In a points-based rewards program, is the 'per point' fee the operator charges its client companies taxable, and does Tennessee sales tax apply to the reward merchandise shipped to participants — and on what amount?

Plain-English summary

A company in the incentive-and-recognition industry runs points-based rewards programs for client companies. Participants earn "Points" and redeem them for merchandise from an awards catalogue. The operator bills each Client a "Per Point Fee" when points are issued (not when redeemed), buys the award merchandise from third-party suppliers in its own name, and ships it directly to participants from a warehouse outside Tennessee. There's no dollar amount on the Points, and participants can't pay cash for catalogue items. The operator asked three questions; the answers split the transaction in two.

1. The Per Point Fee charged to Clients — NOT taxable. Tennessee taxes retail sales of tangible personal property and a short list of enumerated services (only enumerated services are taxable — Ryder Truck Rental). The Department found none of the three taxability hooks applies:

• No sale of tangible personal property to the Client. A "sale" needs a transfer of title or possession of TPP (§ 67-6-102(80)(A)). The operator buys the merchandise in its own name; the Client never takes title or possession; and the goods ship directly to the participant from out of state. So no TPP is sold to the Client.
• Not an enumerated service. Managing an awards/incentive program isn't among Tennessee's enumerated taxable services.
• Nothing taxable to bundle into. Because there's no TPP sale and no taxable service, the fee can't be swept in as a non-enumerated service sold "as part of" a taxable sale (§ 67-6-102(81)(A)).

So the Per Point Fee is not subject to Tennessee sales and use tax.

2. Reward merchandise shipped to participants in Tennessee — TAXABLE. This is a retail sale of tangible personal property. All three elements of a retail sale are met: (a) the operator transfers title and possession of the merchandise (TPP) to the participant; (b) for consideration — the Points have value even though no cash value is stated; and (c) the participant is the consumer, not a reseller (§ 67-6-102(78), (80)(A)). The operator is a "dealer" and must collect and remit Tennessee sales tax on merchandise shipped to Tennessee participants. The dealer is ultimately liable to the State even if it fails or is unable to collect the tax from the customer (§ 67-6-501(a); Beare Co. v. Olsen; Sam Carey Lumber; Smoky Mt. Canteen), and non-collection draws interest and penalties (§§ 67-6-504(b), 67-6-517, 67-6-522). (One carve-out, per the ruling's footnote: a gift certificate isn't a sale of tangible personal property, so "merchandise" here excludes gift cards.)

3. How much tax — the "sales price." The measure is the item's sales price (§ 67-6-102(81)(A)) — total consideration, no deduction for the seller's cost or delivery. The consideration is the Points redeemed, and because the operator invoices the Client a set amount per point, the Per Point Fee is the money value of each Point. So:

Sales price = Per Point Fee × number of Points redeemed for the item.

Whether tax is added on top or backed out depends on what the receipt says (Rule 1320-5-1-.90): a vendor must indicate whether the customer is paying sales tax.

• Tax not stated as included: a $1.00 per-point fee and a 100-Point widget → $100 sales price, and (at a 9.5% example rate) the operator collects $9.50 on top.
• Receipt says price includes tax: the $100 is treated as tax-inclusive → sales price $91.32, tax $8.68.

What this means for you

Operators of rewards, loyalty, and incentive programs

The service of running a points program — the fee you charge your business clients — is generally not taxable in Tennessee, as long as you aren't selling your client tangible personal property and aren't performing an enumerated service. But the moment you fulfill a redemption by shipping merchandise to a participant in Tennessee, you've made a taxable retail sale and you're the dealer on the hook to collect and remit — even though no cash changed hands with the participant and the "price" is denominated in points. Build sales-tax collection into your fulfillment for Tennessee recipients, and decide up front whether your stated point-prices are tax-inclusive.

Client companies sponsoring a program

You generally aren't buying taxable tangible personal property when you pay a per-point program fee — the operator owns and ships the merchandise. The tax exposure sits with the operator/dealer on merchandise delivered to Tennessee participants, not on your program fee.

