Are discounts a supermarket gives customers who present a loyalty card excluded from the sales price that New York sales tax is based on?

Plain-English summary

PricewaterhouseCoopers LLP asked the Department, on behalf of an unnamed supermarket chain client, whether cash discounts triggered by scanning a customer's encoded loyalty card at checkout are excluded from the "receipt" on which sales tax is calculated. The chain issued the cards to existing check-cashing and courtesy-card customers (and to anyone else who asked), and periodically announced which products were discounted for card users through circulars and in-store displays.

The Department analyzed the card the same way it treats an ordinary store coupon: when a customer gets a price cut just by presenting something at the register, the tax applies to the discounted price actually paid, unless the store itself is reimbursed for that discount by a manufacturer or distributor -- in which case the tax is due on the full pre-discount price, because the reimbursement is really part of what the store received for the sale.

The supermarket's various supplier funding arrangements (off-invoice allowances, bill-back allowances, net price adjustments, advertising sponsorships, and "scan buy-downs") were all negotiated as ordinary wholesale buying practices and were not tied to whether a particular customer used the card. Since none of these supplier payments reimbursed the store specifically for card-triggered discounts, the Department ruled the discounts are excluded from the taxable receipt -- customers pay sales tax only on the discounted price.

What this means for you

Grocery stores and retailers running loyalty or discount-card programs

A customer-specific discount card works like a store coupon for sales tax purposes: tax applies to the price the customer actually pays, not the pre-discount sticker price -- as long as you aren't separately reimbursed by a supplier for extending that particular discount. Keep your supplier funding programs (allowances, ad sponsorships, buy-downs) structured as general cost-of-goods or marketing arrangements rather than per-card reimbursements if you want this treatment.

Accountants and tax professionals

This is a straightforward application of the store-coupon-versus-manufacturer-coupon distinction in 20 NYCRR § 526.5(c): a manufacturer's coupon (or a store coupon for which the store gets reimbursed) keeps the full pre-discount price in the taxable receipt, while an unreimbursed store discount reduces the taxable receipt to the amount actually collected. The ruling walks through five common types of supplier trade-promotion funding and confirms none of them count as "reimbursement" tied to the card discount itself.

Common questions

Q: Does sales tax apply to the discount amount or the price the customer actually pays?
A: Only the price the customer actually pays, since the store isn't reimbursed by suppliers specifically because a customer used the loyalty card.

Q: Would the answer change if a supplier paid the store back for every card-triggered discount?
A: Yes -- if a manufacturer or distributor reimburses the store for the discount because of the customer's card use, the reimbursement is treated like a manufacturer's coupon, and tax is due on the full pre-discount price.

Q: Do "scan buy-down" payments from suppliers count as reimbursement for the card discount?
A: No, not on these facts -- the supplier pays the store a fixed amount per unit sold based on register scan data, regardless of whether the customer used a card, so the payment isn't tied to the card discount.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(3) (definition of "receipt")
• Tax Law § 1105(a) (imposition of sales tax on retail sales)
• 20 NYCRR § 526.5(c) (coupons)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a99_10s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(10)S
Sales Tax
March 1, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S981019A

