If customers bid no-value promotional 'bonus dollars' for merchandise at an auction, are those transactions taxable Texas sales?

Plain-English summary

A radio/TV station ran a "Keep It At Home" campaign to encourage local shopping. Participating merchants handed customers promotional "bonus dollars" — one bonus dollar for every real dollar of merchandise bought. Merchants also bought advertising from the station and paid part of the bill by donating merchandise for an on-air auction, where the public bid using their bonus dollars.

An earlier Comptroller letter (dated October 10, 1988) had told the station to collect and remit sales tax based on the "redemption value" of the bonus dollars bid. This January 17, 1989 letter modifies that instruction and reaches the opposite conclusion:

• The bonus dollars have no monetary value. Because they are worthless, exchanging them for merchandise, meals, or services is not a "sale" as defined in Texas Tax Code § 151.005. So the station is not making taxable sales at the auction, the station does not collect sales tax, and bidders do not pay sales tax on what they "buy" with bonus dollars.

• But tax is still owed on the merchandise itself. A retailer that contributed merchandise as part of its payment for advertising is liable for sales tax on the item's purchase price if the retailer had originally bought that merchandise tax-free under a resale certificate. Under Texas Tax Code § 151.154, a person who uses a resale-certificate item for any purpose other than holding it for resale owes tax on the purchase price. Donating the goods to the auction is such a non-resale use.

What this means for you

Businesses running promotions with play money or points

If your promotional "currency," points, or scrip has no monetary value, redeeming it for goods or services is not a taxable sale — there is no consideration that meets the definition of a sale under § 151.005. Don't collect sales tax on the redemption itself.

Retailers who donate inventory for a promotion or auction

Watch the resale certificate. If you bought the goods tax-free to resell them and then divert them to a giveaway, donation, or auction contribution instead, you owe sales tax on your purchase price under § 151.154. The tax follows the goods even though the auction "sale" for bonus dollars is not itself taxable.

Stations and organizers hosting the auction

You are not collecting tax from bidders when the bidding is done in no-value promotional dollars, but make sure the donating merchants understand their own § 151.154 exposure on resale-certificate merchandise they contribute.

Common questions

Q: Do I collect sales tax when customers "buy" items with no-value promotional bonus dollars?
A: No. Because the bonus dollars have no monetary value, the exchange is not a "sale" under Texas Tax Code § 151.005, so no sales tax is collected on the redemption.

Q: So the whole transaction is tax-free?
A: Not entirely. The redemption is not a taxable sale, but a retailer who donated merchandise it had bought tax-free on a resale certificate owes tax on that merchandise's purchase price under § 151.154.

Q: Why does the donating retailer owe tax?
A: Section 151.154 taxes a resale-certificate item that is used for any purpose other than resale. Contributing the goods to the auction is a non-resale use, so tax is due on the purchase price.

Q: Didn't an earlier letter say to tax the "redemption value"?
A: Yes, the October 10, 1988 letter said that. This January 17, 1989 letter modifies it and concludes the redemptions are not taxable sales.

Q: Can I rely on this letter for my own promotion?
A: Treat it as guidance only. It is based on the specific facts presented and can change with different facts; on the STAR system it binds the Comptroller only as to the taxpayer it was issued to and may no longer reflect current policy.

Citations and references

Statutes:

• Tex. Tax Code § 151.005 (definition of "sale" or "purchase")
• Tex. Tax Code § 151.154 (tax due when an item bought under a resale certificate is used for a purpose other than resale)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8901L0917F14

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller January 17, 1989

Dear ***:

This letter is to modify Sandi Skaggs' letter of October 10, 1988,
regarding your tax liability the redemption of 'bonus dollars' for
merchandise auctioned in the 'Keep It At Home' campaign.

You were instructed to collect and remit sales tax based on the
"redemptive value" of the "bonus dollars" surrendered or bid on
taxable items at future auctions.

We have concluded that the 'bonus dollars' have no monetary value.
Because the 'bonus bucks' have no value, the transactions involv-
ing the exchange of the 'bonus bucks' for merchandise, meals, and
services are not sales as defined in Section 151.005 of the Texas
Tax Code (tax code). * TV will not be making sales at the
auction. Because these are not sales, * TV will not be requir-
ed to collect sales tax on "sales" and persons "purchasing" mer-
chandise will not be required to pay sales tax.

However, sales tax must be paid on the merchandise. Retailers
contributing merchandise as part of their payment for advertising
will be liable for sales tax based on the purchase price if the
merchandise was purchased tax-free under a resale certificate.
Section 151.154 of the tax code requires a person who uses an
item purchased under a resale certificate for any purpose other
than holding it for resale to pay sale tax on the purchase price.

This opinion is based on the facts presented. If there are addi-
tional or different facts, the opinion may change.

If you have any questions or need more information, you may call
toll-free 1-800-252-5555, ext. 3-4683. The regular number is
512/463-4600. You may write me at Tax Correspondence, Comptroller
of Public Accounts.

Sincerely,
Eddie C. Washington
Tax Correspondence

COMPTROLLER OF PUBLIC ACCOUNT
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller October 10, 1988

Dear ***:

Thank you for your letter regarding the redemption of "bonus dollars" for
merchandise.

You stated in your letter that you ran a 'Keep It At Home' campaign to
encourage shoppers to shop in the coastal bend area. Merchants issued
"bonus
dollars" to their customers in an amount equal to merchandise purchased -
one
'bonus dollar' for each dollar purchased. The merchants purchased
advertising from you and paid a portion of their bill with an item for
the
auction, the remainder in cash.

On August 27, 1988, you held an auction, to dispose of the merchandise
from
above. Individuals made bids using the "bonus dollars". Some items sold
for
over retail, while other items sold below retail. Sales tax was charged
on
the retail amount, irregardless of what the item sold for in your
auction.
Sales tax will be remitted on your quarterly return based upon the retail
value of the merchandise.

This procedure is acceptable for the auction held on August 27, 1988.
However, in the future, you should collect and remit the appropriate rate
of
tax based on the redemption value of the "bonus dollars" surrendered.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call our
toll-free
number 1-800-252-5555, ext. 3-4687. The regular number is 512/463-4600.
You
may write me at Tax Correspondence, Comptroller of Public Accounts.

Sincerely,
Sandi Skaggs
Tax Correspondence