Accountants and tax professionals

Two separate transactions: a nontaxable service (program management, not enumerated, no TPP transferred to the client) and a taxable retail sale of merchandise to the participant. The novel piece is the measure: Points are valued in money via the Per Point Fee, so sales price = fee × points. Watch Rule 1320-5-1-.90 for the tax-inclusive vs tax-added treatment, and the gift-certificate carve-out.

Common questions

Q: Is the fee I charge clients to run their rewards program taxable in Tennessee?
A: Generally no. Managing an incentive/awards program isn't an enumerated taxable service, and you aren't transferring tangible personal property to the client, so the per-point program fee isn't subject to sales tax.

Q: Do I owe Tennessee sales tax on reward merchandise I ship to participants?
A: Yes, on merchandise shipped to participants in Tennessee. That's a retail sale of tangible personal property for consideration (the points), and you're the dealer who must collect and remit.

Q: The participant doesn't pay cash — how is the tax calculated?
A: On the item's sales price, which equals your Per Point Fee multiplied by the number of points redeemed for that item. A $1.00 per-point fee and a 100-point item is a $100 sales price.

Q: What about gift cards?
A: Different treatment. A gift certificate isn't a sale of tangible personal property, so the merchandise analysis here doesn't cover gift cards.

Q: Can I rely on this letter ruling?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it was issued to, and it can be revoked or modified. Confirm your own situation with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.; 2011 codification):

• § 67-6-101 (Retailers' Sales Tax Act — retail sales of TPP and enumerated services taxable)
• § 67-6-102(80)(A) ("sale"); § 67-6-102(78) ("retail sale"); § 67-6-102(81)(A) ("sales price")
• § 67-6-501(a) (dealer liability for the tax); §§ 67-6-504(b), 67-6-517, 67-6-522 (interest and penalties)

Tennessee rule:

• Tenn. Comp. R. & Regs. 1320-5-1-.90 (1974) (vendor must indicate whether sales tax is included in the stated price)

Cases cited by the ruling:

• Ryder Truck Rental, Inc. v. Huddleston, 1994 WL 420911 (Tenn. Ct. App. 1994) (only enumerated services are taxable)
• Beare Co. v. Olsen, 711 S.W.2d 603 (Tenn. 1986); Sam Carey Lumber Co. v. Sixty-One Cabinet Shop, Inc., 773 S.W.2d 252 (Tenn. Ct. App. 1989); Smoky Mt. Canteen Co. v. Kitzer, 247 S.W.2d 69 (Tenn. 1952) (the dealer is liable for the tax even if it fails or is unable to collect from the customer)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/12-01.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 12-01

WARNING
Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This presentation of the ruling in a redacted form is
informational only. Rulings are made in response to particular facts presented and are not
intended necessarily as statements of Department policy.
SUBJECT
The application of the Tennessee sales and use tax to incentive programs.
SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon
the Department, and are applicable only to the individual taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation
or modification shall be effective retroactively unless the following conditions are met, in which
case the revocation shall be prospective only:
(A) The taxpayer must not have misstated or omitted material facts involved in
the transaction;
(B) Facts that develop later must not be materially different from the facts upon
which the ruling was based;
(C) The applicable law must not have been changed or amended;
(D) The ruling must have been issued originally with respect to a prospective or
proposed transaction; and
(E) The taxpayer directly involved must have acted in good faith in relying upon
the ruling; and a retroactive revocation of the ruling must inure to the taxpayer’s
detriment.
FACTS
[TAXPAYER NAME] (the “Taxpayer”), is engaged in the incentive and recognition industry. 1
The Taxpayer enters into contracts with [REDACTED] (the “Clients”) that provide
[REDACTED] (the “Participants”) with access to incentive programs. Participants earn
[REDACTED] (“Points”) based upon [REDACTED]. Participants may redeem Points for
merchandise.
1

[REDACTED]; this letter ruling therefore does not address nexus.

