When an auto dealer gets a factory-to-dealer incentive payment from the manufacturer to discount a car for an eligible buyer, is that payment part of the taxable sales price — and does the buyer end up paying sales tax on it?

Plain-English summary

A car dealer participates in an auto manufacturer's New Vehicle Purchase Program. Eligible buyers — typically the manufacturer's current and retired employees, their families, and similar affiliated people — get a set discount on a new vehicle. The dealer sells at the reduced price, and the manufacturer reimburses the dealer for the discount with a "factory-to-dealer incentive payment." The dealer asked whether that incentive payment is left out of the taxable sales price of the car.

The Department's answer has two parts. First, the incentive payment is included in the sales price. Tennessee taxes the full "sales price" of a vehicle (Tenn. Code Ann. § 67-6-202(a)), and "sales price" includes consideration the seller receives from a third party when (1) the seller actually receives it from someone other than the buyer, (2) it's tied to a price reduction, (3) the seller must pass that reduction through to the buyer, and (4) the amount is fixed and determinable at the time of sale — plus one of the extra criteria in § 67-6-102(79)(C)(iv), here that the buyer identifies as a member of a group entitled to the discount ((iv)(b)). The manufacturer's reimbursement met all of that, so it's part of the sales price.

Second, a special statute cancels the tax on it. Tennessee law gives an immediate credit for the sales tax attributable to a "motor vehicle manufacturer's incentive payment" (§ 67-6-341(a)-(b)): the tax is computed on the sales price minus the qualifying incentive payment. In practical terms, the credit equals the incentive amount times the state sales tax rate — so the end result is the same as if the incentive had never been in the price. The buyer doesn't pay sales tax on the incentive portion.

To get that credit, the program has to fit the statutory definition of a manufacturer's incentive purchase program (§ 67-6-341(c)): sponsored by a motor vehicle manufacturer, paying the dealer an amount based on the per-vehicle price, and requiring the dealer to reduce the price without a manufacturer's coupon or redemption certificate. The program qualified. The only close question was the "no coupon/redemption certificate" requirement, because buyers had to present an authorization number. The Department held that an authorization number is not a coupon or redemption certificate: a coupon or certificate grants a discount to its bearer, whereas these buyers were already entitled to the discount by their relationship to the manufacturer and the authorization number merely verifies that eligibility (a faster substitute for the dealer phoning the manufacturer's HR department). Because Tennessee doesn't define those terms, the Department used their ordinary meaning, drawing on how Massachusetts and Kentucky define them by regulation.

What this means for you

Auto dealerships

A factory-to-dealer incentive that reimburses you for discounting a vehicle is technically part of the taxable sales price, but Tennessee's § 67-6-341 credit means neither you nor the buyer pays sales tax on the incentive amount — tax lands on the net price. Make sure the program is a genuine manufacturer's incentive purchase program (manufacturer-sponsored, per-vehicle-priced, and not run through a manufacturer's coupon or redemption certificate). Verification tools like an authorization number for employee/family eligibility don't disqualify the program.

Accountants and tax professionals

Two layers: third-party consideration is in the sales price under § 67-6-102(79)(C)/(C)(iv), then § 67-6-341 grants an offsetting credit specifically for motor vehicle manufacturer's incentive payments (credit ≈ incentive × state rate). The dispositive distinction is coupon/redemption certificate (grants the discount) vs. eligibility verification (confirms a pre-existing entitlement). Note the ruling expressly takes no position on § 67-6-341's application to third-party discounts that land in the sales price via the coupon route, § 67-6-102(79)(C)(iv)(a), or the invoice-identified route, (iv)(c).

Common questions

Q: Is a factory-to-dealer incentive payment part of the taxable price of a car in Tennessee?
A: Yes, as third-party consideration (Tenn. Code Ann. § 67-6-202(a); § 67-6-102(79)(C)). But a credit under § 67-6-341 removes the sales tax on a qualifying motor vehicle manufacturer's incentive payment, so tax is effectively owed only on the net price.

Q: So does the buyer pay sales tax on the discounted incentive amount?
A: No. The § 67-6-341 credit makes the tax come out as if the incentive had never been included — tax is computed on the sales price less the incentive payment.

