Determining the Correct Taxable Base for Sales Tax (Part 1)

By Freed Maxick Tax Team on December 4, 2017
Back to main Blog
Freed Maxick Tax Team

Determining the Correct Taxable Base for Sales Tax (Part 1)Many business practices can contribute to determining a company’s base for sales tax. For instance, companies will often utilize incentives to sell their product to customers by offering discounts, rebates, loyalty programs, gift certificates and so on. Changes to the ultimate sale price may or may not influence the tax base subject to sales tax.

Discounts can occur in many forms. Vendors may offer a discount on a sale if a specified quantity is purchased. Some may offer an incentive discount for customers to prepay. In other cases, a vendor may offer a retroactive discount.

When dealing with multiple jurisdictions, the rules are not uniform. Some states have guidance on whether the discounted sales price is the taxable base to charge sales tax. The general concept with discounts in sales and use tax is whether the discount is applied in the present or future.

Colorado, for example, states that discounts not determined by future events are taxable at the discounted amount but a cash discount that is contingent on a date that a future payment is made does not reduce the selling price because the discount is contingent upon a future event. Also, a quantity discount or discount card that reduces the selling price which is not contingent on any other event would be taxed at the discounted price. Regarding discounts offered after the sale, a New York case ruled that retroactively granted discounts based on volume were not exempt from tax, likely because there was a contingency on the discount being honored at the time of the transaction.

It’s important, therefore, to be aware of how the discount is being applied to the customer and how the jurisdiction treats such discount.

Coupons are generally structured in two different forms: (1) as a manufacturer coupon for which the retailer is reimbursed on the sale, or (2) a retailer coupon for which the retailer incurs the cost of the discount on the sale. Generally, the taxable base of a sale with the use of a retailer coupon would be at the discounted sale price. Manufacturer coupons, however, are   generally excluded from the taxable base because the retailer is being compensated by the manufacturer for the sale.

Stored value cards or Groupons are becoming increasingly popular and few states have provided guidance on the tax base. For New York, the amount subject to sale depends if the voucher is for a “specific product or service” or a “stated face value voucher.” If it’s for a specific product or service, the taxable base is the price the customer paid for the voucher. For a stated face value voucher, tax is calculated on the selling price of the items before the value of the voucher – that is, the full value of the voucher is subject to sales tax, not just the amount paid by the customer.

Understanding and applying sales and use tax rules can be quite cumbersome for many business operating in multiple states. Determining the correct taxable base and deductions for sales and use tax reporting could be highly material to your business if done incorrectly.

(In part 2 we’ll discuss how transportation charges and bad debts affect calculating a company’s sale tax base.)

Are you confident in the accuracy of your sales and use tax compliance? Contact our State and Local Tax team by clicking here or calling 716-847-2651 to get in touch with a member of the Freed Maxick SALT Team for a no cost consultation on your sales and use tax accounting issues.

Stay up to date