On October 19, 1998, the Department of Taxation and Finance received a Petition for
Advisory Opinion from PricewaterhouseCoopers LLP, One Post Office Square, Boston,
Massachusetts 02109.
The issue raised by Petitioner, PricewaterhouseCoopers LLP, is whether cash discounts taken
at the time of sale upon presentation of an encoded and electronically readable card are excluded
from the sales price upon which the sales tax is based.
Petitioner submits the following facts as the basis for this Advisory Opinion.
A supermarket chain (the "Company") has implemented a retail customer-specific discount
program. Under this program, the Company issued an encoded electronically readable card (the
"Card") to all of its existing check-cashing and courtesy card customers. The Company continues
to offer Cards to any customers who request one. Each Card, which is similar in shape, appearance,
and function to a bank automatic teller machine (ATM) card, carries unique information that enables
the Company to identify the customer to whom the Card was issued and to use the data gathered with
the Card for various marketing purposes.
A customer who purchases goods at one of the Company's supermarkets may present the
Card for scanning at the cash register. Purchases made by a customer who has presented a Card are
eligible for price discounts which are announced by the Company on a periodic basis. The discounts
are promoted by a number of methods, including advertising circulars distributed by newspaper
inserts and displays located in the supermarkets. Customers who do not present the Card when they
make their purchases do not receive the discounts. The Card-user discounts are allowed in addition
to any price reductions the customer may receive by presenting a manufacturer's coupon for a
specific item (including items for which a Card-user discount is offered).
The choice of products to be discounted during any particular period is based upon a number
of factors. In determining whether to discount a particular product, the Company considers the
availability of supplier price discounts and reductions, as well as other supplier promotions,
allowances, sponsorships, or reimbursements (collectively referred to below as "supplier discount
programs"). These supplier discount programs are only a portion of the market factors considered
when discounting products. These supplier discount programs are negotiated in the ordinary course
of the Company's business to reduce the cost of the applicable products from the products'
manufacturers, distributors, promoters, and other suppliers who desire the Company's promotional

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Sales Tax
March 1, 1999

services with respect to their products. These supplier discount programs may take any number of
forms, including the following:

1. Off-invoice allowances, where the supplier reduces the invoice cost of a product to the
   Company for a limited period (e.g., a reduction from $10 to $8.00 in the Company's invoice cost to
   purchase a case of product units);
2. Bill-back allowances, which are similar to off-invoice allowances, except the allowance
   is made separately from the invoice, which reflects the usual cost of the product to the Company;
3. Net price product adjustments, where the supplier permanently reduces a product's invoice
   price to reflect a promotional allowance;
4. Advertising sponsorships, where the supplier pays money to the Company so that the
   Company will feature their products in Company produced promotional and advertising materials;
   and
5. "Scan buy-downs", where the supplier pays the Company a fixed amount per product unit
   sold to the customer determined solely based on products sold (i.e. "scanned" at the register),
   adjusted for lost sales, and are not dependent on Card usage.
   All the above supplier discount programs are often implemented in various combinations.
   For example, a supplier desiring to promote a particular product might grant an "off-invoice"
   allowance for that product for a specified period and might simultaneously pay the Company an
   additional sum in order to have the Company feature the product as a sale item for Card participants
   in the Company's weekly advertising circular.
   Applicable Law and Regulations
   Section 1101(b)(3) of the Tax Law defines the term "Receipt" as follows:
   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
   property accepted in part payment and intended for resale....

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TSB-A-99(10)S
Sales Tax
March 1, 1999

Section 1105 of the Tax Law provides, in part:
Imposition of sales tax.-On and after June first, nineteen hundred seventy­
one, there is hereby imposed and shall be paid a tax of four percent upon:
(a) The receipts from every retail sale of tangible personal property, except
as otherwise provided in this article....
Section 526.5 of the Sales and Use Tax Regulations states in part:
(a) Definition. The word receipt means the amount of the sale price of any
property and the charge for any service taxable under articles 28 and 29 of the Tax
Law, valued in money, whether received in money or otherwise. The following
subdivisions of this section discuss elements of a receipt.
*

*

*

(c) Coupons. (1) Where a manufacturer issues a coupon entitling a
purchaser to a credit on the item purchased, the tax is due on the full amount of
the receipt. The receipt is composed of the amount paid and the amount of the
coupon credit. The coupon credit reflects a payment or reimbursement by
another party to the vendor.
Example 1: A manufacturer issues coupons entitling the holder to credit
allowances of 12 cents on the purchase of its products from a retailer. The tax is
computed as follows by the retailer:
Regular price
Tax at 7% rate
Credit for mfr. coupon
Amount due from purchaser

63¢
5¢
68¢
12¢
56¢

(2) Where a store issues a coupon, entitling a purchaser to a credit on the
item purchased, for which it is reimbursed by a manufacturer or distributor, the
tax is due on the full amount of the receipt. The receipt is composed of the amount
paid and the amount of the coupon credit. The coupon must indicate, by "mfr"
or some other code, that reimbursement is made. The reimbursement from the
manufacturer or distributor to the store may be made in any form, such as cash or
a credit against purchases or in additional merchandise.

