Tax Type
Retail Sales and Use Tax
Description
Coupons, premiums, and cash discounts; Promotional merchandise distributed at no charge
Topic
Basis of Tax
Date Issued
01-13-1994
January 13, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear ****************
This is in reply to your letter of September 16, 1993, in which you contest a sales and use tax assessment against*********************(the "Taxpayer") for the period September 1, 1989 through August 31, 1992. In your letter of November 17, 1993, and in a telephone conversation with a member of my staff, you have provided additional information to be considered in this appeal.
FACTS
The Taxpayer is a manufacturer and distributor of cigars. It has locations in Virginia and ***********from which cigars are sold into and outside of Virginia. To promote the sale of cigars, the Taxpayer will periodically give away free boxes of cigars in connection with the sale of cigars to customers. For example, if a customer purchases 400 boxes of cigars, the Taxpayer will give away 50 boxes of cigars free. The wholesaler or retailer receiving the 450 boxes of cigars will usually place all of the cigars into their inventory for sale to customers.
The sales price of the cigars given away in this promotion is charged to a "Promotional Markdown" expense account at the ***************** location. However, in the Virginia location, the sales price of these cigars is charged to a "Gratis" expense account. The "Gratis" account also includes cigars that are consumed merchandise or promotional shipments to end users, which the Taxpayer agrees are taxable.
The Taxpayer was assessed tax on the cost price of cigars given away in connection with the sale of other cigars. While the accounting and classifications are different between the two locations, the Taxpayer contends that, in substance, since the cigars given away accompany other cigars that are sold, the cost of the cigars given away is exempt from the tax in the same manner as the cigars sold.
DETERMINATION
Va. Code §58.1-602 (copy enclosed) defines sales price as the total amount for which tangible personal property is sold "valued in money, whether paid in money or otherwise." If a person sells merchandise to a customer and also gives away additional merchandise to the customer, the tax is computed on the sales price charged to the customer. Both the merchandise sold and the merchandise given away are considered to be sold for the discounted sales price. The enclosed Public Document 84-195 (October 22, 1984) addresses a similar situation.
In this instance, the merchandise given away is not considered used or consumed by the seller. Instead, it is considered part of the sale and is subject to the same resale exemption which applied to merchandise sold. Therefore, the cost of the merchandise given away to the customer in connection with a sale is exempt from the consumer use tax.
Based on the information presented, the cigars given away to customers in connection with the sale of cigars, whether the give-away cigars are charged to the "Promotional Markdown" or "Gratis" accounts, are exempt from the consumer use tax and will be removed from the audit. However, additional information needed to substantiate amounts represented in your letter must be furnished to the Interstate Audit Unit within 30 days so that the necessary revisions can be made. Once the revisions are completed, a corrected Notice of Assessment will be issued, which will be immediately due and payable.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/7422N
Rulings of the Tax Commissioner