Coupons, Discounts and Rebates (Publication 113)

Manufacturers, vendors, and other third parties often offer incentive programs for credits or payments based on your purchases of inventory or sales of products to your retail customers. These payments and credits include offers such as purchase and cash discounts, coupon reimbursements, ad or rack allowances, buy-downs, scanbacks, voluntary price reductions, and other incentives, promotions, and rebates. "Third party" means a person other than the retailer or the retailer's customer, such as a manufacturer or retailer's vendor. Please refer to Regulation 1671.1, Discounts, Coupons, Rebates, and Other Incentives, for additional information.

Taxable discounts and coupons

Manufacturer coupons

Manufacturer coupons are paper or paperless coupons allowing customers to receive a percentage or amount off the advertised selling price when purchasing the manufacturer's product. If you accept manufacturer coupons, amounts paid by manufacturers to reimburse you for the value of the manufacturer's coupons are included in your total taxable sales when the sale is subject to tax.

Double discount

As a retailer, you may offer a "double discount" to customers for certain manufacturer coupons. For example, your customer presents a manufacturer's coupon offering $1 off the purchase of a specific product. In turn, you also allow an additional $1 off the selling price. In this case, the value of the manufacturer's coupon is included in your total taxable sales. The additional $1 discount you provide to your customer is not subject to tax.

Nontaxable discounts and coupons

Prompt payment cash discounts

As a retailer, your total taxable sales are reduced by the amount of cash discounts you offer your customers for prompt payment by that customer. If the customer does not make prompt payment, your taxable sales are the amount billed.

Excess tax reimbursement for cash discounts

If you allow discounts for prompt payment, but charge customers sales tax computed upon the prices before the discount is deducted, you are collecting excess tax reimbursement. For example:

A sale is made for $100 plus $8.25 sales tax. Upon prompt payment for the item, the purchaser is allowed a discount of two percent of the sales price of $100. Since you are deducting the amount of the discount, $2, from taxable gross receipts, you are charging tax of $8.09 (8.25 percent of $98) to your customer.

When a discount of two percent is offered for prompt payment and an error is made and the discount of two percent is excluded from the computation, excess tax reimbursement of $0.16 will be collected from your customer ($8.25 - $8.09 = $0.16). The excess tax reimbursement should be returned to your customer or must be paid to the state.

Please refer to Regulation 1700, Reimbursement for Sales Tax, for additional information on excess tax reimbursement.

Note: While this example shows tax calculated at a rate of 8.25 percent, you should use the rate in effect at your business location. Please see California City and County Sales and Use Tax Rates, for current tax rates.

Purchase discounts

Purchase discounts are given to you by both manufacturers and wholesalers and are based on the amount of your prior or future purchases. These discounts are not included in your total taxable sales because they are based on the number of products you purchase, not the number of products sold. Agreements with a third party to sell products for a specific price and period of time are also "purchase discounts" and are excluded from your total taxable sales when the discount is based on the number of products you purchase from your vendor and are not otherwise tied to the amount of product sold.

Ad or rack allowances

Ad or rack allowances are contracts between you and a manufacturer to advertise a product, or to give that product preferential shelf space. Ad or rack allowances are also known as "Local Pay," "Display Shelf Payments," or something similar. Such allowances are not related to the retail sale of a product and are excluded from your total taxable sales.

Discount club card

You may offer a discount club card for your store. Your customer uses the club card when purchasing various products. The price reductions associated with the club card are not part of your total taxable sales if you are not receiving compensation from a third party. Amounts paid by a third party such as a manufacturer to reimburse you for the club card discount are subject to tax.

Retailer coupons

You may issue retailer coupons in paper or paperless form. When your customers present these coupons to you, it allows them to buy products at a certain amount or percentage off the regular selling price. Retailer coupons do not result in compensation from a third party and are excluded from your total taxable sales unless your customer has previously given you compensation for the coupon. For example, if the coupon was purchased as part of a coupon booklet sold by you to your customer, the pro rata share of the cost of the booklet represented by the purchase for which the coupon was given must be included in your total taxable sales.