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TSB-A-99(10)S
Sales Tax
March 1, 1999

Example 2: A store issues a coupon, labeled "mfr" entitling the holder to a
credit allowance of 12 cents on the purchase of its products from a retailer. The
purchaser is billed as follows by the retailer:
Regular price
Tax at 7% rate
Credit for mfr. coupon
Amount due from purchaser

63¢
5¢
68¢
12¢
56¢

(3) Where a store issues a coupon entitling a purchaser to a discounted price
on the item purchased, and receives no reimbursement, the tax is due from the
purchaser on only the discounted price, which is the actual receipt.
Example 3: A store issues coupons entitling the holder to credit
allowance of 12 cents on the purchase of its products from a retailer. The purchaser
is billed as follows by the retailer:
Regular price
Store coupon
Tax at 7 percent rate
Amount due from purchaser

63¢
12¢
51¢
4¢
55¢

(4) Where a store issues a coupon involving manufacturer's reimbursement,
but does not disclose that fact to the purchaser on the coupon or in the
advertisement, the vendor will collect from the purchaser only the tax due on the
reduced price, but will be required to pay the tax on the entire receipt--the amount
of the price and the reimbursement received from the manufacturer or distributor.
Opinion
The use of the Card by a customer of the Company produces the same result as when the
customer offers a coupon for an item. That is, when a coupon for an item is offered simultaneously
with the purchase of the item, a discount equal to the face amount of the coupon is given to the
customer. Like a coupon, discounts available through the use of the Card generally have limited
effective dates as the discounts are available only during a particular time period. Therefore, the
issuance of the Card is equivalent to the issuance of a continuous and generic store issued coupon
for purposes of Section 526.5(c) of the Sales and Use Tax Regulations.

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Sales Tax
March 1, 1999

Since the use of the Card by a customer for purposes of obtaining discounts on the purchase
of items is the same as using a store issued coupon, we must determine whether the various supplier
discount programs as described by Petitioner constitute a manufacturer's or distributor's
reimbursement to the Company based on the use of the Card within the meaning and intent of
Section 526.5(c) of the Sales and Use Tax Regulations. The Company enters into these supplier
discount programs as part of its normal wholesale buying practices. Regarding the 1) off-invoice
allowances, 2) bill-back allowances, and 3) net price product adjustment arrangements, the suppliers
are providing different forms of up front reductions in the cost of goods purchased by the Company.
With respect to 4) advertising sponsorships, the suppliers provide Company with money to be used
for featuring their products in Company produced promotional and advertising materials. The facts
of the Petition do not indicate that, with respect to these discount programs, the Company will be
reimbursed for discounts given to customers that result from presenting the Card at the point of
purchase.
Regarding 5) scan-buy downs, suppliers participate by paying the Company a fixed amount
per product unit sold. The payments are determined solely on cash register data, not upon Card
usage. That is, regardless of whether the customer presents a Card and receives the discount, the
Company receives a payment from the supplier for each sale of its product. Use of a Card is
irrelevant to the payment from the supplier, as the Company receives an amount from the supplier
based on the occurrence of the sale, and not the use of the Card.
The various supplier discount programs described by Petitioner do not result in
reimbursements by manufacturers or distributors related directly to customers' use of the Card.
Therefore, the cash discounts taken at the time of sale are not included as receipts subject to sales
tax under Section 1101(b)(3) of the Tax Law. See Section 526.5 of the Sales and Use Tax
Regulations. The opinion expressed herein is limited to and relates only to the supplier discount
programs specifically described in this Petition.

DATED: March 1, 1999

NOTE:

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

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