Q: Does requiring an authorization number disqualify the program?
A: No. An authorization number only verifies that the buyer is already entitled to the discount (e.g., as an employee or family member); it's not a "manufacturer's coupon" or "redemption certificate," which would themselves grant the discount.

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 and can be revoked or modified. Confirm your own programs with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-341(a) (credit for sales tax on a motor vehicle manufacturer's incentive payment included in the sales price); § 67-6-341(b) (tax owed on sales price less the incentive payment); § 67-6-341(c)(1)-(c)(2) (definitions; program must require a price reduction without a manufacturer's coupon or redemption certificate)
• § 67-6-202(a) (sales tax on the sales price of TPP sold at retail)
• § 67-6-102(79)(A) (definition of "sales price"); § 67-6-102(79)(C) (third-party consideration included in sales price — four conditions); § 67-6-102(79)(C)(iv) (additional coupon/group-membership/invoice criteria, incl. (iv)(b) group membership; (iv)(a) and (iv)(c) expressly not addressed)

Authority cited by the ruling:

• Bryant v. Genco Stamping & Mfg. Co., 33 S.W.3d 761 (Tenn. 2000) (undefined statutory terms take their usual and accepted meaning)
• 830 Mass. Code Regs. 64H.1.4 (definition of "manufacturer's coupon"); 103 Ky. Admin. Regs. 31:080 (definition of "redemption certificate") — cited as reflecting common usage

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/13-11.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 13-11
Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This ruling is based on the particular facts and
circumstances presented, and is an interpretation of the law at a specific point in time. The
law may have changed since this ruling was issued, possibly rendering it obsolete. The
presentation of this ruling in a redacted form is provided solely for informational purposes,
and is not intended as a statement of Departmental policy. Taxpayers should consult with a
tax professional before relying on any aspect of this ruling.
SUBJECT
Application of the Tennessee sales and use tax to factory-to-dealer incentive payments made to
an automotive dealership.
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] (the “Taxpayer”) receives incentive payments under the following programs,
which comprise part of the New Vehicle Purchase Program offered by [AUTO
MANUFACTURER]: [INCENTIVE PROGRAMS]. [AUTO MANUFACTURER] is a motor
vehicle manufacturer.
The Incentive Programs apply to sales of new and unused [AUTO MANUFACTURER] vehicles
to certain eligible purchasers. Depending on the particular program, eligible purchasers may

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include current or retired [AUTO MANUFACTURER] employees, surviving spouses of retired
employees, [AUTO MANUFACTURER] dealer operators and their employees, and other
[AUTO MANUFACTURER]-affiliated parties.
The amount of the incentive is set on a per-model basis. In turn, dealers are required to use the
incentive to reduce the purchase price of the vehicle by the amount of the incentive received. In
order to receive a price reduction under one of the Incentive Programs, eligible purchasers must
obtain an authorization number from [AUTO MANUFACTURER] and present this number to
the Taxpayer. Utilizing the authorization number, the Taxpayer obtains an approval code from
[AUTO MANUFACTURER] and may then sell the vehicle to the eligible purchaser at a reduced
price. After the Taxpayer notifies [AUTO MANUFACTURER] of the sale and submits any
additional necessary data, [AUTO MANUFACTURER] remits an incentive payment (the
“Incentive Payment”) to the Taxpayer to reimburse the Taxpayer for the price reduction afforded
to the eligible purchaser.
RULING
For Tennessee sales and use tax purposes, is the Incentive Payment excluded from the sales price
of a vehicle sold to a purchaser participating in one or more of the Incentive Programs described
above?
Ruling: For Tennessee sales and use tax purposes, the Incentive Payment is included in
the sales price of a vehicle sold to a purchaser participating in one or more of the
Incentive Programs, but under TENN. CODE ANN. § 67-6-341(a) (2011), an immediate
credit is given for the portion of the sales tax attributable to the Incentive Payment. As a
result, the amount of sales tax due on the sale of the vehicle is as if the Incentive Payment
had not been included in the sales price of the vehicle.
ANALYSIS
TENN. CODE ANN. § 67-6-202(a) (Supp. 2012) imposes the Tennessee sales tax on the sales price
of each article of tangible personal property sold at retail in Tennessee. TENN. CODE ANN. § 676-102(79)(A) (Supp. 2012) 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 costs or charges for services necessary to complete the sale,
among other things.
Generally, the sales price of an item will include consideration received by the seller from a third
party when: 1) the seller actually receives consideration from a party other than the purchaser;
2) the consideration is directly related to a price reduction or discount on the sale; 3) the seller
has an obligation to pass the price reduction or discount through to the purchaser; 4) the amount
of the consideration attributable to the sale is fixed and determinable by the seller at the time of
the sale of the item to the purchaser. 1 In addition, TENN. CODE ANN. § 67-6-102(79)(C)(iv) sets
1

