Document Number
95-53
Tax Type
Retail Sales and Use Tax
Description
Commissions and cancellation fees; Coffee equipment sales
Topic
Computation of Tax
Taxability of Persons and Transactions
Date Issued
03-23-1995
March 23, 1995



Re: Request for Ruling: Retail Sales and Use Tax



Dear**************

This will reply to your letter in which you request a ruling, on behalf of your client, Corporation X ('X'), regarding the application of the sales and use tax to the sale of coffee brewing equipment at a discounted price when the transaction involves the provision of coffee services by a third party.
FACTS

X is a Virginia corporation engaged in retail sales of office supplies, including commercial coffee brewing equipment ("equipment") which is primarily sold to businesses that provide free coffee to their employees. The cost of the equipment is $300 and the regular retail price is $400; however X will sell the equipment at a reduced price of $100 if a customer contracts for coffee services (coffee, cups, stirrers, sugar, creamer, etc:.) provided by a third party who bills the customer directly. Under written agreement, X receives a commission of $350 from the third party if the customer does not cancel its coffee service contract within ninety days. Otherwise X must return the commission and currently does not penalize the customer in order to recover the lost commission. In the future, X plans to require that its customers pay a $300 early cancellation penalty when the customers terminate the coffee service within ninety days. You request a ruling to address the following issues:
  • Does the sale of equipment by X at the $100 reduced price, where the customer contracts for the coffee service, constitute a retail sale entitling X to purchase the equipment under the resale exemption?
  • Is the $100 reduced sales price of the equipment subject to the sales and use tax?
  • Is the $300 early cancellation penalty subject to the sales and use tax or does it constitute a reimbursement of lost commission?
RULING

Code of Virginia §58.1-603 imposes the sales tax upon the "sales price" of tangible personal property sold in the state. "Sales price" is defined in 58.1-602 as "...the total amount for which tangible personal property or services are sold, including any services that are a Dart of the sale..." The effect of the statutes is to (1) ensure that tax is collected on the whole consideration received and (2) make clear that the consideration includes charges for related services.

You contend that X discounts the equipment comparable to a retailer's coupon and that the discounted price is the sales price for which title or possession to tangible personal property is exchanged for a consideration. According to Virginia Regulation (VR) 630-10-27.2 the value of the retailer's coupon is not included in the sales price of advertised merchandise. The retailer absorbs the loss resulting from the discount and will not be reimbursed by any organization. Thus, a true reduction in the sales price occurs and the coupon has no value to the retailer. You cite P.D. 84-195 (10/22/84) which provides that when a retailer sells two pizzas for the price of one, the selling price of both pizzas is discounted by the amount of the coupon because the coupon has no value to the pizza retailer.

The instant case is readily distinguishable from the situation in P.D. 84-195 as the pizza retailer was engaged in retail sales only and absorbed the economic losses resulting from the retailer coupon discounts and was not reimbursed for those losses. In this case, X is also engaged in retail sales of the equipment, however the incentive for X to solicit customers to contract for the coffee service is that it will receive a $350 commission. The commission offsets the $300 purchase of the equipment by X. In the future X will charge a $300 early cancellation penalty to recover the lost commission from the cancellation of the contract within ninety days.

Notwithstanding the terminology, the commission and penalty amounts represent a recapture of any loss by X from the transaction. As such, the transactions are directly analogous to those involving a manufacturer's coupon. Under VR 630-10-27.2, the value of a manufacturer's coupon is included in the taxable sales price of the goods sold.

The charges whereby X receives a $350 subsidy from the third party or a $300 early cancellation fee constitute elements of gross receipts derived from the sale of tangible personal property - the coffee equipment at the sales price of $100. Therefore, they are considered charges made in connection with sale of tangible personal property and are subject to the tax. X may purchase the equipment exempt of the tax under the resale exemption and as such no tax is due on the $300 cost price of the equipment. When the equipment is sold at the $400 retail sales price, X is required to collect the sales tax on that amount.

Currently, X must include the $350 subsidy and the equipment sales price of $100 in the base for computing the sales tax. In the future, when the customer honors the contract, X will continue to apply the tax to the $450 amount. However, in the instances when the customer does not honor the agreement and X must return the $350 subsidy, then X must compute the tax on the $300 termination fee plus the $100 sales price.

I hope the foregoing has responded to your inquiry and please do not hesitate to contact *********if you have additional questions.


                        • Sincerely,


                          Danny M. Payne
                          Tax Commissioner

OTP/6994J

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46