IPT 2016 Sales Tax Symposium Indianapolis, Indiana. Sales Taxation of Loyalty and Rewards Programs

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1 IPT 2016 Sales Tax Symposium Indianapolis, Indiana Sales Taxation of Loyalty and Rewards Programs

2 Presenters Gregg D. Barton, Esq. Partner Perkins Coie, LLP Andrew L. Nunes Director, Indirect Tax PricewaterhouseCoopers, LLP 2 Materials also prepared by Mary Benton and Matt Hedstrom at Alston & Bird

3 Agenda Overview of Loyalty and Rewards Programs State Definitions of Sales Price Loyalty Program Guidance SSUTA State Specific Guidance Other Issues Industry Considerations 3

4 Overview What is earned? Dollars, points, rewards, certificates and even cash equivalents that can be redeemed later for goods or services May be distinguished from a two for one coupon in which the purchase and reward are simultaneous Who grants rewards? Airlines, hotels, retailers of goods and other services Credit card issuers Employers Potentially through a third-party intermediary 4

5 Overview How are they earned/redeemed? 1. From the retailer granting the award and with whom the customer will redeem In return for some action by the customer or employee For purchasing goods or services For answering a survey For being a secret shopper For signing up for the loyalty program Giving a name, address, phone number and/or For referring a friend On an anniversary date Social media activities 5

6 Overview How are they earned/redeemed? 2. From a third party different than the one with whom it will be redeemed Points granted by a bank for the use of their credit card Grants by an employer under an incentive program Grants by an affiliate (e.g., where a retailer operates stores in one entity, and an e-commerce business in another, each grants points, and the points can be redeemed at either) Affiliated or third party gift card company administers the program for the retail company Programs operated by franchisors but redeemed at franchisee operations 6

7 Overview How do they impact the purchase price? Points may be redeemed for goods or service without further payment; or Points may be redeemed in combination with cash or other consideration The points may allow for a reduction in the amount of cash paid by a percentage, or by an established dollar amount 7

8 Overview Summary Rewards may be granted and redeemed by the same company or by two different companies If they are different companies, there is likely consideration flowing from the one that granted it, and the one that redeemed it Recipient may have purchased goods/services and also received points in a transaction for consideration, or the recipient may have performed a service (e.g., consideration ) to earn the points These nuances, depending upon the jurisdiction, may result in different sales and use tax consequences 8

9 9 State Definitions of Sales Price

10 Definition of Sales Price New York: N.Y. Tax Law 1101(b)(3) Receipt - the amount of the sale price of any property and the charge for any [taxable] service valued in money, whether received in money or otherwise and including any amount for which credit is allowed by the vendor to the purchaser, without deduction for expenses or early payment discounts; and any charges by the vendor to the purchaser for shipping or delivery regardless of whether such charges are separately stated. but excluding any credit for tangible personal property accepted in part payment and intended for resale. 10

11 Definition of Sales Price Louisiana: La. R.S. 47:301(13)(a) The total amount for which tangible personal property is sold, less the market value of any article traded in..., whether paid in money or otherwise, and including: Cost of materials used, labor, service costs, except financing but excluding: Cash discounts 11

12 Definition of Sales Price Texas: Tex. Tax Code The total amount for which a taxable item is sold, leased or rented, valued in money, without a deduction for the cost of: The taxable item sold, leased, or rented The materials used, labor or service employed, interest, losses, or other expenses The transportation or installation of tangible personal property; and Transportation incident to the performance of a taxable service, excluding the following, if separately identified: Cash discounts Returns Finance, carrying and service charges Value of trade-in property 12

13 13 Loyalty Program Guidance

14 General State Framework Cash discounts Vendor coupons Manufacturer coupons Relevance to loyalty programs Varies widely between states Guidance can arguably be inconsistent in similar states SSUTA states are not identical Not always directly on point 14

