Does a company that operates a can-crushing prize machine owe sales tax on the advertising fees it charges, or on the machine and prizes it buys?

Subject

Machine With Mechanism That Reads Like Slot Machine — Crushes Aluminum Cans For Prizes/Coupons Using Advertisers Logos As Match — Ups

Plain-English summary

A taxpayer (identity redacted) asked the Comptroller about sales tax on a machine that dispenses prizes or coupons when someone crushes an aluminum can in it. When a can is crushed, the machine triggers a slot-machine-like display of advertisers' logos; the more logos that match up (from one to five), the better the prize or coupon the customer wins. The taxpayer sells the advertising space on the machine to companies who want their logos displayed, and those companies redeem the coupons.

The Comptroller's answer had two parts:

• The charge for advertising that the taxpayer collects from the companies placing their logos on the machine is not taxable.
• However, the taxpayer is responsible for paying sales tax on its own purchases of taxable items used to run the promotion, including the machines themselves, the prizes, the printing of the logos, and the printing of the coupons.

As with other letters of this era, the Comptroller noted the opinion is based on the facts submitted and that other, similar facts could yield a different result.

What this means for you

Businesses running promotional or vending-style prize machines

If you operate a similar promotional machine (redeeming prizes or coupons based on how it interacts with the item deposited, like crushing a can), the fee you charge advertisers to place their logos on the machine is not itself a taxable sale under this ruling. But you are on the hook for sales tax as the purchaser of the machine, the prizes, and any printed materials (logos, coupons) — you can't pass that tax liability through to the advertisers just because their logos are involved.

Companies buying advertising space on such machines

Under this ruling, the fee you pay to have your logo placed on someone else's prize machine is not a taxable charge.

Accountants and tax professionals

The key distinction here is between the (non-taxable) service of selling advertising space and the (taxable) purchases the machine operator makes to build and stock the promotion — the machine, the prizes, and the printing. Sales tax attaches at the operator's purchase of those taxable items, not at the advertising transaction.

Common questions

Q: Is the fee charged to companies for placing their logo on the prize machine taxable?
A: No. The Comptroller ruled that the charge for advertising is not taxable to the companies wishing to place their logos on the machine.

Q: Does the machine operator owe sales tax on anything?
A: Yes. The operator is responsible for paying sales tax on its purchases of taxable items, including the machines, the prizes, the printing of the logos, and the printing of the coupons.

Q: Could a different set of facts change this answer?
A: Yes. The letter states the opinion is based on the facts submitted, and other facts, though similar, may yield different results.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609L1436A06

Original ruling text

September 4, 1996

Dear ***:

Thank you for your letter concerning your sales tax responsibility for a
machine that dispenses prizes or coupons in return for crushing cans.

Situation: The machine crushes aluminum cans which triggers a mechanism
that will read out (like a slot machine) advertisers logos. A prize will
be given away every time a can is placed into the machine. The more logos
that match up from one to five, the better the prize or coupon.

You will sell advertising to any company to place their logos on the
machine. The companies will redeem the coupons.

Response: The charge for advertising is not taxable to the companies
wishing to place their logos on the machine. However, you are responsible
for paying sales tax on the purchase of any taxable items including the
machines, prizes, printing of the logos, printing of the coupons, etc.

This opinion is based on the facts you submitted. Other facts, though
similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct
line is 512/475-0030. You may also write to Tax Policy, Comptroller of
Public Accounts.

Sincerely,

David Somerville
Tax Policy Division

NOTE: Previous Accession Number 9609677L