Can a buyer reduce the sales or use tax it already paid on equipment purchases when the vendor later gives back a cash or credit rebate or discount tied to those specific purchases?

Subject

Rebate — Obtained From Seller/Retailer As Cash Or Credit Discount After Sale — Excludable From Tax Base

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9611125L

Plain-English summary

A purchaser of "state of the art" communications-industry equipment asked the Comptroller whether several kinds of after-the-sale rebates and discounts from its vendor could be used to reduce the sales/use tax originally paid or accrued on the gross purchase price. The purchaser had already paid or accrued tax at the full (gross) invoice price, and later received rebate checks or credits tied to specific purchases.

The facts described several different rebate/discount arrangements under a purchase contract:

• Cooperative Market Funding (Section 1.J): the vendor pays the purchaser a cooperative marketing funding amount equal to 5% of the purchase price of future purchases, within fourteen days of the purchaser's payment.
• Volume discounts (Section 1.F): a Volume Discount Schedule based on purchase volume, or "such greater discount as may be mutually agreed upon by Seller and Buyer ... with respect to individual orders."
• Combined purchases across affiliates (Section 2.F): sales to the purchaser and its affiliates are combined when calculating the volume discount.
• Consigned units and depreciation allowances: the vendor places consigned equipment at no charge for a multi-year consignment period; when a proven consigned unit is later purchased, the sales price may be the market price less the vendor's depreciation. Because the original invoice was rendered at the gross price, the vendor later cuts a rebate for the amount of depreciation taken.
• Marketing incentive payments: the vendor pays the purchaser a percentage of the purchase price for certain city-specific unit purchases, to help defray the purchaser's marketing costs -- described as a volume discount resulting from marketing costs the vendor doesn't have to pay, not payment for marketing services performed by the purchaser.
• Spares-kit discounts: discounts off list price for spare-parts kits ordered before a stated date.
• Rebates for late or non-conforming equipment: if the vendor doesn't have a unit in place when promised, or the unit fails to perform to specifications, the purchaser pays tax on the gross sales price up front and the vendor later discounts or rebates an amount for the shortfall.

Some original invoices noted a "Coop Discount" line; others didn't. Some rebates were fixed in the underlying contract; others were negotiated individually right before or at the time of a specific sale. Rebate checks and an accompanying vendor memorandum identified the specific original invoices each rebate related to.

The Comptroller's answer: Volume discounts and cash rebates are excludable from the sales/use tax base of a taxable item if properly documented. If the vendor collected the tax, it must be refunded to the customer in proportion to the sales price refunded on which the tax was collected. The refund or rebate must be in the form of cash or credit, and it must come directly from the vendor to the purchaser -- a rebate/discount paid by a manufacturer rather than the vendor does not reduce the purchase price for tax purposes.

The Comptroller quoted Rule 3.301(d) (Cash discounts): bona fide cash discounts taken at the time of sale are never part of the sales price and never in the tax base. Cash discounts taken after the sale has already been used in the measure of the tax may be deducted from the tax liability for the reporting period in which the discount is taken, but only if the retailer seeking the adjustment shows it adjusted, pro rata, any reimbursement tax it collected from its purchasers -- and the discount must be substantiated in the accounts, invoices, and records of the retailer to the Comptroller's satisfaction.

Applying that rule, the Comptroller found that the rebates for marketing costs the vendor didn't have to pay, and the discounts for equipment that wasn't in place as agreed or failed to perform to specifications, are valid reductions in the sales price and are not included in the measure of the tax.

The letter also addressed the purchaser's own self-assessed use tax: where the purchaser self-assessed use tax on the gross sales price of the equipment and later receives a rebate or price reduction from the vendor, the purchaser may adjust a subsequent return or amend the return on which the tax was remitted, for the discount or rebate received. Again, the rebate or discount must be substantiated in the retailer's accounts, invoices, and records, and documented in the purchaser's records, tying the discount or rebate directly to a specific equipment purchase.

The Comptroller noted this opinion is based on the facts presented, and other facts -- even if similar -- may produce a different result.

What this means for you

Equipment purchasers who receive vendor rebates or discounts

If you paid or accrued sales/use tax at the gross invoice price and later get a cash or credit rebate directly from your vendor (not the manufacturer) tied to that specific purchase, you can generally exclude the rebated amount from the tax base -- but only if you can document it: rebate checks, vendor memos, and records tying each rebate to a specific original invoice. If you self-assessed use tax on the gross price, you can adjust a later return or amend the original return once you receive and document the rebate.

