How does New York sales tax treat a hotel's complimentary drinks, staff-meeting food, discount coupons, and gift certificates -- including certificates given to dissatisfied customers or donated to charity?

Plain-English summary

First Colony Company, a full-service hotel with rooms, meeting space, a restaurant, and a gift shop, asked the Department to sort out sales tax treatment for five recurring situations: complimentary drinks at conference receptions, free food and drink at its own staff meetings, discount coupons bundled into promotional packages, gift certificates given to dissatisfied customers, and gift certificates donated to charity. The Department answered each one separately.

Complimentary drinks as part of a paid package. When the hotel contracts with a conference customer to provide the meeting space and throws in complimentary food and drink (including alcohol) at a reception, as a separately stated part of that paid agreement, the hotel's own purchases of the liquor and mixers are treated as purchases for resale (tax-free with a resale certificate) -- the cost is really baked into the price the conference customer pays for the overall event. But if the hotel just hands out free drinks unconnected to any paid package, its own purchase of the alcohol and mixers is a taxable retail purchase, since nothing recovers that cost in a sale price.

Staff meeting food. Food and drink the hotel buys and consumes internally at staff meetings (not treated as employee income) can't be purchased for resale -- it's the hotel's own taxable purchase, just like buying any other business supply.

Discount coupons. When a customer redeems a hotel-issued coupon for a discount on a meal (with no reimbursement to the hotel from anyone else), the customer only owes sales tax on the discounted price actually paid -- the same store-coupon rule that applies to any retailer.

Gift certificates. Selling or giving away a gift certificate isn't itself a taxable event; tax applies only when the certificate is later redeemed for a taxable purchase (a room, a meal, drinks), just as if the customer paid cash. A certificate donated to a Section 1116(a)(4) exempt charitable organization escapes tax when the charity itself redeems it for food and drink -- but if someone else buys that certificate from the charity (say, at a charity auction) and redeems it, ordinary tax applies to that purchase. The one exception is a free replacement certificate the hotel gives a dissatisfied customer for a free stay or meal with no third-party reimbursement: since the room or meal is genuinely free, the customer owes no tax when redeeming it (treated like a store coupon rather than a "gift certificate"), though the hotel still owes tax on its own cost of the food, drink, and other taxable items it provides.

What this means for you

Hotels, restaurants, and hospitality businesses

Track why an item is free. Complimentary items folded into a paid customer contract (a conference package, an event fee) are generally tax-free purchases for you because the cost is recovered in the sale price; complimentary items with no revenue behind them (staff food, unconditional freebies) are taxable purchases by your business, just like any other supply expense.

Businesses issuing gift certificates or service-recovery vouchers

Selling or donating a gift certificate is not a taxable event by itself -- tax attaches only at redemption, and only if the redeemed purchase is itself taxable. A "make-good" voucher for a genuinely free replacement service, given directly to a dissatisfied customer with no reimbursement from anyone, is treated like a coupon rather than a paid gift certificate: the customer owes nothing at redemption, but you still owe use tax on your own cost of providing the free item.

Accountants and tax professionals

This opinion is a good one-stop reference for the resale-versus-taxable-purchase line on promotional giveaways (20 NYCRR § 526.6(c)(4)), the coupon-discount rule (20 NYCRR § 526.5(c)(3)), and the gift-certificate-versus-coupon distinction the Department draws based on whether any consideration or third-party reimbursement is involved.

Common questions

Q: Does the hotel owe sales tax on liquor it gives away for free at a conference reception?
A: Not if the reception is a separately stated part of a paid contract with the conference customer -- the hotel's purchase of the liquor is treated as a tax-free purchase for resale. If there's no paid contract behind it, the hotel's purchase is taxable.

Q: Is a gift certificate taxed when it's sold or given away?
A: No -- tax applies only when the certificate is redeemed for a taxable purchase, not when it changes hands.