15 SSUTA Treatment Streamlined Sales & Use Tax Agreement (amended through Oct. 8, 2014) Sales price shall not include: Discounts, including cash, term, or coupons that are not reimbursed by a third party that are allowed by a seller and taken by a purchaser on a sale. 15

16 SSUTA Treatment Sales price shall include consideration received by the seller from third parties if: The seller actually receives consideration from a party other than the purchaser, and the consideration is directly related to a price reduction or discount on the sale; The seller has an obligation to pass the price reduction or discount through to the purchaser; The amount of the consideration attributable to the sale is fixed and determinable by the seller at the time of the sale of the item to the purchaser; and 16

17 SSUTA Treatment One of the following criteria is met: The purchaser presents a coupon, certificate or other documentation to the seller to claim a price reduction or discount where the coupon, certificate or documentation is authorized, distributed or granted by a third party with the understanding that the third party will reimburse any seller to whom the coupon, certificate or documentation is presented; The purchaser identifies himself or herself to the seller as a member of a group or organization entitled to a price reduction or discount (a preferred customer card that is available to any patron does not constitute membership in such a group), or The price reduction or discount is identified as a third party price reduction or discount on the invoice received by the purchaser or on a coupon, certificate or other documentation presented by the purchaser. 17

18 SSUTA Treatment Other Streamlined Authority Interpretive Opinion Issue Paper Buydowns, Manufacturers Coupons, Store Coupons (March 9, 2005) Matrix - Buydowns and Coupons (Dec. 28, 2004) 18

19 State Specific Guidance New York Turf House, Inc./Holiday Inn, TSB-A-04(19) (Sept. 2, 2004). Department of Taxation and Finance concluded that points earned in connection with Intercontinental Hotel Group s reward program were subject to sales tax. NYC Finance Memorandum 06-2 (Nov. 30, 2006) The New York City DOF essentially took the opposite view that when a member redeems points for a room, the hotel is not required to collect the Hotel Room Occupancy Tax. 19

20 State Specific Guidance New York Matter of Marriott International, Inc. et al. DTA Nos (N.Y. Tax. App. Trib. Jan. 14, 2010) Effectively revoked the Department s opinion in Turf House, Inc./Holiday Inn. The Tribunal found that the members previously provided the consideration for occupancy of the hotel rooms by earning rewards and since full sales taxes were paid by the member on the initial point-earning stays no further sales taxes needed to be collected when the hotels were reimbursed for those stays. Considered to be reimbursements Distinguished case from trading stamp rule. 20

21 State Specific Guidance New York TSB-M-11(10)S (June 29, 2011) Generally treats loyalty programs under the coupon framework Impact of the use of the loyalty card will be determined by applying the principles applicable to coupons that is, if the retailer is reimbursed for the discount, the full selling price will be subject to tax. Other guidance In the Matter of GRJH, Inc., DTA No (Div. Tax App. Jan. 15, 2015 N.Y. Tax Bulletin TB-ST-145 (Sept. 29, 2011) 21

22 State Specific Guidance Washington Became Streamline Sales Tax Member July 1, 2008 (Adopted RCW (1)(b) and (c)). When enacted, there was no intent that there be any changes to the law. 22

23 State Specific Guidance 23 Washington Det. No (Unpublished Dec. 23, 2011) Issue: Whether the face value of certificates tendered by customers is part of the selling price and subject to retail sales tax. Facts: Taxpayer obtains customers addresses to participate in the program; members earn 1 point for every $1 spent; points cannot be redeemed for cash. Conclusion: The value of reward certificates are included in the measure of tax if the certificates are consideration and not otherwise excluded from the definition of selling price; because the member earns points by becoming a member, providing the address and buying goods, the taxpayer is receiving benefits and therefore, the certificates are consideration not discounts, so the face value of the certificates is part of the sales price.