1

Participants accumulate Points in a database account set up by the Taxpayer and the Taxpayer
sends statements to the Participants showing their respective balances. Points may be redeemed
during the duration of a particular program for any of the many awards featured in an awards
catalogue, which is sent to each Participant at the program outset. The catalogue details the
amount of Points necessary to obtain merchandise. Each award has a stated point value for which
it may be ordered; the more Points a Participant accumulates during the program, the more
awards he or she can earn.
There is no dollar amount associated with Points. Additionally, no cash value is communicated
to the Participant relating to the value of the Points. The Participant does not have the option of
paying cash for an item featured in the awards catalogue.
The Taxpayer does not use a “bill on redemption” pricing model whereby Clients are billed as
merchandise is redeemed by Participants; rather, the Taxpayer bills the Client for the program
when award points are issued to the database accounts of the Participants. The Taxpayer invoices
the Client on a per point basis (the “Per Point Fee”), unless special customization charges are
added. At the time the Taxpayer bills the Client, the parties do not know whether the points will
ultimately be redeemed by the Participants or for what type of award (i.e., for merchandise, a gift
card, and so on). Additionally, the Taxpayer does not notify the Client when the Participants
make selections of awards.
The Taxpayer purchases award merchandise from third party suppliers. The Taxpayer
sometimes, but not always, uses a resale certificate to make such purchases. The Taxpayer
purchases the items in its own name, not as an agent for the Client; the Client does not take
possession of, or title to, the award merchandise. When award merchandise is ordered by a
Participant, the Taxpayer ships the merchandise directly to the Participant from its warehouse
outside Tennessee (merchandise is generally shipped from [LOCATION]). The Client does not
direct the Taxpayer to ship merchandise. The Taxpayer’s Clients are located throughout the
United States.
RULINGS
1.

Is the Per Point Fee charged by the Taxpayer to a Client subject to the Tennessee sales
and use tax?
Ruling: No. The Per Point Fee charged by the Taxpayer to a Client is not subject to the
Tennessee sales and use tax.

2.

Is Tennessee sales and use tax due with respect to merchandise shipped to Participants in
Tennessee?
Ruling: Yes. The Taxpayer must collect and remit Tennessee sales and use tax with
respect to merchandise shipped to Participants in Tennessee.

3.

If the answer to Question #2 is affirmative, what is the measure of the Tennessee sales or
use tax due?

2

Ruling: The measure of the Tennessee sales or use tax due with respect to merchandise
shipped to a Participant in Tennessee is the sales price of the item. The sales price of the
item equals the Per Point Fee, multiplied by the number of Points redeemed by the
Participant to obtain the item.
ANALYSIS
1.