Deal-of-the-Day Instruments

Third-party Internet-based companies (for example, Groupon or LivingSocial) offer Deal-of-the-Day Instruments (DDI) for sale on their website. Customers purchase DDIs online at discounted prices which allow them to purchase products and/or services from the retailer offering the DDI. DDIs with the specific terms and conditions discussed below are considered retailer coupons. As such, you, the retailer, are considered the issuer of the DDI.

Terms and conditions applicable to transactions involving DDIs:

• Retailers negotiate contracts with the DDI provider (third-party Internet-based company) to sell DDIs for a set price that is specified in the contract.
• The contracts provide that the DDI provider receives a certain percentage or dollar amount from the sale of each DDI as compensation for the service of advertising and selling the DDI on the retailer's behalf and/or the DDI provider markets the DDI as an agent or representative of the retailer. These amounts are nondeductible costs paid by the retailer to the DDI provider in exchange for such services.
• Customers may purchase DDIs with cash, cash equivalents, DDI "bucks," reward points, loyalty points, or friend referrals.
• Terms and conditions of the DDI include specified limitations on the use of the DDI. For example, they may state that the DDI cannot be combined with any other coupons or promotions or with other offers, or it is not valid for certain items, or the customer must use the DDI in one visit and/or cannot receive cash back for partial redemption.
• An expiration date for the full value of the DDI is printed on the face of the instrument (for instance, six months from the date of issuance). However, the amount paid for the DDI generally has a later expiration date (for instance, one year from date of issuance). As an example, using the above dates, after a DDI is issued it can be redeemed for its full value for six months, after which time it can be redeemed for only the amount paid for the DDI for one year from the issue date. After the paid value expires, the DDI has zero value.
• The retailer does not provide the customer gift certificates, cash, or cash equivalents when the DDI is redeemed.
• DDIs are single-use instruments and lose all value after the first use.

The sale of a DDI to a customer is not regarded as a sale of tangible personal property (merchandise) or a service. The DDI is evidence of an intangible right to receive merchandise and/or a service at a later date and therefore the sale of the DDI to the customer is not subject to tax.

However, when the DDI is redeemed, it is that sale (the use of the DDI to purchase a good or service) that may be subject to tax.

When the DDI is redeemed for taxable merchandise/service, your gross receipts subject to tax include the consideration paid by the customer for the DDI plus any additional cash, credit, or other consideration that is paid to you at the time of sale.

If the type of sale is normally not subject to tax, then tax would not apply to the sale of the merchandise and/or service when a DDI is redeemed by the customer. Common sales that are generally not subject to sales tax include sales of services (such as cleaning or cosmetology), sales of cold food to go (such as ice cream), and a charge for admission to an event (such as entertainment and sports events).

Example 1: A DDI is offered for a specific baseball bat. The bat is valued at $100. Your customer pays $50 for the DDI as advertised online. Prior to any DDI expiration dates, the customer uses the $50 DDI to purchase the baseball bat with a suggested retail price of $100 and pays no additional amount for the baseball bat other than the amount for "sales tax." The amount subject to tax is $50 which equals the amount paid for the DDI.

Example 2: A DDI is offered for $90 off $200 or more of custom jewelry. Your customer pays $25 for the DDI. Prior to any DDI expiration dates, your customer redeems the DDI to purchase $200 (excluding tax) of jewelry from you. The amount subject to tax is $135 which is the total of the $25 paid for DDI plus the additional $110 the customer pays to get the jewelry ($200 sales price-$90 discount from DDI=$110).

For further information, please refer to Regulation 1671.1, Discounts, Coupons, Rebates, and Other Incentives.

Note: This publication summarizes the law and applicable regulations in effect when the publication was written, as noted above. However, changes in the law or in regulations may have occurred since that time. If there is a conflict between the text in this publication and the law, decisions will be based on the law and not on this publication.