Can a direct-sales company reduce the sales tax it collects on prepaid discount vouchers to reflect that only about 1% of the vouchers are ever actually redeemed?

Plain-English summary

A direct-sales/multi-level-marketing company sells "Discount Redemption Vouchers" to its independent distributors, with prices varying by quantity purchased. Distributors then resell the vouchers — capped at the suggested retail price, though most actually sell at a substantial discount. A voucher holder can later redeem it for $5.95 shipping and handling and receive one of several printed items: trading cards, postcards, greeting cards, calendars, or business cards. Sales tax is charged on that $5.95 shipping/handling charge when a Texas resident redeems a voucher.

The wrinkle: only about 1% of the vouchers issued are ever actually redeemed — a figure the company can document through inventory counts and sales records, and for which it books an accounting liability at the time of sale. The company asked whether, given that low redemption rate, it could collect sales tax on the vouchers based on the 1% expected-redemption figure rather than the full suggested retail price of every voucher sold.

The Comptroller said no. Sales tax must be collected by the company from its distributors on the suggested retail price of the vouchers, full stop — because a voucher is a prepaid receipt for the future purchase of a taxable item, and the suggested retail price of that taxable item is the tax base. Booking a 1% redemption liability for the company's own accounting purposes doesn't change what the voucher is worth in the hands of a distributor or purchaser who could still redeem it at any point. The Comptroller also noted the obvious commercial reality: distributors are buying vouchers expecting to resell them for more than they paid, which reinforces that the vouchers carry real, full retail value regardless of how often they're actually redeemed. Under no circumstances can a company adjust its reported sales to remit less tax than what it actually collected.

What this means for you

Direct sales and MLM companies selling vouchers, coupons, or prepaid redemption certificates

You can't shrink your sales tax collection obligation by pointing to a low actual-redemption rate, even if that rate is well-documented. The tax base is the suggested retail price of the taxable item the voucher represents, set at the time of sale — not an expected-value calculation based on how many vouchers you predict will actually be redeemed.

Accountants and tax professionals

This letter draws a clean line between financial accounting (where booking a liability based on expected 1% redemption may be entirely appropriate) and sales tax reporting (where the tax base is fixed at the suggested retail price regardless of redemption probability). Useful precedent whenever a client's business model involves prepaid vouchers, gift cards, or redemption certificates with low actual usage rates.

Common questions

Q: Can a company reduce sales tax collected on vouchers to reflect a low redemption rate?
A: No, per this letter — tax must be collected on the full suggested retail price of the vouchers, regardless of the actual redemption rate.

Q: What is the tax base for these vouchers?
A: The suggested retail price of the taxable items (trading cards, calendars, etc.) the voucher can be redeemed for, per this letter.

Q: Does booking an accounting liability for the expected redemption rate change the sales tax owed?
A: No, per this letter — that's an internal accounting treatment and doesn't affect the voucher's suggested retail price for sales tax purposes.

Citations and references

No specific Tax Code section or Comptroller rule number is cited in this letter; the Comptroller applied its general prepaid-receipt/suggested-retail-price tax base policy to these facts, referencing an earlier related STAR document (9806569L) discussed in the taxpayer's original inquiry.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9809822L

Original ruling text

September 18, 1998

Dear **:

Thank you for your September 2nd letter concerning STAR document (9806569L) and
the taxability of sales from COMPANY to an independent distributorship.

Situation: The independent distributor purchases "Discount Redemption
Voucher's" from COMPANY for prices that vary depending on the quantity
purchased. The vouchers can then be resold for a price not to exceed the
suggested retail price; however, most are sold at substantial discounts. The
purchaser may then redeem the voucher for $5.95 shipping and handling and
receive trading cards, postcards, greeting cards, calendars, or business cards.
Sales tax is charged on the shipping and handling charges if a Texas resident
redeems the vouchers.

To expand on your previous explanation, only about 1% of the Discount
Redemption Vouchers are actually redeemed. This percent can be easily obtained
and proven by inventory counts and sales figures. When the vouchers are sold a
liability is booked for the 1% of the vouchers that are redeemed.

Question: You understand that COMPANY is responsible for collection and
remittance of sales tax on the sale of the Discount Redemption Vouchers and
that the tax must be collected on the suggested retail price of the vouchers.
Since only 1% of the vouchers are redeemed, can the price that sales tax is
based on be adjusted to reflect the low redemption rate?

Response: No. The sales tax must be collected by COMPANY from distributors on
the suggested retail price of the Discount Redemption Vouchers. The vouchers
are prepaid receipts for the purchase of taxable items and the suggested retail
price for the taxable items is the basis of the tax. The booking of the 1%
liability does not change the suggested retail price of the vouchers in the
hands of distributors and/or purchasers that at some point could be redeemed.
Obviously, the distributors are expecting to sell the vouchers at some point
for a price greater than the price they paid COMPANY. Under no circumstances
may the reported sales be adjusted to remit less tax than what was collected.

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