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November 20th, 2018
Gift Cards in Advertising Promotions and New York Sales Tax
Does the value of a gift card offered as part of an advertising promotion reduce the taxable receipts from a sale for New York sales tax purposes? It is an important question for advertisers. Under-collection of sales tax can leave you liable for the underpayment, while over-collection can serve as the basis for a class action. A New York State Division of Tax Appeals decision recently spelled out the proper way to calculate taxable receipts in common gift card situations. Here is what you need to know.
In In the Matter of the Petition of Apple Inc., DTA No. 827287, (November 1, 2018), Apple challenged a New York State Division of Taxation decision that Apple owed additional New York sales taxes. The case arose from an Apple “Back to School” promotion for sales of computers and iPads. Under the terms of Apple’s promotion, educators, students and parents who purchased qualifying Apple devices had the option to either accept or reject an Apple gift card that could be later used to purchase products at Apple’s Mac App Store, iTunes Store, App Store and iBookstore. If a customer rejected the gift card, Apple would record the sale as having been made for the full price of the purchased Apple device with applicable sales tax charged. Conversely, if a customer accepted the gift card, Apple would record the sale as having been made at a discount equal to the amount of the gift card with applicable sales tax charged on that discounted amount. Apple would then separately charge the customer for the full value of the gift card.
What the law says. Under New York Tax Law Section 1105(a), New York State generally imposes sales tax on the receipts from every retail sale of tangible personal property. Discounts that represent a reduction in price are deductible from receipts. Thus, taxable receipts do not include the amount of a store-issued discount coupon used in the purchase of a taxable item where the store is not reimbursed by a third party (typically, a manufacturer). Sales of gift cards are not subject to sales tax in New York. Sales tax applies to a gift card only when the gift card is used by a customer to purchase an item subject to sales tax.
The Apple decision. The New York State Division of Tax Appeals focused on whether Apple’s “Back to School” promotion required a customer “to purchase a gift card to receive a discount equal to the value of the card … or whether the promotion required the purchase of a qualifying computer or tablet in order to receive a gift card for free.” If the customer purchased the gift card along with the device, then sales tax would apply only to the portion of the purchase price attributable to the device since the purchase of a gift card is not subject to sales tax. If, however, the customer received the gift card for free, then sales tax would apply to the total purchase price.
The Division of Tax Appeals held that Apple’s “Back to School” promotion was for the purchase of a computer or iPad and the receipt of a free gift card. The Division of Tax Appeals based its decision on the terms of the promotion and Apple’s advertising. The terms of the promotion made clear that the purchase of a device was required in order to receive the gift card, indicating that the gift card was free. And although Apple did not use the word “free” in its advertising, its advertising also did not state that the purchase of a gift card was required in order to receive a discounted computer or iPad. The decision rejected Apple’s argument that including the gift card amount in taxable receipts would result in double taxation when the purchaser used the gift card later to buy a taxable item. The decision said the use of the gift card is a separate transaction, and "[t]he gift card is something of value, whether paid for by cash or whether given to the customer for free."
The Apple decision offers important lessons for advertisers offering free gift cards or other items of value as part of a promotion. Advertisers should not reduce taxable receipts by the amount of any gift card or other item of value offered for free as part of a promotion.
For more information about the Apple decision and New York sales tax matters, please contact Jeffrey Marks at (212) 826-5536 or email@example.com, Bernard C. Topper, Jr. at (212) 826-5547 or firstname.lastname@example.org, Lee Silver at (212) 705-4826 or email@example.com or any other member of Frankfurt Kurnit's Tax Group. To read other Frankfurt Kurnit Tax Alerts - click here.
Other Regulatory Alerts
IRS Final Regulations Clarify Charitable Contribution Substantiation Requirements
Tax deductions for charitable contributions require the satisfaction of certain substantiation requirements. Read more.
August 28 2018
Claiming the New 20% Pass-Thru Business Deduction—IRS Proposed Regulations Provide Guidance on Meaning of “Specified Service Business”
Background. On August 8, 2018, the IRS issued proposed (not final, but taxpayers can rely on them currently) regulations (the "Regulations") intepreting the 2017 Tax Cuts & Jobs Act's new rule under which an individual taxpayer may deduct up to 20% of his income from a domestic business operated as a sole proprietorship or through a partnership (including an LLC taxed as a partnership) or S corporation (a "pass-thru business"). With this 20% deduction, the effective federal marginal tax rate on an individual taxpayer's qualified business income (assuming he is otherwise subject to the maximum 37% tax rate) is 29.6%. The deduction is available through 2025. Read more.
August 15 2018
Tax Alert for Tax-Exempt Organizations
The Tax Cuts and Job Act of 2017, which was enacted on December 22, 2017 (the "Act"), contains several provisions that impact tax-exempt organizations ("EOs"). Some of these provisions impose new or additional taxes that may adversely affect an EO's ability to accomplish its exempt purposes. Read more.
January 12 2018