Vendors offering volume discounts, cooperative marketing funds, or performance rebates

Whether the rebate is framed as cooperative marketing funding, a volume discount, a consignment depreciation credit, a marketing incentive payment, or a make-good for late or non-conforming equipment, the same rule applies: it's excludable from the tax base only if properly documented, and if you collected tax from the customer, you must refund the tax proportionally to the price you refunded. Discounts taken at the time of sale are simply never part of the sales price; discounts taken after the sale requires substantiation and a pro rata adjustment of any tax reimbursement collected from purchasers.

Accountants and tax professionals

The key documentation elements the Comptroller looked for are: (1) a direct cash-or-credit refund/rebate from the vendor (not a manufacturer) to the purchaser; (2) traceability of the rebate to specific original invoices; and (3) proof, in the retailer's accounts, invoices, and records, that any reimbursement tax collected was adjusted pro rata. Whether a discount was set out in the master contract or negotiated individually at the time of a specific sale did not change the analysis in this letter.

Common questions

Q: Does it matter whether the rebate/discount was written into the blanket contract versus negotiated individually at the time of sale?
A: The letter does not indicate that this distinction changed the outcome; the Comptroller's response addressed all of the described rebate/discount scenarios together based on documentation and traceability, not on how or when the discount was agreed to.

Q: Can a manufacturer's rebate (rather than the vendor's) reduce the tax base?
A: No. The ruling states the discount/rebate is not allowed as a reduction of the purchase price if it is paid from the manufacturer, rather than the vendor, to the purchaser.

Q: What if the original invoice already showed a "Coop Discount" line, but the seller still charged tax at gross?
A: The letter describes this fact pattern without carving it out for different treatment -- the invoice taxes were paid or accrued at gross either way, and the subsequent rebate is treated under the same documentation-based rule as the other rebates described.

Q: Are rebates for equipment that wasn't installed on time, or that didn't perform to specifications, treated the same as marketing/volume discounts?
A: Yes. The Comptroller specifically found that rebates for marketing costs the vendor didn't have to pay, and discounts for equipment not in place as agreed or that failed to perform to specifications, are valid reductions in the sales price not included in the measure of the tax.

Q: If I already remitted use tax on the gross price, how do I get credit once I receive a rebate?
A: The letter says you may adjust a subsequent return or amend the return on which the tax was remitted for the discount or rebate received, provided the rebate is substantiated and tied to the specific equipment purchase.

Citations and references

Rules:

• Rule 3.301, Promotional Plans, Coupons, Retailer Reimbursement -- Subsection (d), Cash discounts (quoted in full in the ruling: bona fide cash discounts taken at time of sale are never in the tax base; cash discounts taken after the sale has been used in the tax measure may be deducted from tax liability if substantiated and if reimbursement tax collected is adjusted pro rata)

Original ruling text

November 13, 1996

VIA FAX: ****

Dear****:

This is in response to your request for a ruling regarding cooperative
discounts and rebates tied to specific purchases and whether they can be used
to reduce tax paid on purchases on the gross amount.

YOUR FACTS

The situation relates to state of the art equipment utilized in the
communications industry:

Contract Provisions include:

Section 1.J: Cooperative Market Funding. In addition to the base discount
volume level included in Section 1.F, a cooperative marketing funding of five
(5) percent of the purchase price for all future purchase under this agreement
shall be made by (Vendor) to (Purchaser) within fourteen days of payment by
Purchaser to Vendor for purchases for residential and business markets."

Section: 1.F. The two columns headed, "Volume Amount" and "Discount",
contained in the Volume Discount Schedule, " appearing on page one of the
Appendix A, are deleted in their entirety and replaced with the following,

Volume Amount Discount *
(no amounts shown)

• "or such greater discount as may be mutually agreed upon by Seller and Buyer
  from time to time with respect to individual orders".

Section 2.F

*Sales to Purchaser and all affiliates of Purchaser will be considered in
calculating the volume discount provided in paragraph 1."

• consigned units and depreciation allowances

Due to the dynamics of the industry the Vendor will place consigned units. The
consigned systems shall be provided at no charge (including all future
expansion hardware and software) and title to such systems will remain vested
in Vendor. The consignment period shall be for a minimum of five years with
Purchaser having the option to an extension of five more years at no charge.
Each consigned system shall be expanded in capacity or upgraded to match growth
or upgrades purchased by Purchaser for the two purchased systems in City 1 or
City 2.

Due to the evolving nature of this service industry, Purchaser is a point
company relative to implementation of machines exhibiting state of the art
technology capabilities. Due to the experimental state of same, units are
placed with Purchaser and may serve as a basis to evaluate improvements.

Periodically, proven consigned units are purchased by Purchaser. Sales price
may be the market sales price less Vendor depreciation amounts The original
purchase invoice rendered is at gross. A rebate is later cut for reduction of
sales prices equal to value of depreciation taken by Vendor.