24 State Specific Guidance 24 Washington The Determination was on appeal and a small stakeholder group was convened. Excise Tax Advisory 3191 (Sept. 30, 2014) resulted If a rewards program award represents consideration paid by the customer to the seller, valued in money, then that award must be included in the product sales price upon redemption. A members provision of his or her name, telephone number, address or physical address does not represent consideration. Discount awards are excluded unless the seller receives consideration from a third party. Awards provided solely for enrollment, or the passage of time, solely for purchasing seller s product, and price reductions solely for members are excluded.

25 State Specific Guidance 25 Washington The following are not allowed as discounts: Points received for completing surveys for the taxpayer Points received for acting as a secret shopper for the taxpayer Points received as an employee for making sales exceeding a certain target Points purchased for cash Points earned from one retailer which are redeemable at another retailer and where the first retailer reimburses the second Points received for purchases using a co-branded credit card where the bank reimburses the retailer Points earned for purchases at one retailer, under a program administered by a separate company, and where the separate company reimburses the retailer

26 State Specific Guidance Washington Use tax issue Earlier draft language was deleted from the final ETA If an award represents a bona fide discount and on redemption it reduces a purchaser s product sales price to $0.00, the seller will generally owe deferred sales or use tax on the product provided at no charge. But the position is raised in Interim Statement Regarding Rewards Programs Deferred Sales or Use Tax (Oct. 1, 2014). See Sprint Spectrum, LP v. State, Dept. of Revenue, 174 Wash. App. 645, rev. denied, 178 Wn.2d 1024 (2013) (cellular provider that did not resell cellular phone, not even for a penny, subject to use tax). Contrast 2 for 1 arrangements which are also not subject to sales tax, but not use tax either. 26

27 State Specific Guidance Washington Interim Statement Regarding Rewards Programs Commingling Rewards Program Awards (Nov. 12, 2014) Where taxpayer has granted some qualifying discount awards, and some for consideration If seller does not segregate such awards the total value of the commingled rewards are taxable at the time of redemption for goods and services, or alternatively, Prepayment method option seller must prepay retail sales tax on taxable awards that have been commingled with discount awards at the time the taxable awards are issued. 27

28 State Specific Guidance Washington Areas requiring further clarification Prepayment method Third party consideration, particularly related to co-branded credit cards (i.e., testing whether third party consideration meets the requirements under the Streamline provision) 28

29 State Specific Guidance Washington Det. No R (Unpublished June 9, 2015) Issue: Whether, on reconsideration, under RCW and ETA , Taxpayer is subject to retail sales tax... on the face value of reward certificates. Facts: Taxpayer obtains customers addresses to participate in the program; members earn 1 point for every $1 spent; points cannot be redeemed for cash. Conclusion: In Det. No , because Taxpayer accrued a benefit in the form of customer information and benefits from third parties, the Department found that the certificates were additional consideration and that the certificates were not discounts. Based upon ETA 3191, Taxpayer s petition for relief is granted. 29

30 State Specific Guidance Minnesota Defines sales price as the measure subject to sales tax, and means the total amount of consideration, including cash, credit, personal property, and services, for which personal property or services are sold, leased, or rented, valued in money, whether received in money or otherwise. Id. 297A.61, subd. 7(a). Sales price does not include discounts, including cash, terms, or coupons, that are not reimbursed by a third party and that are allowed by the seller and taken by a purchaser on a sale. Regulatory distinction between unreimbursed retailer coupons (discounts and scrip (taxable consideration)). See Minn. R

31 State Specific Guidance Minnesota Revenue notice No (rev. Nov. 5, 2012) addresses a rewards program if an incentive item is transferred to a customer in exchange for consideration, it is a sale at retail and consequently is subject to tax. Consideration may be in the form of scrip, and it does not matter whether the scrip is purchased or earned by the customer or is given free to the customer. 31

