward items taxable?

Plain-English summary

Puglisi, Midler & Co. asked on behalf of a client ("Company X") that runs sales-incentive programs for manufacturers. A manufacturer hires Company X to build a point-based rewards program: distributor and reseller sales representatives ("the Channel") earn points for selling designated products, track their balance through Company X's database, and redeem points for awards from a catalog. Company X buys the award items itself from third-party suppliers (not as the manufacturer's agent -- title never passes to the manufacturer), bills the manufacturer for administration and award costs based on points issued, and has awards shipped directly from the supplier to the winning representative's home. Two questions: does Company X have to register as a sales tax vendor, and are its purchases of the award items taxable?

On vendor registration, the Department said no. Company X isn't selling tangible personal property to the manufacturer or to the Channel representatives -- it's providing an exempt advertising or promotional service (designing and running the incentive program). Since it's not making taxable sales, it doesn't need to register as a vendor or collect sales tax from its client.

On the award purchases, though, Company X is treated as the actual retail buyer of the awards -- a sales representative "redeeming" points for an award isn't a retail sale in its own right, and property purchased and given away for promotional purposes isn't a purchase for resale. Because New York's sales tax is a destination tax (the place where the property is delivered controls), Company X owes New York sales or use tax whenever an award is shipped to a New York address, regardless of whether the supplier itself is located inside or outside the state. If the award ships to an out-of-state recipient, no New York tax applies to that purchase.

What this means for you

Companies that design and administer sales-incentive or loyalty-reward programs

Running the program itself is generally a nontaxable service, so you likely don't need to register as a vendor just because you administer the program. But when you buy the actual reward merchandise to give away, you -- not the manufacturer sponsor, and not the recipient -- are the retail purchaser for tax purposes, and you owe tax based on where each item is shipped.

Manufacturers hiring third-party incentive-program administrators

Since your program administrator is the retail purchaser of the awards (title never passes to you), your own liability for sales tax on awards purchased for the program is generally limited -- confirm with your administrator how they're tracking and paying tax on awards shipped to New York recipients.

Accountants and tax professionals

The key mechanic here is New York's destination-tax rule (20 NYCRR § 525.2(a)(3)): tax follows the delivery address of the reward item, not the location of the supplier or the program administrator. Combine that with 20 NYCRR § 526.6(c)(4)'s rule that promotional giveaways aren't purchases for resale -- the administrator can't use a resale certificate to buy the awards tax-free.

Common questions

Q: Does a sales-incentive program administrator need a sales tax vendor registration?
A: Not if it's only providing an exempt promotional/advertising service and not selling tangible property or taxable services itself.

Q: Who owes tax on the reward merchandise -- the manufacturer, the administrator, or the winning salesperson?
A: The program administrator, as the actual retail purchaser of the awards, since a point redemption by the salesperson isn't itself a retail sale and the administrator can't buy the awards tax-free as a resale.

Q: Does this ruling apply to my incentive or rewards program?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else. It shows how the Department reasons, but your facts may differ.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(8)(i)(A) (definition of vendor)
• 20 NYCRR § 525.2(a)(3) (sales tax as a destination tax)
• 20 NYCRR § 526.6(c)(4) (promotional/advertising giveaways not purchased for resale)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_25s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(25)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S971114B

On November 14, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Puglisi, Midler & Co. LLP, 200 North Central
Avenue, Hartsdale, New York 10530.
The issues raised by Petitioner, Puglisi, Midler & Co. LLP, are:

1. Whether under the following circumstances its client is required to
   register as a sales tax vendor and collect sales and use tax.
2. Whether purchases by Petitioner’s client of tangible personal property
   are subject to sales and use tax.
   Petitioner submits the following facts as the basis for this Advisory
   Opinion.
   Petitioner’s client (Company X), which is located in New York, will develop
   a sales promotion program, as described below, for one of its clients, a
   manufacturer.
   Company X’s manufacturer client markets its products through
   distributors who in turn sell to dealers, value added resellers (VARs) and
   catalog houses, who sell to businesses, government and consumers.
   The
   manufacturer may be located in New York or outside New York.
   Since these dealers, VARs and catalog houses (hereinafter called the
   Channel) carry many products, Company X’s programs would help the manufacturer
   get the attention and concentrated selling efforts of the Channel sales
   representatives.
   The program structure would be based on a point system with a fixed point
   amount assigned to each of the designated products the manufacturer produces and
   wants to include in the promotion. By selling these products, Channel sales
   representatives accumulate points in a database account Company X sets up for
   them, and Company X sends the representatives statements representing their
   balance. These points may be redeemed anytime for any of the many different
   awards featured in an awards catalog. Each award has a stated point value at
   which it can be ordered. The more a Channel salesperson sells during the year­
   long, nationwide campaign, the more awards he or she can earn at higher values.
   Company X purchases the items that serve as awards from third party
   suppliers that may be located within or outside New York State.
   Company X
   purchases the item in its own name, not as agent for the manufacturer. The
   manufacturer does not take title to these items.
   Company X bills the
   manufacturer for the administration and awards costs based on the award points
   that are issued to the database accounts of the Channel sales representatives.
   When awards are ordered by a sales representative, Company X has them shipped
   from the supplier directly to the representative’s home, on behalf of the
   manufacturer. All unused award points expire at the end of the program.

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TSB-A-98(25)S
Sales Tax

Applicable Law and Regulations
Section 1101(b)(8)(i)(A) of the Tax Law defines a vendor as: “A person
making sales of tangible personal property or services, the receipts from which
are taxed by this article.”
Section 525.2(a)(3) of the Sales and Use Tax Regulations provides:
The sales tax is a “destination tax”, that is, the point of delivery
or point at which possession is transferred by the vendor to the
purchaser or designee controls both the tax incident and the tax
rate.
Section 526.6(c)(4) of the Sales and Use Tax Regulations provides, in part:
(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 retail 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.
Opinion
Company X is not selling tangible personal property.
Rather, it is
providing an exempt advertising or promotional service. If Company X does not
sell any tangible personal property or taxable services, it is not required to
register as a vendor and collect sales and use tax from its client.
Company X is the retail purchaser of the tangible personal property that
it acquires for use as awards in its program. The subsequent redemption of the
property by sales representatives for points is not a retail sale. Since the New
York State sales and use tax is a destination tax, Company X is required to pay
the sales and use tax based upon the place at which it has the tangible personal

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TSB-A-98(25)S
Sales Tax

property delivered. If the property is shipped by the supplier to an award
recipient at an out-of-state address, Company X’s purchase of the property is not
subject to sales and use tax. If the property is shipped to an address within
New York State, whether the supplier is located within or outside New York State,
Company X’s purchase of the property is subject to tax.

DATED: April 14, 1998

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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