Coupons, Discounts, and Rebates (Publication 113)
Nontaxable Rebates and Incentives

Preferential shelf space

You enter into a written agreement with a manufacturer to advertise the manufacturer's products and to provide the products preferential shelf space. You agree to the manufacturer's terms and receive compensation from the manufacturer at the end of the promotional period. Assuming you can document that the agreements were not based on a selling price reduction, the payments from the manufacturer are not included in your taxable gross receipts.

Threshold agreements

You enter into graduated rebate agreements with a soda distributor that allows you reimbursement from the distributor based on the number of 12-packs of soda sold at a required discounted price during the month of July. The amount of the sales discount is dictated by the distributor as follows: It is certain that you will receive 50 cents for every 12-pack of soda sold in July at the required discounted price. However, after surpassing a minimum threshold of 12-pack units sold, you will receive an additional 50 cents for each additional 12-pack units sold over the minimum threshold. At the end of the promotional period, after verifying the number of 12-pack units sold, the distributor issues a rebate check to you. Only the certain payment of 50 cents for every 12-pack of soda that you sell in July at the required discounted price is subject to tax. Any additional contingent rebates received for exceeding the minimum threshold are not included in your total taxable sales.

Compensation based on your sales

A soda distributor enters into written agreements with you that allow you to receive payment from the distributor based on your sales of 12-packs of soda during the month of July. You retain copies of the agreements. In the agreement there is no requirement to reduce the selling price of the 12-packs of soda. At the end of the promotional period, the distributor issues you a rebate check. Provided you can document that the distributor did not require you to reduce the selling price of the product, the additional revenue is not included in your total taxable sales.

Compensation resulting in a reduced cost to you

You enter into an agreement with a manufacturer's representative that allows you to receive payment from the manufacturer if your sales of the manufacturer's automobile care products exceed a specific amount during the month of July. You offer the products at a reduced price and provide the automobile care products with preferential shelf space. Your sales for July exceed the specified amount and the manufacturer issues a check to you, as agreed. The rebate payment is not subject to tax.

Rebate based on the number of products you purchased

You buy products from either a wholesaler or the manufacturer. Retail sales of these products are generally subject to tax. An agreement may be entered into with either party for a rebate based upon the number of products purchased from the manufacturer or the wholesaler, if you agree to sell the products at a "target" price for a specified period. Typically, a target price is used to establish a general price range for a particular geographic area or demographic market. The rebates received either directly from the manufacturer or from the wholesaler are not subject to tax since they are tied to your wholesale purchases of the products, not to the number of retail sales made at the target price.

Documenting nontaxable agreements

The types of documentation that will generally support that the third party consideration received is not subject to tax include, but are not limited to, a copy of an agreement or contract between you (the retailer) and a third party that:

1. Requires you to give specified products preferential shelf space in exchange for the payment received.
2. Provides you with an advertising allowance, equal to or in excess of the payment received, to advertise the third party's products.
3. Provides that payment will be received only if you sell a certain quantity of the products within a specified price range during a particular period, or if you purchase a certain quantity of the products during a particular period.

In the absence of a written agreement or contract, you may use any verifiable method of establishing that the consideration received from the third party was not subject to tax, such as a signed and dated letter provided by the third party that meet the nontaxable rebate requirements.