Per Point Fee

The Per Point Fee charged by the Taxpayer to a Client is not subject to the Tennessee sales and
use tax.
Under the Retailers’ Sales Tax Act, TENN. CODE ANN. § 67-6-101 et seq., retail sales of tangible
personal property and certain enumerated services in Tennessee are generally subject to the sales
and use tax. The sales tax does not apply to all services; rather, it only applies to retail sales of
those services specifically enumerated by the statute. Ryder Truck Rental, Inc. v. Huddleston,
1994 WL 420911 (Tenn. Ct. App. Aug. 12, 1994). Even if a service is not specifically
enumerated by the statute, however, the service may be subject to the sales tax where charges for
the service are included in the sales price of a taxable good or service. Specifically, TENN. CODE
ANN. § 67-6-102(81)(A) (2011) provides that the sales price of a good or service equals the “total
amount of consideration … for which personal property or services are sold,” including any
services necessary to complete the sale. Thus, when the sale of a non-enumerated service is part
of the sale of a taxable good or service, the charges for the non-enumerated service are included
in the sales price of the taxable good or service and as such are subject to taxation.
Accordingly, the Per Point Fee will be subject to the Tennessee sales and use tax if the
transaction involves 1) the retail sale of tangible personal property; 2) the furnishing of a taxable
service; and/or 3) the furnishing of an otherwise nontaxable service that is sold as part of the sale
of a taxable good or service.
First, Taxpayer makes no sales of tangible personal property to the Client. TENN. CODE ANN.
§ 67-6-102(80)(A) defines the term “sale” in pertinent part as “any transfer of title or possession,
or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any
means whatsoever of tangible personal property for a consideration.” (Emphasis added.) Here,
the Taxpayer purchases award merchandise from third party suppliers in its own name. The
Client does not take possession of, or title to, the award merchandise. Rather, when award
merchandise is ordered by a Participant, the Taxpayer ships the merchandise directly to the
Participant from its warehouse outside Tennessee. Accordingly, the Taxpayer makes no sales of
tangible personal property to the Client.
Second, the Taxpayer’s services are not among the enumerated services that are subject to the
Tennessee sales and use tax. As noted above, only specifically enumerated services are subject to
the Tennessee sales and use tax. Here, the Taxpayer provides a service whereby it manages an
awards and incentive program for a particular Client. No provision of the Retailers’ Sales Tax
Act subject such services to taxation.
Third, because the Taxpayer does not make sales of tangible personal property to the Client and
does not provide a taxable service, no part of the transaction between the Taxpayer and the
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Client can be described as the furnishing of an otherwise nontaxable service that is sold as part of
the sale of a taxable good or service.
Accordingly, the Per Point Fee charged by the Taxpayer to a Client is not subject to the
Tennessee sales and use tax.
2.

Merchandise shipped to Participants in Tennessee

The Taxpayer must collect Tennessee sales and use tax with respect to merchandise shipped to
Participants in Tennessee. Under the Retailers’ Sales Tax Act, TENN. CODE ANN. § 67-6-101 et
seq., retail sales of tangible personal property in Tennessee are generally subject to the sales and
use tax. TENN. CODE ANN. § 67-6-102(78) defines a “retail sale” as a “sale, lease, or rental for
any purpose other than for resale, sublease, or subrent.” The term “sale” is defined in pertinent
part as “any transfer of title or possession, or both, exchange, barter, lease or rental, conditional
or otherwise, in any manner or by any means whatsoever of tangible personal property for a
consideration.” TENN. CODE ANN. § 67-6-102(80)(A).
Thus, with respect to merchandise2 shipped to a Participant in Tennessee, a retail sale will take
place if the following requirements are met: 1) there is a transfer of title, possession, or both of
tangible personal property to the Participant; 2) such transfer is undertaken in exchange for a
consideration; and 3) the transaction is for any purpose other than for resale, sublease, or subrent.
The first requirement is met because the Taxpayer transfers title and possession of the
merchandise, which is tangible personal property, to the Participant.
The second requirement is met because the Taxpayer transfers the tangible personal property in
exchange for a consideration. Although no cash value is communicated to the Participant relating
to the value of the Points, the Points clearly do have value and are thus properly characterized as
consideration.
The third requirement is met because the Participant is the consumer of the merchandise and
does not purchase the merchandise for resale, sublease, or subrent.
Thus, the Taxpayer makes retail sales of tangible personal property in Tennessee with respect to
merchandise shipped to Participants in Tennessee. Such sales are subject to the Tennessee sales
and use tax.
In Tennessee, every dealer making retail sales of taxable services or tangible personal property is
liable for the payment of Tennessee sales tax. TENN. CODE ANN. § 67-6-501(a) (2011); Beare
Co. v. Olsen, 711 S.W.2d 603, 605 (Tenn. 1986). While the dealer may charge the consumer the
appropriate tax, it is the dealer that is ultimately liable to the State. Sam Carey Lumber Co. v.
Sixty-One Cabinet Shop, Inc., 773 S.W.2d 252 (Tenn. Ct. App. 1989). Neither a dealer’s failure,
nor its inability, to collect the tax from its customer will relieve the dealer of this duty. Smoky
Mt. Canteen Co. v. Kitzer, 247 S.W.2d 69 (Tenn. 1952). In the event that the dealer does not
collect and remit Tennessee sales tax on the sales of taxable services or tangible personal
2

Note that the sale of a gift certificate is not considered a sale of tangible personal property; therefore, for purposes
of this letter ruling, the term “merchandise” does not include gift cards.