See TENN. CODE ANN. § 67-6-102(79)(C).

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forth three criteria, one of which must also be met in order for consideration received by a seller
from a third party to be included in the sales price of an item:
(a)
The purchaser presents a coupon, certificate or other documentation to the seller
to claim a price reduction or discount, where the coupon, certificate or other
documentation is authorized, distributed or granted by a third party, with the
understanding that the third party will reimburse any seller to whom the coupon,
certificate or documentation is presented;
(b)
The purchaser identifies itself to the seller as a member of a group or organization
entitled to a price reduction or discount. A preferred customer card that is available to any
patron does not constitute membership in such a group; or
(c)
The price reduction or discount is identified as a third-party price reduction or
discount on the invoice received by the purchaser, or on a coupon, certificate or other
documentation presented by the purchaser.
Incentive payments of the type received by the Taxpayer are generally included in the sales price
of the item because: 1) the Taxpayer actually receives consideration from [AUTO
MANUFACTURER], a third party; 2) the consideration is directly related to a price reduction or
discount on the sale; 3) the Taxpayer has an obligation to pass the price reduction or discount
through to the purchaser; 4) the amount of the consideration attributable to the sale is fixed and
determinable by the Taxpayer at the time of the sale of the item to the purchaser; and 5) the
purchaser identifies himself to the Taxpayer as a member of a group entitled to a price reduction
or discount in accordance with TENN. CODE ANN. § 67-6-102(79)(C)(iv)(b).
Notwithstanding the inclusion of such incentive payments in the sales price of an item, the
General Assembly has created an immediate credit applicable when a motor vehicle
manufacturer’s incentive payments are involved.
Specifically, TENN. CODE ANN. § 67-6-341(a) (2011) provides that a “credit shall be granted in
the manner provided in [TENN. CODE ANN. § 67-6-341(b)] for the amount of the sales tax due on
motor vehicle manufacturer’s incentive payments included in the sales price of motor vehicles
sold at retail.” TENN. CODE ANN. § 67-6-341(b) provides that the “credit shall apply such that
sales tax is owed on the sales price of the motor vehicle less any otherwise taxable motor vehicle
manufacturer’s incentive payment associated with the sale.” 2
TENN. CODE ANN. § 67-6-341(c)(1) defines the term “motor vehicle manufacturer’s incentive
payment” as “the amount due to the retailer pursuant to a motor vehicle manufacturer’s incentive
purchase program.” TENN. CODE ANN. § 67-6-341(c)(2) defines “motor vehicle manufacturer’s
incentive purchase program” as “a program sponsored by a motor vehicle manufacturer pursuant
to which an amount, whether paid in money, credit, or otherwise, is received by a retailer from a
motor vehicle manufacturer based upon the unit price of motor vehicles sold at retail that

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As a practical matter, the amount of the credit may be calculated by multiplying the amount of the incentive
payment by the state sales tax rate.

