Tax Type
Retail Sales and Use Tax
Description
Cash discounts; Advertising allowance
Topic
Taxability of Persons and Transactions
Date Issued
04-04-1988
April 4, 1988
Re: Virginia Code §58.1-1821 Application
Retail Sales and Use Tax
Dear*****************
This is in reply to your letter of August 24, 1987 in which you make application for correction of the recent Retail Sales and Use Tax assessment issued to your client, ********* (Taxpayer).
FACTS
The taxpayer is engaged in the business of selling furniture at retail. The first of the two areas of the recent audit that you contest involves the tax assessed by the department's auditor relating to "advertising allowances." When a customer purchases an item of furniture at one price and later discovers that Taxpayer has the same item on sale at a lesser price, Taxpayer will then refund the difference in purchase price to the customer. When recording this transaction on its books, the taxpayer entered the sales tax due based on the gross sales price without consideration of the discount due to the refund. However, in filing its monthly sales tax returns, the taxpayer reduced its gross taxable sales by the full amount of the refunds allowed to customers. Thus, the taxpayer's accrued sales tax liability shown on its books exceeded the sales tax shown due on its returns. The auditor then held these amounts to represent tax collected but unremitted, and computed the audit assessment on the total amount that the sales tax accrual account exceeded the amount remitted.
You admit that in reporting its sales tax to the department, the taxpayer erred by reducing its taxable sales by the entire amount of the "advertising allowance." You point out in your letter, that the amount of "advertising allowance" returned to the customer also included the applicable tax. Therefore, you contend that the auditor erroneously held that the taxpayer owed additional sales tax on 100% of the amount that its sales tax accrual amount exceeded its tax remitted.
Furthermore, you request that the department waive all penalties assessed.
DETERMINATION
An examination of the facts reveals that Taxpayer's "advertising allowance" operates in a manner very similar to a cash discount. Accordingly, the department agrees that application of Virginia Regulation 630-10-18 is appropriate in this case. Subsection B of Virginia Regulation 630-10-18 provides that "[i]n computing the amount of a discount which may be subtracted from gross sales, the discount must be allocated between sales price and sales tax." When the discount is stated as a specific dollar amount and not as a percentage of sales price, the regulation provides the following example for allocating the discount between sales price and sales tax:
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- Dealer B sells an item to a customer for $100 and bills the customer $100 for the item and $4 for the tax. The terms of the sale provide for a $10.00 discount if the bill is paid within 30 days. The customer pays within 20 days and is therefore entitled to the discount, which is computed as follows:
- Dealer B sells an item to a customer for $100 and bills the customer $100 for the item and $4 for the tax. The terms of the sale provide for a $10.00 discount if the bill is paid within 30 days. The customer pays within 20 days and is therefore entitled to the discount, which is computed as follows:
Sales Price 100.00
Tax 4.00
Less $10.00 Discount
$10.00 - 1.04 = 9.62 sales price discount
.38 tax discount
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- Therefore, customer remits $94.00 which includes $90.38 in sales price and $3.62 in sales tax. Dealer B may deduct $9.62 from gross sales, and will accordingly remit only $3.62 in tax.
- Therefore, customer remits $94.00 which includes $90.38 in sales price and $3.62 in sales tax. Dealer B may deduct $9.62 from gross sales, and will accordingly remit only $3.62 in tax.
Accordingly, the assessment will be adjusted in this case to reflect additional sales tax due by the taxpayer on 3.8% of the discounts allowed to its customers, and not on 100% of such discounts as claimed in the audit.
While the department has determined in this case that there is sufficient reason to adjust the audit to remove a portion of the tax resulting from the surplus in the sales tax accrual account, I must point out that in the future steps must be taken by Taxpayer to ensure that his accounting system properly reflects the tax consequences of "advertising allowances."
Additionally, I find basis for the waiver of all penalties imposed in this case. The assessment will be adjusted in a manner consistent with the foregoing and a refund will be issued to the extent that Taxpayer has overpaid the adjusted assessment.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner