Is the exchange of 'trade dollars' between a taxpayer and its vendors subject to Texas sales tax?

Subject

Trade Dollars (Five Dollars Face Value) Issued To Vendors In Exchange For Goods/Services — Vendor Redeems For Taxable Items — Both Transactions Taxable

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310L1273B01

Plain-English Summary

A taxpayer's client issues "trade dollars" — credits with a five-dollar "face value" — to vendors in exchange for goods and services the vendors provide. Vendors can later redeem those trade dollars for purchases from the taxpayer. When a vendor redeems trade dollars, the taxpayer rings up the sale as tax-exempt, gives no cash back for any leftover value, and requires the customer to pay any difference in cash if the purchase is worth more than the trade dollars redeemed. No sales tax was being collected on redemption transactions.

The Comptroller rejected that approach. The letter explains that exchanging goods or services for "money, trade units or other mediums of exchange" is a "sale" within the meaning of Tax Code Section 151.005 (1) — trade dollars are treated as a barter-like medium of exchange, not something outside the sales tax system. Because of this, both halves of the trade-dollar cycle are taxable transactions when taxable goods or services are involved:

1. When the taxpayer's client obtains taxable goods or services from a vendor and pays with trade dollars, the client owes sales tax to the vendor on that purchase — paying with trade dollars instead of cash doesn't change that.
2. When a vendor later redeems trade dollars back with the taxpayer for taxable items, the vendor owes sales tax to the taxpayer on that redemption.

The letter notes this opinion is based on the facts presented, and that different facts, though similar, may lead to a different answer.

What This Means For You

If your business issues "trade dollars," credits, or similar in-house currency to vendors: Treat each exchange as a taxable sale (or purchase) when taxable goods or services change hands, exactly as if cash were used. The medium of exchange being a "trade dollar" rather than currency does not remove the transaction from the sales tax base under Tax Code Section 151.005 (1).

Don't rely on register coding to avoid collecting tax: Marking a trade-dollar redemption as "tax exempt" at the point of sale does not make it exempt. Per this letter, sales tax is owed on both the original exchange of goods/services for trade dollars and on the later redemption of trade dollars for taxable items.

Track both legs of the transaction: Because the letter treats the initial issuance of trade dollars (in exchange for the vendor's goods/services) and the later redemption (vendor buying taxable items from the taxpayer) as two separate taxable events, businesses using trade-dollar-style programs should be prepared to account for tax on each leg, not just one.

Q&A

Q: What are "trade dollars" in this ruling?
A: Per the facts described in the letter, they are credits with a five-dollar "face value" that a taxpayer's client issues to vendors in exchange for goods and services, redeemable by the vendor for purchases from the taxpayer.

Q: Is exchanging goods or services for trade dollars considered a "sale" for Texas sales tax purposes?
A: Yes. The letter states the exchange of goods or services for money, trade units, or other mediums of exchange is a "sale" within the meaning of Tax Code Section 151.005 (1).

Q: Does the taxpayer's client owe sales tax when it pays a vendor with trade dollars for taxable goods or services?
A: Yes. The letter states the client owes sales tax to vendors that provide taxable goods and services even when paying with "trade dollars."

Q: Does the vendor owe sales tax when it redeems trade dollars back to the taxpayer for taxable items?
A: Yes. The letter states the vendors also owe sales tax to the client when they exchange the trade dollars back to the client for taxable items.

Q: Was it correct for the taxpayer to ring up trade-dollar redemptions as tax-exempt and not collect sales tax?
A: No. The facts describe that no sales tax was collected on redemption transactions, but the Comptroller's response makes clear that redemptions of trade dollars for taxable items are taxable sales on which the vendor owes sales tax to the taxpayer.

Original ruling text

October 20, 1993

Dear**

This is in response to your letter dated October 11, 1993, regarding
sales tax as it applies to "trade dollars" as explained below.

FACTS: A client (referred to as "Taxpayer") issues "trade dollars" to
vendors in exchange for goods and services provided. These "trade
dollars" have a "face value" of five dollars and can be redeemed by
the vendor for purchases from Taxpayer.

When these "trade dollars" are redeemed, the company will ring-up the
purchase on the- cash register, indicating that the transaction is
tax exempt. The company does not issue cash back for the
difference between the "face value" of the "trade dollar" and the value
placed on the purchase. If the total value of the purchase is more
than the "face value" of the "trade dollar," the customer must pay the
difference in cash. As a result, the "trade dollar" must be completely
redeemed. Sales tax is not collected on any transaction involving the
redemption of "trade dollars."

RESPONSE: As described above, the exchange of the "trade dollars" is a
sale (analogous to a barter) when the "dollars" are given or received
for goods or services. The exchange of goods or services for money,
trade units or other mediums of exchange is a "sale" within the
meaning of Tax Code 151.005 (1). When the goods or services for which
the "trade dollars" are given or received are taxable, sales tax must
be collected and remitted.

Your client owes sales tax to vendors that have provided him with
taxable goods and services even when he pays for the goods or services
with "trade dollars" as described above. The vendors also owe sales
tax to your client when they exchange the "trade dollars" back to your
client for taxable items.

This opinion is based on the facts presented. Different facts, though
similar, may result in different answers. If you have any questions or
need moreinformation, please write or call me at 1-800-531-5441,
extension 50330, or 512-475-0330.

Sincerely,

Bettie Peterson
Tax Administration Division

NOTE: Previous Accession Number 9311106L.3 and/or 9311106L