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requires the retailer to reduce the sales price of the product to the purchaser without the use of a
manufacturer’s coupon or redemption certificate.”
Thus, the TENN. CODE ANN. § 67-6-341 credit is available if the Incentive Payment is properly
considered a motor vehicle manufacturer’s incentive payment, as defined under TENN. CODE
ANN. § 67-6-341(c)(2). To qualify as a motor vehicle manufacturer’s incentive payment, the
Incentive Payment must be an amount due to the Taxpayer under a motor vehicle manufacturer’s
incentive purchase program.
For an Incentive Program to be considered a motor vehicle manufacturer’s incentive purchase
program, the following requirements must be met: 1) the Incentive Program must be a program
sponsored by a motor vehicle manufacturer; 2) the Taxpayer must receive an amount, whether
paid in money, credit, or otherwise, from the motor vehicle manufacturer pursuant to the
Incentive Program; 3) the amount received must be based upon the unit price of motor vehicles
sold at retail; and 4) the Incentive Program must require the Taxpayer to reduce the sales price of
the product to the purchaser without the use of a manufacturer’s coupon or redemption
certificate.
Here, the Incentive Program is properly considered a motor vehicle manufacturer’s incentive
purchase program.
First, the Incentive Program is sponsored by [AUTO MANUFACTURER], a motor vehicle
manufacturer. Second, the Taxpayer receives an amount, paid in money, credit, or otherwise,
from [AUTO MANUFACTURER] pursuant to the Incentive Program. Third, the amount
received is based upon the unit price of the motor vehicle sold at retail.
Fourth, the Incentive Program requires the Taxpayer to reduce the sales price of the product to
the purchaser without the use of a manufacturer’s coupon or redemption certificate. The
Retailers’ Sales Tax Act does not define the terms “manufacturer’s coupon” or “redemption
certificate.” When a word or phrase is not defined in a statute, the Tennessee Supreme Court
“look[s] to its usual and accepted meaning from sources of common usage.” 3 Fortunately, other
states have defined such terms by regulation in a manner that reflects common usage and
understanding. For example, Massachusetts defines a “manufacturer’s coupon” for sales tax
purposes as “a coupon issued by the manufacturer, supplier or distributor of tangible personal
property to be redeemed by a retail purchaser of that property.” 4 “Redemption certificate” is
defined in Kentucky’s sales tax regulations as “a certificate in writing vesting in a customer upon
the purchase of certain tangible personal property the right to a reduction in the sales price of the
property.” 5
The Taxpayer has indicated that, in order to receive a price reduction under one of the Incentive
Programs, eligible purchasers must obtain an authorization number from [AUTO
MANUFACTURER] and present this number to the Taxpayer. Utilizing the authorization
3

Bryant v. Genco Stamping & Mfg. Co., 33 S.W.3d 761, 765 (Tenn. 2000).

4

830 MASS. CODE REGS. 64H.1.4 (West, Westlaw through July 19, 2013).

5

103 KY. ADMIN. REGS. 31:080 (West, Westlaw through July 1, 2013).

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number, the Taxpayer obtains an approval code from [AUTO MANUFACTURER]. This
authorization number is different from a manufacturer’s coupon or redemption certificate. The
primary distinction is that the authorization number is simply used to verify eligibility for a
specific group of individuals, whereas a coupon or certificate generally functions to entitle the
bearer to a discount. In other words, coupons or certificates bestow entitlement to a discount,
whereas participants in the Incentive Programs are already entitled to a discount by the nature of
their relationship to [AUTO MANUFACTURER], and simply need to verify their status to the
Taxpayer. The authorization number is simply a more efficient method of verifying employee
and family eligibility than requiring the dealership to contact [AUTO MANUFACTURER]’s
human resources department and inquire based on the customer’s name.
This interpretation is also in line with the purpose underlying TENN. CODE ANN. § 67-6-341,
which was enacted to allow a motor vehicle dealer to pass along the benefit of a factory-to-dealer
incentive payment without the inclusion of the payment in the sales tax due on the motor vehicle.
Such factory-to-dealer incentive payments reduce the dealers’ wholesale cost of the vehicle,
incentivizing the dealer to participate in the program due to the way the program maintains
consistent profit margins for the dealership selling to [AUTO MANUFACTURER] employees
and family vis-à-vis regular customers, and the payments incentivize employees and family to
purchase from the dealer due to the discount.
Having met all applicable requirements, the Incentive Programs are properly considered a motor
vehicle manufacturer’s incentive purchase program. 6 Accordingly, the Incentive Payment
qualifies for the TENN. CODE ANN. § 67-6-341(a) immediate sales tax credit.

R. John Grubb II
Senior Tax Counsel
APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

8/27/13

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Note that this ruling applies to the facts presented herein, and takes no position on the application of TENN. CODE
ANN. § 67-6-341 to any discounts that are properly included in the sales price of an item by the operation of TENN.
CODE ANN. § 67-6-102(79)(C)(iv)(a), (c).

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