Were beauty-store loyalty memberships taxable when members received discounts and became entitled to free gifts?

Subject

Loyalty memberships remained taxable because they entitled customers to free gifts

Plain-English summary

Virginia upheld sales tax on the beauty retailer's loyalty-program memberships because buying a membership entitled customers to tangible personal property. A prior determination had already sustained the assessment, and the retailer sought reconsideration with additional internal records.

The retailer said the published terms did not reflect how the program actually operated and that the card did not include free property. Its store-operations manual showed otherwise. Members received a one-time $10 birthday-month discount, became entitled to free gifts at their fourth and eighth points, and were described as receiving 10% off purchases plus other free gifts.

The new documentation confirmed rather than disproved the earlier finding. Because Virginia defined a sale to include transferring title or possession of tangible personal property for consideration, and the assessment was presumed correct, the retailer failed to carry its burden. No audit revision was made.

What this means for you

• A membership fee can be taxable when the purchased rights include free merchandise.
• Program manuals, register records, and actual benefits can outweigh a business's characterization of the membership.
• Discounts alone were not the only issue; the free-gift entitlement was central here.
• Reconsideration requires evidence that actually refutes the original factual basis.

Common questions

What benefits did the manual describe?

A $10 birthday-month discount, 10% discounts, and free gifts at specified point levels.

Did the new documents help the retailer?

No. Virginia said they further confirmed the taxable property benefit.

Was the assessment changed?

No.

Citations and references

• Va. Code §§ 58.1-205, 58.1-602, and 58.1-603.
• Virginia Public Document 09-43.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-64

Original ruling text

May 12, 2010

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

Dear *:

This is in response to your request for reconsideration submitted on behalf of * (the "Taxpayer") in which you seek correction of the retail sales and use tax assessment issued for the period October 2004 through August 2007. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates as a retail business that sells beauty products. In the audit, the Taxpayer was assessed tax on the sale of loyalty program memberships because the loyalty program entitled the Taxpayer's customers to receive a gift once a year. The Taxpayer filed an appeal and was issued a determination letter by the Tax Commissioner in Public Document 09-43 (4/24/09), which upheld the assessment of tax. In its request for reconsideration, the Taxpayer contends that the terms and conditions of its discount program may be misleading and do not portray the way in which the program actually operates. The Taxpayer provides additional documentation in support of its contention that the program memberships are not subject to the retail sales and use tax. The Taxpayer states the terms of its loyalty program do not include the provision of tangible personal property free of charge.

DETERMINATION

Virginia Code § 58.1-603 levies and imposes "a license or privilege tax upon every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth . . . . "

Virginia Code § 58.1-602 defines sale 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 ...."

The Taxpayer provided a portion of its "Store Operations Manual" (the "Manual") to support its contention that its customers do not receive tangible personal property as a benefit of purchasing the Taxpayer's loyalty program card. The terms of the Manual provide that the customer receives a one-time $10 discount that can be used towards the purchase of any item in the store when the customer visits the store during the customer's birthday month. The terms of the Manual further provide that once a customer has received its 4 th or 8 th point in the loyalty program, the customer is entitled to receive a free gift. Additionally, the Overview portion of the Manual states that when customers purchase a loyalty card they "receive 10% off all purchases as well as other free gifts ...." [Emphasis added.]

The Taxpayer also provided copies of cash register tapes to demonstrate how the birthday purchases are accounted for at the point of sale. The register tapes reflect sales made at the Taxpayer's location(s) in *.

The documentation provided by the Taxpayer does not refute the finding made in my prior determination that the Taxpayer's customers are entitled to receive tangible personal property as a result of purchasing a membership. Rather, the documentation provided further confirms the findings made in the audit and my prior determination that the loyalty program entitles the Taxpayer's customers to receive tangible personal property. Pursuant to Va. Code § 58.1-205, any tax assessed by the Department is prima facie correct. The Taxpayer has the burden of proving that the tax assessed by the Department is incorrect. Based on the information provided, the Taxpayer has failed to meet that burden. Accordingly, I find no basis to warrant any revisions to the audit or the assessment as issued.

Pursuant to Va. Code §§ 58.1-603 and 58.1-602 (definition of sale), the sale of the Taxpayer's loyalty program memberships to its customers is subject to the retail sales and use tax. Based on this determination, the assessment is correct. A revised bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit your payment to: Virginia Department of Taxation, Attention: *, 600 East Main Street, 15th Floor, Richmond, Virginia 23219. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia sections cited are 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,

Janie E. Bowen

Tax Commissioner

AR/1-3538653756.P