Louisiana Denies Claim of Overpaid Sales Tax from Rewards Program Transactions

May 31, 2019

This Louisiana Court of Appeals decision highlights the sales tax impact of discounts, including rebates and coupons, which can vary depending on the type of discount and can be a trap for the unwary that results in exposure for collecting and remitting less sales tax than required.

By Tina M. Chunn, SALT Senior Manager

It has become increasingly popular for businesses to offer reward programs to their loyal customers.  Since these programs can vary in how they are applied, it is important to understand the transaction for the correct application of sales tax.  In some transactions, the reward points or intended customer loyalty discount may not reduce the sales price that is subject to sales tax.  Recently, the Louisiana Court of Appeals issued an opinion denying the taxpayer’s appeal pertaining to its refund claim for overpayment of sales tax paid on transactions involving redeemed rewards from the taxpayer’s virtual rewards program.[1]

The taxpayer, AMC Theaters, provides a loyalty rewards program to its patrons called the “Stubs Rewards Program.”  Under the program, customers purchase a membership for $12 per year that allows them to accrue virtual rewards on purchases of goods or services at the theater.  For every $100 spent, the customer accrues $10 in virtual rewards to be used in a future purchase of goods or services at the theater.

During this period, the theater also used a tax-inclusive pricing structure, in which the tickets or concessions were sold for a posted or fixed sales price that included all applicable state and local sales taxes.  By contrast, a tax-exclusive pricing structure (which is what most purchasers are used to) is where the tax is computed as an additional amount paid by the purchaser on the advertised sales price.[2]  In tax-inclusive pricing, the sales tax remitted to the taxing authority is calculated by dividing the sales price by 1 plus the tax rate and then subtracting the result from the sales price.

The taxpayer claimed their point-of-sale system had incorrectly treated virtual rewards redeemed by members of its loyalty program as taxable cash receipts instead of a cash discount or retailer issued coupon.  Thus, the taxpayer argued that this treatment resulted in the overpayment of sales tax to Jefferson Parish.

For example, assume a customer purchased $15 worth of concessions (tax-inclusive) and used a $5 virtual reward, and the sales tax rate is 8 percent.  The taxpayer’s point-of-sale system calculated the sales tax as $15 less $15 divided by 1.08, which is $1.11.[3]  To get the equivalent result in a tax-exclusive structure, the concessions would be sold for a total of $13.89 plus sales tax of $1.11, which equals the $15 tax-inclusive price.  Based on this calculation, the taxpayer remitted $1.11.

However, the taxpayer argued that the $5 virtual reward should have reduced the $15 tax-inclusive price to a $10 tax-inclusive price, resulting in sales tax to be remitted in the amount of $0.74.

Louisiana statutes and regulations define the sales price to be exclusive of cash discounts allowed. For discounts based on coupons, however, the discount taken will be dependent upon the type of coupon presented.  Retailer’s coupons will reduce the taxable sales price because they reduce the amount that the retailer receives for the taxable good or service.  Manufacturer’s coupons in which the retailer is reimbursed by the manufacturer for the amount of the discount provided to the purchaser generally do not because the retailer ultimately receives the full purchase price.[4]

The Court disagreed with the taxpayer’s position based on the findings during the audit that found that the Stubs Reward program did not function as a discount or retailer issued coupon.  First, the rewards member could use the rewards in any increment it wished and retain the unused rewards for future use.  This practice is inconsistent with a typical coupon which is for a fixed amount and does not allow a customer to retain an unused balance thereof for future use.

Further, the terms and conditions of the program provided that the rewards and benefits of the program may be taxable as the rewards are a form of payment rather than a discount or coupon.  The auditor determined that this provision makes sense only if the rewards are treated as a form of payment and not as a coupon.  Finally, the virtual rewards could be applied to the entire tax-inclusive price which would not be allowed under state law if the rewards were treated as cash discounts or retailer coupons.

As sales and marketing departments continue to get more creative with loyalty programs and ways to offer incentives to customers, it is important to review these transactions and determine the proper sales tax treatment.  Aprio’s SALT team is experienced with these issues and can advise your business so that you do not under-collect sales tax on transactions involving discounts and incur unnecessary exposure and penalties.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn at tina.chunn@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the May 2019 SALT Newsletter.

[1] American Multi-Cinema, Inc.  A/K/A AMC Theaters v. Normand, La. Ct. App., 5th Cir., Dkt. No. 18-CA-488, 04/03/2019.

[2] Tax-inclusive pricing is common with entertainment and athletic admissions and concessions where vendors like to handle quick transaction in whole dollar amounts.  States typically require the vendor to have signage that the prices shown include applicable sales tax; otherwise, the vendor may be viewed as illegally absorbing the sales tax.

[3] For the math nerds among us, the formula is: sales tax = sales price – (sales price/1+tax rate).

[4] La. R. S. § 47:301(13).  Louisiana Administrative Code, Title 61, Part I, § 4301 (C).  This distinction between retailer and manufacturer coupons, and their impact on sales tax, is common among the states, but there are exceptions.  For example, in Texas, coupons reduce price upon which sales tax is collected regardless of whether the retailer is reimbursed.  Tex. Admin. Code § 3.301(e).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Tina Chunn

Tina is a senior manager with Aprio’s State & Local Tax group. She has over 24 years of experience assisting companies and their owners to minimize their tax liability and maximize their profitability. Some of the industries Tina serves include professional services, manufacturing, warehousing and distribution, telecommunications, real estate, retailers and wholesalers. Tina has extensive experience dealing with corporate tax issues, including state and local tax returns; state and federal tax credits; state and local sales; and use, income, escheat, business licenses and property tax issues.