Were loyalty-program membership fees taxable when members received future purchase discounts but no free merchandise?

Subject

Sale of loyalty program memberships; transfer of tangible personal property

Plain-English summary

A beauty-products retailer's loyalty-program membership fees were not subject to Virginia sales tax because members received discounts, not free merchandise. Earlier determinations had upheld the audit, but the retailer returned with additional documents and explained the program in a meeting with the Department.

Marketing materials called the rewards a birthday "gift," a four-point "gift," and an eight-point "gift." In practice, no tangible item was given away. Members received a $10 discount on a birthday-month purchase, a $15 discount after earning four points, and a $25 discount after earning eight points.

Virginia treated membership fees as exempt when the membership merely entitled the customer to future discounts and did not transfer tangible personal property or provide a taxable service at the point of sale. Because the audit was based solely on the loyalty memberships, the Department abated the assessment in full.

What this means for you

• The actual benefit controls, not labels such as "gift" in marketing materials.
• A paid discount membership can be exempt when no property or taxable service is transferred with the fee.
• Free merchandise directly tied to the membership could change the result.
• Additional documentation can change a reconsideration outcome when it establishes materially different program facts.

Common questions

Did customers receive merchandise during their birthday month?

No. They received a $10 discount on a purchase.

What did four and eight points provide?

A $15 discount after four points and a $25 discount after eight points.

Why had the Department upheld the assessment before?

The earlier determinations were based on the record then provided. The additional documentation showed that the supposed gifts were only discounts.

What happened to the audit assessment?

It was abated in full because it was based solely on the membership sales.

Citations and references

• Va. Code § 58.1-602.
• Virginia Public Documents 84-89, 96-231, 09-43, and 10-64.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-212

Original ruling text

September 15, 2010

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your request made on behalf of * (the "Taxpayer") for a reconsideration of the prior determination issued to the Taxpayer. The Taxpayer seeks correction of the retail sales and use tax assessment issued for the period October 2004 through August 2007.

FACTS

The Taxpayer operates as a retail business that sells beauty products. In the audit, the Taxpayer was assessed sales tax on the sale of loyalty program memberships. The Taxpayer filed an appeal and was issued a determination letter by the Tax Commissioner (Public Document (P.D.) 09-43 (4/24/09)), which upheld the assessment of tax. The Taxpayer filed a request for reconsideration and provided additional documentation to support its contention. In P.D. 10-64 (5/12/10), the assessment of tax was once again upheld.

In this reconsideration request, the Taxpayer has provided additional documentation for review and in support of its contention that the program memberships are not subject to the retail sales and use tax. The Taxpayer contends that the terms of its loyalty program do not include the provision of tangible personal property free of charge.

It is my understanding the Taxpayer met with members of the Department's Appeals and Rulings unit to further discuss the terms of the program. In that meeting, the Taxpayer stated its customers do not receive free gifts as a result of purchasing loyalty program memberships. The Taxpayer states that a customer receives a discount on a purchase made during the customer's birthday month. Additionally, the Taxpayer states that its customers receive a discount on a purchase made after earning 4 points in the program and after earning 8 points in the program.

DETERMINATION

Virginia Code § 58.1-602 defines sale, in pertinent part, as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration ...."

In P.D. 84-89 (7/3/84), pursuant to the Va. Code § 58.1-602 definition of sale, the Tax Commissioner ruled that the sale of video club memberships was exempt from sales and use tax. Because the sale of video memberships did not include the transfer of tangible personal property or the provision of a taxable service, this type of transaction was not subject to the sales and use tax.

In P.D. 96-231 (9/17/96), the Department's current policy regarding transactions of this type is more clearly set out. The public document states that the sale of a membership that does not include the provision of tangible personal property directly related to the membership fee is an exempt sale. Accordingly, sales of membership cards that entitle the card holder to discounts on future purchases are exempt of the sales and use tax if there is no other transfer of tangible personal property to the purchaser at the time the membership card is sold.

While labeled a "birthday gift" in the Taxpayer's literature, the Taxpayer's customer does not actually receive an item of tangible personal property free of charge during the customer's birthday month. Instead, the customer receives a $10 discount on a purchase made during the customer's birthday month. Likewise, while labeled a "4 point gift" and an "8 point gift" in the Taxpayer's literature, the Taxpayer's customer does not actually receive an item of tangible personal property from the Taxpayer after accumulating the required number of points. Instead, after accumulating 4 points, the customer receives a $15 discount on a purchase at the Taxpayer's retail stores. Likewise, after accumulating 8 points, the customer receives a $25 discount on a purchase.

After further consideration and based upon the additional information provided by the Taxpayer, I have determined that the sale of the loyalty program memberships does not involve the transfer of tangible personal property to the Taxpayer's customers at the point of sale. The sale of the loyalty program memberships does not include the provision of tangible personal property directly related to the membership fee. Rather, the memberships entitle the Taxpayer's customers to discounts on future purchases at the Taxpayer's retail stores. Accordingly, the Taxpayer is not subject to the retail sales and use tax on the sale of the loyalty program memberships. The audit assessment was based solely on sales of the Taxpayer's loyalty program memberships. Accordingly, the assessment will be abated in full.

The Code of Virginia section and public documents cited acre available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-4532875669.P