32 State Specific Guidance Minnesota St. Paul Abrasives, Inc., et al. v. Commissioner of Rev., Nos. 6814, 6815, 6816 (Minn. Tax Ct. Oct. 12, 1998); Home and Garden Party, Inc. v. Commissioner of Rev., No R (Minn. Tax Ct. Nov. 24, 2008) Minnesota law does not provide that sales tax is limited to only that portion of the selling price that is paid in cash or by check, but rather on the total consideration received, whether or not that consideration is in the form of money. 32

33 State Specific Guidance Minnesota Informal guidance provides an example of taxable scrip: A customer earns points for every $20 worth of books purchased at a book store. These points may be accumulated and used to pay for, or partially pay for, other books. The bookstore must charge tax on sales of books, whether paid for in whole or in part by the points. Minn. Sales Tax Fact Sheet No. 167 (Mar. 1, 2013). Is the state s position truly consistent with the statute? Scrip is a more inclusive term than coupon? Coupon is used in connection with advertising Is that logical? Can the terms and conditions alter the result? 33

34 State Specific Guidance Minnesota Sales Tax Fact Sheet No. 167, 06/01/2015 Adopted to clarify sales tax application to discounts, awards, coupons, et. al. States that the specific facts and circumstances of a program will control and that the taxpayer must have the necessary records to support the tax treatment. The value of a reward under a rewards programs is a discount, and therefore not subject to tax if the reward (i) is not purchased, (ii) is not provided in exchange for services, (iii) cannot be redeemed for cash, and (iv) is not reimbursed by a third party. Examples include store discount cards, punch cards that provide a price reduction after a number of purchases, seller s cash, and discounts for opening a store credit card. 34

35 State Specific Guidance Minnesota Sales Tax Fact Sheet No. 167, 06/01/2015 The value of a reward under a rewards program is not a discount, and therefore subject to tax if the reward (i) requires the customer to pay cash or other consideration for the reward, (ii) requires the customer to provide services in exchange for the reward, (iii) is reimbursed by a third party, or (iv) can be redeemed for cash. Examples include secret-shopper rewards, hostess rewards and credit card points reimbursed by third parties. If a taxable reward is bundled with a nontaxable reward, the entire reward is taxable unless the seller can provide documentation showing otherwise. 35

36 State Specific Guidance Georgia Sales price generally defined in accordance with SSUTA total amount of consideration, including cash, credit, property, and services, for which personal property or services are sold, leased, or rented, valued in money, whether received in money or otherwise. O.C.G.A (34). Little guidance addressing loyalty programs before 2015 Historically addressed vouchers and trading stamps Taxes full value of items purchased with vouchers Georgia authorities treat trading stamps as consideration subject to the sales tax. Colonial Stores, Inc. v. Undercofler, 153 S.E.2d 549 (Ga. 1967). 36

37 State Specific Guidance Georgia LR SUT (September 9, 2015) Taxpayer owns and operates token prize machines Taxpayer places the machines and prizes at no cost to customer Customer purchases tokens from taxpayer for their customers/clients Taxpayer is deemed to providing a service Taxpayer must remit use tax on all prizes and machines at their time of purchase 37

38 State Specific Guidance Georgia LR SUT (December 16, 2015) Taxpayer owns, operates and franchises hotels Affiliate operates marketing program Grants reward points that can be redeemed for free nights or upgrades Annually hotels pay % of stays to affiliate and affiliate reimburses hotels for redeemed points Upgrades/free nights subject to tax without deduction for offset payments to affiliate Sales of points to members are sales of intangibles 38

39 Other Issues Accounting What if part of the purchase is with a coupon and part with points? Tracking cash vs. points Revenue recognition Compliance vs. customer lawsuits Program implementation Third party administration fees Sourcing (sale or use) 39

40 Industry Considerations Banking Branded credit cards Points redeemed for goods Program implementation Third party administration fees Sourcing (sale or use) Retail Cross-branded or double point awards Multiple layers of redemptions Compliance and class-action 40

41 Industry Considerations Gaming Free in-game upgrades Characterization of the upgrade Post redemption sale of upgrade Points redeemed for goods 41