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property, it will be subject to interest and penalties. See TENN. CODE ANN. §§ 67-6-504(b)
(2011), 67-6-517 (2011), 67-6-522 (2011).
Here, the Taxpayer is a dealer for Tennessee sales and use tax purposes. Therefore, the Taxpayer
must collect and remit Tennessee sales and use tax with respect to merchandise shipped to
Participants in Tennessee.
3.

Measure of the tax

The measure of the Tennessee sales and use tax due with respect to merchandise shipped to a
Participant in Tennessee is the sales price of the particular item. The sales price of a particular
item of merchandise equals the Per Point Fee, multiplied by the number of Points redeemed by
the Participant to obtain the item.
TENN. CODE ANN. § 67-6-102(81)(A) defines the term “sales price” in pertinent part as the “total
amount of consideration, including cash, credit, property, and services, for which personal
property or services are sold, leased, or rented, valued in money, whether received in money or
otherwise,” with no deduction for the seller’s cost of the property sold, charges by the seller for
services necessary to complete the sale, or delivery charges. (Emphasis added.)
Here, the consideration for the sale of a particular item of merchandise is the Points redeemed by
the Participant. Although no cash value is communicated to the Participant relating to the value
of the Points, the Points can be valued in money. The facts state that the Taxpayer invoices the
Client on a per point basis; in other words, the Taxpayer receives a set amount of money per
Point issued to a Participant. Thus, the Per Point Fee constitutes the value to the Taxpayer of
each Point. Accordingly, the sales price of a particular item of merchandise generally equals the
Per Point Fee, multiplied by the number of Points redeemed by the Participant to obtain the item.
Importantly, the Taxpayer must either 1) charge the sales tax due on the sales price of the
particular item; or 2) indicate on the receipt, invoice, or other record given to the Participant that
the stated price of a particular item includes applicable sales tax. TENN. COMP. R. & REG. 13205-1-.90 (1974).3
Accordingly, if the Taxpayer does not indicate to the Participant that the stated price includes
applicable sales tax, the sales price of the item will equal the Per Point Fee, multiplied by the
number of Points redeemed by the Participant to obtain the item. The Taxpayer must then collect
and remit the sales tax due on the sales price. For example, assume that the Per Point Fee is
$1.00. The Taxpayer’s catalogue states that the Participant may acquire a widget for 100 Points,
and the receipt given to the Participant does not indicate that the stated price of the widget
includes applicable sales tax. The applicable sales tax rate is 9.5%. For Tennessee sales and use
tax purposes, the sales price of the widget is therefore $100.00 and the Taxpayer must collect and
remit an additional $9.50 in sales tax.

3

TENN. COMP. R. & REG. 1320-5-1-.90 states that “[v]endors within the State must indicate in some definite manner
whether their customers are paying any Sales Tax. This indication must be stated on the ticket, invoice, or other
record given to the customer, or it may be shown by posting a sign in the place of business of the dealer indicating
that the prices shown include any applicable Sales Tax.”

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On the other hand, if the Taxpayer indicates to the Participant that the stated price includes
applicable sales tax, the sales price of an item equals the value of the Points redeemed, less the
applicable sales tax. For example, assume that the Per Point Fee is $1.00. The Taxpayer’s
catalogue states that the Participant may acquire a widget for 100 Points, and the receipt given to
the Participant indicates that the stated price of the widget includes applicable sales tax. The
applicable sales tax rate is 9.5%. For Tennessee sales and use tax purposes, the sales price of the
item is therefore $91.32 and the applicable sales tax to be remitted by the Taxpayer equals $8.68.

Kristin Husat
Director of Legal Services

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

3-13-12

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