New York Tax Appeals Tribunal Rules that Gift Card Promotion Does Not Reduce Sales Tax Value

February 27, 2020

The application of sales/use tax to a particular transaction often depends on the form in which that transaction is structured, and a business’s failure to respect that form may give rise to sales/use tax liability.

By Tina M. Chunn, SALT Senior Manager

When offering discounts and promotions, retailers may not always consider sales and use tax impact of how the transaction is structured.  The sales and use tax treatment of promotions, retailer discounts, manufacturer discounts, and rebates can differ in the same state and among states.  A recent New York Tax Appeals Tribunal opinion addressed how differences in how a gift card promotional transaction is structured could impact sales tax obligations.[1]

In 2011 and 2012, Apple Inc. had a Back to School (“BTS”) promotion where qualified purchasers of an Apple computer or iPad would receive an Apple gift card.  Specifically, the terms of the BTS promotion were that qualified individuals who purchased a qualifying Apple Computer or iPad during the promotion period “may receive a Back to School Gift Card” in certain amounts to be used at certain Apple stores (both physical and online).  Customers were permitted to decline the gift card.

Advertisements of the promotion stated: “Congratulations. Your Mac will come with a $100 Back to School Gift Card. We’ll add your $100 Back to School Gift Card to your order. You’ll see it appear in your cart, but you will not be charged for it at checkout.”

In addition, Apple’s website contained the following FAQ: “Q. Why was I charged for the free Back to School Gift Card? A. Your invoice or receipt will also show an equivalent discount amount to cancel out the charge for the card. As a result, your invoice or receipt will amount to the cost of the Mac or iPad only including applicable shipping cost and sales tax.”

If a device purchased under the BTS promotion was returned, the gift card had to be returned as well.  If the gift card was not returned or had already been redeemed, such value was deducted from the product refund amount.

For in-store purchases, due to Apple’s POS system being unable to process discounts to gift card values, the discount was instead applied to the applicable device purchased.  For example, if a customer bought a $1,000 computer, the invoice would show a $100 gift card and a $900 computer (the value of the gift card being deducted from the computer).  Therefore, sales tax was computed based on $900 as opposed to $1,000 (gift card purchases are not subject to sales tax).

Interestingly, for online purchases under the BTS promotion and due to the online POS system being unable to apply the discount, Apple employees instructed customers to remove the gift cards from the shopping cart to “set [the customer] up with the proper price” and that Apple’s processing department was “manually adding cards to [the customer’s] orders.”

During a sales tax audit, the auditor contended that the tax should be applied to the full value of the qualifying device, and therefore assessed Apple sales tax based on the difference between the discounted and original value of the purchased device.  In the example above, assuming a 10% sales tax rate, the additional sales tax assessed was $10.  The actual assessment against Apple was almost $1,000,000 (excluding interest).

At issue is whether the BTS promotion required the purchase of a BTS gift card to receive the discount equal to the value of the card to be applied to the qualified device or if the BTS promotion required the purchase of a qualifying device to receive the BTS gift card for free.

The Tribunal determined that the BTS promotion required the purchase of a qualifying device to receive the BTS gift card for free, and therefore, sales tax was due on the non-discounted value of the device.  In reaching that conclusion the Tribunal relied on the facts summarized above, specifically (i) the terms and conditions of the BTS promotion, (ii) advertising of the BTS promotion as receipt of a gift card with the purchase of a qualifying device, (iii) the differing treatment of the BTS promotion transactions between online and in-store purchases (i.e. online purchasers paid sales tax on the full price of the device), and (iv) the return policy.

As seen from this case, it is important that the structure of the promotion/discount be analyzed from a sales tax perspective to make sure that the invoicing is done properly.   Aprio’s SALT Team is experienced with reviewing these types of sales tax transactions to identify areas of risk and the appropriate sales tax treatment so that your business does not incur unexpected liabilities 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 or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the February 2020 SALT Newsletter.

[1] In the Matter of the Petition of Apple, Inc., New York Tax Appeals Tribunal Decision DTA No. 827287, December 24, 2019.

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.