Q: If a hotel gives a free-stay certificate to a dissatisfied guest, does the guest pay tax when redeeming it?
A: No, because the stay is genuinely free with no reimbursement to the hotel -- but the hotel itself still owes sales or use tax on its cost of the goods and services it provides.

Q: What if a charity redeems a donated gift certificate itself versus someone who bought it at a charity auction?
A: The charity's own redemption is tax-free under its Section 1116(a)(4) exemption; a purchaser who buys the certificate from the charity and then redeems it for a taxable item owes ordinary sales tax.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(3) (definition of "receipt")
• Tax Law § 1101(b)(4)(i) (definition of "retail sale")
• Tax Law § 1101(b)(5) (definition of "sale, selling or purchase")
• Tax Law § 1105(a), (d)(i), (e) (tangible personal property; restaurant food and drink; hotel occupancy)
• Tax Law § 1110 (compensating use tax)
• Tax Law § 1116(a)(4) (exempt charitable organizations)
• 20 NYCRR § 526.5(c) (coupons)
• 20 NYCRR § 526.6(c) (resale exclusion; promotional giveaways)

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_13s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(13)S
Sales Tax
March 1, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S981221A

On December 21, 1998, the Department of Taxation and Finance received a Petition for
Advisory Opinion from First Colony Company, 660 Albany-Shaker Road, Albany, New York,
12211.
The issues raised by Petitioner, First Colony Company, are as follows:
1) Whether items ordinarily sold by Petitioner that are offered on a complimentary basis as
a customer inducement (e.g., complimentary cocktails at a reception for a conference) are subject
to sales and compensating use tax.
2) Whether items ordinarily sold by Petitioner that are consumed by Petitioner (e.g., food and
beverages consumed at staff meetings) are subject to sales and compensating use tax.
3) How are discount coupons given to customers with special promotional packages treated
for purposes of calculating taxable receipts for sales tax purposes? For example, if a customer
redeems a coupon for a discount on the price of a dinner, is the dinner taxable at the gross amount
or the discounted amount?
4) Whether gift certificates given by Petitioner to customers who are not satisfied with
Petitioner's service are subject to sales and compensating use tax.
5) Whether gift certificates donated by Petitioner to a charitable organization are subject to
sales and compensating use tax upon redemption of the certificate at Petitioner's business by either
the charitable organization or by someone who purchased the certificate from the charitable
organization at auction.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a full service hotel providing overnight rooms, meeting rooms, restaurants, and
gift shop, etc. Petitioner may sometimes offer complimentary drinks as a customer inducement.
Typically, Petitioner will enter into a contract with a customer to provide its hotel facilities for a
conference and Petitioner will provide complimentary food and beverages, including alcoholic
beverages, at a reception for conference attendees as a separately stated part of the customer
agreement. On other occasions, Petitioner may provide food and drink, at no charge, to employees
at staff meetings.

-2­
TSB-A-99(13)S
Sales Tax
March 1, 1999

Petitioner offers discount coupons for meals to customers as part of special promotional
packages. Petitioner also provides gift certificates in some instances. Petitioner may give a gift
certificate for a free stay at Petitioner’s hotel or for a free meal at Petitioner’s restaurant to a
dissatisfied customer. Gift certificates may be donated by Petitioner to a charitable organization.
Applicable Law and Regulations
Section 1101(b)(3) of the Tax Law defines the term "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. For special rules
governing computation of receipts, see section eleven hundred eleven.
Section 1101(b)(4)(i) of the Tax Law defines "retail sale," in part, as:
A sale of tangible personal property to any person for any purpose, other than
(A) for resale as such....
Section 1101(b)(5) of the Tax Law defines the terms "sale, selling or purchase" as:
Any transfer of title or possession or both, exchange or barter, rental, lease
or license to use or consume (including, with respect to computer software, merely
the right to reproduce), 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 1105 of the Tax Law states in part:
Imposition of sales tax. On and after June first, nineteen hundred
seventy-one, there is hereby imposed and there shall be paid a tax of four percent
upon:

-3­
TSB-A-99(13)S
Sales Tax
March 1, 1999

(a) The receipts from every retail sale of tangible personal property, except
as otherwise provided in this article.
*

*

*

(d)(i) The receipts from every sale of beer, wine or other alcoholic beverages
or any other drink of any nature, or from every sale of food and drink of any nature
or of food alone, when sold in or by restaurants, taverns or other establishments in
this state, or by caterers, including in the amount of such receipts any cover,
minimum, entertainment or other charge made to patrons or customers (except those
receipts taxed pursuant to subdivision (f) of this section):
(1) in all instances where the sale is for consumption on the premises where
sold;
*

*

*

(e) The rent for every occupancy of a room or rooms in a hotel in this state,
except that the tax shall not be imposed upon (1) a permanent resident, or (2) where
the rent is not more than at the rate of two dollars per day.
Section 1110 of the Tax Law provides, in part:
(a) Except to the extent that property or services have already been or will be
subject to the sales tax under this article, there is hereby imposed on every person a
use tax for the use within this state on and after June first, nineteen hundred seventy­
one except as otherwise exempted under this article, (A) of any tangible personal
property purchased at retail,...
*

*

*

(b) For purposes of clause (A) of subdivision (a) of this section, the tax shall
be at the rate of four percent of the consideration given or contracted to be given for
such property, or for the use of such property, including any charges for shipping or
delivery as described in paragraph three of subdivision (b) of section eleven hundred
one, but excluding any credit for tangible personal property accepted in part payment
and intended for resale.
Section 1116 of the Tax Law states in part:

-4­
TSB-A-99(13)S
Sales Tax
March 1, 1999

(a) Except as otherwise provided in this section, any sale or amusement
charge by or to any of the following or any use or occupancy by any of the following
shall not be subject to the sales and compensating use taxes imposed under this
article:
*

*

*

(4) Any corporation, association, trust, or community chest, fund or
foundation, organized and operated exclusively for religious, charitable, scientific,
testing for public safety, literary or educational purposes, or to foster national or
international amateur sports competition (but only if no part of its activities involve
the provision of athletic facilities or equipment), or for the prevention of cruelty to
children or animals, no part of the net earnings of which inures to the benefit of any
private shareholder or individual, no substantial part of the activities of which is
carrying on propaganda, or otherwise attempting to influence legislation, (except as
otherwise provided in subsection (h) of section five hundred one of the United States
internal revenue code of nineteen hundred fifty-four, as amended), and which does
not participate in, or intervene in (including the publishing or distributing of
statements), any political campaign on behalf of any candidate for public office;
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....

(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:

-5­
TSB-A-99(13)S
Sales Tax
March 1, 1999

Regular price
Store coupon

63¢
12¢
51¢
Tax at 7 percent rate
4¢
Amount due from purchaser 55¢
With respect to the resale exclusion, Section 526.6(c) of the Sales and Use Tax Regulations
provides, in part:
(1) Where a person, in the course of his business operations, purchases
tangible personal property or services which he intends to sell, either in the form in
which purchased, or as a component part of other property or services, the property
or services which he has purchased will be considered as purchased for resale, and
therefore not subject to tax until he has transferred the property to his customer.
*

*

*

(4)(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.
Opinion
Issue #1
Petitioner’s serving of complimentary cocktails to its customers, where no payment is
received by Petitioner for providing the cocktails, is not subject to the sales tax imposed by Section
1105(a) of the Tax Law. However, Petitioner's purchase of tangible personal property, such as
alcoholic beverages and mixers, to produce the drinks would be subject to State and local sales or
compensating use taxes. Assuming Petitioner furnished a resale certificate (Form ST-120) to its
suppliers when it purchased such tangible personal property and did not pay sales tax on such
purchase, Petitioner may use a reasonable method to determine the tax due.

