Tax Type
Retail Sales and Use Tax
Description
Retailer's coupons; Coupons for free merchandise
Topic
Taxability of Persons and Transactions
Date Issued
11-21-1995
November 21, 1995
Re: Request for Ruling: Retail Sales and Use Tax
Dear****************:
This will reply to your letters dated April 18, 1995 and September 22, 1995 to********of our**********District Office. In your correspondence, you request a ruling on the application of sales and use tax to promotional coupons which are redeemed for free products.
FACTS
The Taxpayer is a retail grocer who distributes coupons for products to the general public as an advertising enticement in the promotion of new store openings. The coupons may be presented at a new or existing store and the customer will receive the product free of charge upon presentation of the coupon.
The Taxpayer requests a ruling that the coupons qualify as retailer's coupons under Virginia Regulation (VR) 630-10-27.2(B).
RULING
VR 630-10-27.2(B) provides that "[t]he value of a retailer's coupon is not included in the sales price of the advertised merchandise...This coupon has no value to the retailer and is an advertisement of a discount." When a retailer's coupon is redeemed, its value is considered a reduction in gross proceeds from the sale and is not included in the sales price of the advertised merchandise. Code of Virginia § 58.1-602 defines sale to mean "any transfer of title or possession...of tangible personal property...for a consideration." (Emphasis added)
In order for a retailer's coupon to constitute a reduction in the sales price, and therefore be exempt from the tax based on its value, there must be an exchange of payment from the customer to the retailer; specifically, a sale must occur. In the Taxpayer's case, products are transferred to its customers without the benefit of a consideration because the coupon is equal to the value of the retail sales price of the product, and therefore, a sale does not take place. In essence, the coupon does not represent a discount in the context of the regulation, but instead provides to the customer an intangible right, upon presentation, to receive a free product.
VR 630-10-32, which discusses dealers' withdrawals from inventory, appropriately describes the Taxpayer's transactions. The regulation provides, in part, that "[a]n item withdrawn from inventory for a promotional give-away or other free distribution, is subject to the tax at the time of withdrawal." As a retail grocer, the Taxpayer is entitled to purchase its store inventory exempt of the tax under the resale exemption because it will be sold to its customers at retail, upon which the tax is imposed. However, when the Taxpayer removes any exempt resale inventory item for a purpose other than an exempt retention, demonstration or display, the item becomes subject to the tax, upon withdrawal, computed on the cost price. This principle is further explained in VR 630-10-20 (Certificates of exemption (copy enclosed)).
In addition, the Taxpayer questions the tax application if it were to charge a sales price of $.01 for the advertised item upon presentation of the coupon. The $.01 sales price would constitute a consideration and the coupon would serve as an advertised discount with no value to the retailer and excluded from the sales price. As such, the coupon in this scenario qualifies as a retailer's coupon in accordance with the regulation.
I hope the foregoing has responded to your inquiry and should you have additional questions, please contact********in the Office of Tax Policy at***********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10276J
Rulings of the Tax Commissioner