Tractability of Rebates/Discounts

Rebates/discounts are readily traceable to specific unit purchases. Taxes on
original invoices are either paid to vendor (at gross sales price) or accrued
by Purchaser. Though some original invoices may note the "Coop discount"
again, invoice taxes were either paid or accrued at gross.

Subsequently, a rebate check is processed. Current documentation available
includes a rebate check from Vendor and a Vendor internal memorandum detailing
rebateable original invoices.

Other basis for rebates are:

Vendor shall make a marketing incentive payment to Purchaser of a __% of the
purchase price for three City 3 and City 4 purchases units within 14 days of
(Purchaser) purchase payment. Purchaser shall use said payment amount to
defray part of its initial marketing cost relating to these markets. In
addition, Vendor shall increase the marketing incentive payment for recently
purchased systems in City #5 from four (4) to five (5) percent. of the purchase
payments and still remit said amount to Purchaser within 14 days of the date of
the acceptance letter.

(Per our converstation of October 13, 1996, you indicated that Purchaser
provides no marketing services for Vendor. The reduction or discount in price
is the result of volume discounts resulting from marketing costs that Vendor
does not have to pay due to the volume of purchases by Purchaser.)

Because of mutual desire of the parties to improve service levels, Vendor
offers Purchaser for orders received before (DATE) spares kits at _% discount
from Vendor list prices. In addition, a __% of list price for City #7.

Another reduction in price results when Vendor fails to have a unit in place
when promised or when the unit in place fails to perform to specifications.
Purchaser initially pays tax on the gross sales price and Vendor later
discounts or rebates an amount for the failure to have the unit in place as
agreed or for the unit not performing to specifications.

QUESTIONS

1. Are each of the reductions listed above (received subsequently through
   direct check reimbursements) a basis for refunding of taxes originally paid or
   accrued at gross amounts on original invoices.

Some purchase invoices (though still taxed at gross) noted an amount for "Coop
Discount", others did not . However, rebate checks identify specific
purchases.

Some rebates/discounts were per agreements and stipulations agreed to though
the blanket contract. Other individual reductions were negotiated immediately
prior to or as the sale was finalized.

Do these situations impact your response relative to taxability in any manner?

In relation to rebates/discounts necessitated due to a level of performance
under that of agreed to specifications, are these allowable reductions to the
original measure of tax paid or accrued?

RESPONSE: Volume discounts and cash rebates are excludable from the tax base
of a taxable item if properly documented. The sales tax, if collected by the
vendor, must be refunded to the customer in proportion to the sales price
refunded on which the tax was collected. The refund/rebate must be in the form
of cash or credit. Note that the rebate/discount must come directly from the
vendor to the purchaser (i.e., the discount/rebate is not allowed as a
reduction of the purchase price if it is paid from the manufacturer, rather
than the vendor, to the purchaser).

Subsection (d) of Rule 3.301. Promotional Plans, Coupons, Retailer
Reimbursement, provides as follows:

Cash discounts. The actual selling price of taxable tangible personal property
is the measure of the tax due under the terms of the Limited Sales, Excise, and
Use Tax Act. Bona fide cash discounts taken by the buyer at the time of the
sale pose no problem, as they are never a part of the sales price and are never
in the tax base. However, if cash discounts are taken after the amount of the
sales have been used in the measure of the tax, such cash discounts may be
deducted from the measure of tax liability for the reporting period in which
such discounts are taken in which instance the retailer seeking an adjustment
in his tax liability must show he has adjusted pro rata the reimbursement tax
collected, if any, from his purchasers. Cash discounts so taken and becoming
the basis of a tax adjustment between retailers, their purchasers, and/or the
State of Texas, must be substantiated in the accounts, invoices, and records of
such retailers to the satisfaction of the Comptroller's office.

Emphasis added.

The rebates to Purchaser for marketing costs that the Vendor does not have to
pay and the discounts for equipment not in place as agreed, or for equipment
that failed to perform to specifications, are valid reductions in the sales
price to Purchaser and are not included in the measure of the tax.

Where your client has self assessed use tax on the gross sales price of this
equipment and later receives a rebate or reduction in price from the vendor of
the equipment, your client may adjust a subsequent return or the amend the
return on which the tax was remitted for the discount or rebate received.
Again, the rebate or discount must be substantiated in the accounts, invoices,
and records of the retailer and documented in the purchaser's records, tying
the discount or rebate directly to a specific equipment purchase.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct line
is 512/463-4502. You may also write to Tax Policy Division, Comptroller of
Public Accounts. My Internet address is: [email protected].

Sincerely,
Gilbert Zamora
Tax Policy Division