-6­
TSB-A-99(13)S
Sales Tax
March 1, 1999

The more typical situation that Petitioner will encounter is where Petitioner enters into a
contract with a customer to provide its hotel facilities for a conference and Petitioner provides food
and beverages, including alcoholic beverages, at a reception for conference attendees, at no charge
to the attendees, as a separately stated part of the customer agreement. In this situation, Petitioner's
purchases of the food and beverages are considered purchases for resale as part of the sale of food
and drink under the customer agreement. Therefore, Petitioner's purchases of such food and
beverages would not be subject to sales tax (see UM Enterprises Ltd, Adv. Op Comm. T&F., March
24, 1998, TSB-A-98(21)S).
If Petitioner offers complimentary items in conjunction with an otherwise taxable sale of
food or drink, e.g., a free bottle of wine offered with the purchase of a meal, the complimentary item
is deemed to be purchased for resale provided that at least 100% of the costs, including labor costs
and overhead, associated with furnishing the complimentary item in conjunction with the sale of
other tangible personal property or with food and beverages is recovered in the selling price paid by
the customer for such other tangible personal property or food and beverages.
Issue #2
Items that are used by Petitioner, such as food and beverages consumed at staff meetings
(where the food and beverages are not income to the employees for federal or state income tax
purposes), can not be purchased for resale. The purchase of such items by Petitioner would be a
retail sale of tangible personal property to Petitioner. Therefore, purchases of such food and
beverages and other items are subject to either sales or compensating use tax, provided that the food
and beverages are not otherwise exempt under Section 1115(a)(1) of the Tax Law. Assuming
Petitioner furnished a resale certificate (Form ST-120) to its suppliers when it purchased such food
and beverages and did not pay sales tax on such purchase, Petitioner may use a reasonable method
to determine the tax due.
Issue #3
When a customer of Petitioner makes a taxable purchase from Petitioner, using a discount
coupon issued by Petitioner, the receipt subject to sales tax is the amount actually paid by the
customer after deducting the value of the coupon, in accordance with Section 526.5(c)(3) of the Sales
and Use Tax Regulations.
Issues #4 and #5
Gift certificates for a stated dollar amount, whether given away for no consideration or sold
to a customer, are not subject to sales tax. When the gift certificate is redeemed, the sales tax is
imposed if a taxable purchase is made. The customer uses the gift certificate as if it were cash to pay
for his or her purchases. If the purchase is subject to tax, the customer must also pay the tax,

-7­
TSB-A-99(13)S
Sales Tax
March 1, 1999

whether from the proceeds of the gift certificate or with additional cash. Therefore, if a gift
certificate is applied to the charge to rent a room in Petitioner's hotel or to the purchase price of a
meal or drinks, sales tax would apply to such charges, in accordance with Section 1105(e) or 1105(d)
of the Tax Law.
If such a gift certificate for a stated dollar amount were to be redeemed by a charitable
organization exempt under Section 1116(a)(4) of the Tax Law for food and drink to be consumed
by the organization, Petitioner's furnishing of such food and drink to the charitable organization
would not be subject to sales or use tax. But, when a person who purchased the gift certificate from
the charitable organization redeems the gift certificate for food and drink from Petitioner, such food
and drink are subject to tax.
Petitioner may give a certificate for a free stay at Petitioner's hotel or for a free meal at
Petitioner’s restaurant to a dissatisfied customer or occupant. Assuming that Petitioner is not
reimbursed by a third party for any portion of the value of the certificate, such a certificate would
be similar to a store coupon and not a gift certificate as discussed above. Since the hotel occupancy
or meal is free to the customer or occupant, no sales tax is due when the certificate is redeemed by
the customer or occupant. If such a certificate for a free hotel stay or meal is donated to an exempt
organization, no sales tax is due when the certificate is redeemed by the exempt organization or
when it is redeemed by a person who purchased the certificate from the exempt organization at
auction. In those cases where a customer redeems a certificate for a free meal, Petitioner is liable
for sales or compensating use tax on its cost of taxable food, drink and other items served to such
customer.

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.