Document Number
10-212
Tax Type
Retail Sales and Use Tax
Description
Sale of loyalty program memberships; transfer of tangible personal property
Topic
Tangible Personal Property
Taxable Transactions
Date Issued
09-15-2010


September 15, 2010



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

Dear *****:

This is in response to your request made on behalf of ***** (the "Taxpayer") for a reconsideration of the prior determination issued to the Taxpayer. The Taxpayer seeks correction of the retail sales and use tax assessment issued for the period October 2004 through August 2007.

FACTS


The Taxpayer operates as a retail business that sells beauty products. In the audit, the Taxpayer was assessed sales tax on the sale of loyalty program memberships. The Taxpayer filed an appeal and was issued a determination letter by the Tax Commissioner (Public Document (P.D.) 09-43 (4/24/09)), which upheld the assessment of tax. The Taxpayer filed a request for reconsideration and provided additional documentation to support its contention. In P.D. 10-64 (5/12/10), the assessment of tax was once again upheld.

In this reconsideration request, the Taxpayer has provided additional documentation for review and in support of its contention that the program memberships are not subject to the retail sales and use tax. The Taxpayer contends that the terms of its loyalty program do not include the provision of tangible personal property free of charge.

It is my understanding the Taxpayer met with members of the Department's Appeals and Rulings unit to further discuss the terms of the program. In that meeting, the Taxpayer stated its customers do not receive free gifts as a result of purchasing loyalty program memberships. The Taxpayer states that a customer receives a discount on a purchase made during the customer's birthday month. Additionally, the Taxpayer states that its customers receive a discount on a purchase made after earning 4 points in the program and after earning 8 points in the program.

DETERMINATION


Virginia Code § 58.1-602 defines sale, in pertinent part, 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 ...."

In P.D. 84-89 (7/3/84), pursuant to the Va. Code § 58.1-602 definition of sale, the Tax Commissioner ruled that the sale of video club memberships was exempt from sales and use tax. Because the sale of video memberships did not include the transfer of tangible personal property or the provision of a taxable service, this type of transaction was not subject to the sales and use tax.

In P.D. 96-231 (9/17/96), the Department's current policy regarding transactions of this type is more clearly set out. The public document states that the sale of a membership that does not include the provision of tangible personal property directly related to the membership fee is an exempt sale. Accordingly, sales of membership cards that entitle the card holder to discounts on future purchases are exempt of the sales and use tax if there is no other transfer of tangible personal property to the purchaser at the time the membership card is sold.

While labeled a "birthday gift" in the Taxpayer's literature, the Taxpayer's customer does not actually receive an item of tangible personal property free of charge during the customer's birthday month. Instead, the customer receives a $10 discount on a purchase made during the customer's birthday month. Likewise, while labeled a "4 point gift" and an "8 point gift" in the Taxpayer's literature, the Taxpayer's customer does not actually receive an item of tangible personal property from the Taxpayer after accumulating the required number of points. Instead, after accumulating 4 points, the customer receives a $15 discount on a purchase at the Taxpayer's retail stores. Likewise, after accumulating 8 points, the customer receives a $25 discount on a purchase.

After further consideration and based upon the additional information provided by the Taxpayer, I have determined that the sale of the loyalty program memberships does not involve the transfer of tangible personal property to the Taxpayer's customers at the point of sale. The sale of the loyalty program memberships does not include the provision of tangible personal property directly related to the membership fee. Rather, the memberships entitle the Taxpayer's customers to discounts on future purchases at the Taxpayer's retail stores. Accordingly, the Taxpayer is not subject to the retail sales and use tax on the sale of the loyalty program memberships. The audit assessment was based solely on sales of the Taxpayer's loyalty program memberships. Accordingly, the assessment will be abated in full.

The Code of Virginia section and public documents cited acre 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,


                • Linda Foster
                  Deputy Tax Commissioner




AR/1-4532875669.P


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46