November 12, 2014
The Department is issuing this interim statement to address the tax treatment of a rewards program that commingles both awards representing taxable consideration and awards representing bona fide discounts.
This interim statement is limited to awards earned from rewards programs similar to those described in the Department’s Excise Tax Advisory (ETA) 3191.2014 on “Rewards Programs – Retail Sales Tax.” Please see ETA 3191.2014 for additional information regarding whether or not rewards program awards constitute taxable consideration includable in the sale price of goods and services redeemed for the awards. Also, please see the interim statement on “Rewards Program – Deferred Sales and Use Tax” regarding a seller’s tax liability when customers redeem discount awards for the full price of goods and services.
Commingled rewards program awards
A rewards program may issue program members awards that represent either taxable consideration (taxable awards) or that are treated as discounts to the sales price (discount awards). In some cases, sellers may commingle these awards. For example, under a rewards program a seller may issue discount awards to members on each member’s birthday and may provide taxable awards to members in exchange for completing a survey; under another rewards program a seller may issue discount awards to members based on the volume of purchases from the seller and may also provide taxable awards to members based on purchases with cobranded credit cards.
If the seller can identify taxable awards separately from discount awards, the taxable awards, plus any additional monetary payment, will generally be the measure of retailing B&O and retail sales tax at the time of redemption. (See ETA 3191.2014.) However, the Department provides the following interim guidance where the awards are commingled and the seller does not identify the taxable awards separately from the discount awards:
When taxable and discount awards are commingled under a rewards program, and the seller does not segregate between awards that are taxable awards and awards that are discount awards at the time of redemption, the total value of the commingled rewards are taxable at the time of redemption for goods and services.
Prepayment method option
In those instances where taxable awards and discount awards are commingled, the Department will recognize a prepayment method in place of the general presumption under limited circumstances. To qualify for the prepayment method and avoid application of the general presumption, the seller must prepay retailing B&O and retail sales tax on taxable awards that have been commingled with discount awards at the time the taxable awards are issued, based on the combined state and local tax rate of the customer’s address that is available from the business records of the seller. See RCW 82.32.730(1)(c). Under this method, the Department will accept treatment of commingled awards as discount awards at the time of redemption. Thus, the seller need not collect additional retail sales tax from the customer on the redemption of these awards.
The seller must maintain adequate records and documentation to demonstrate that tax was accurately calculated and remitted, including the method for calculating the tax, within the reporting period during which the taxable awards are issued; failure to maintain this information may result in denial of a claim for this option. The seller may not later seek refunds of any prepaid taxes for the commingled awards if it uses the prepayment method. If the seller owes deferred sales tax because a customer redeems discount awards for the full price of goods and services, please see the interim statement on “Rewards Programs – Deferred Sales and Use Tax.”
Again, a seller always has the option of maintaining appropriate records that document the conditions of the seller’s rewards program and identify and segregate rewards awarded to and redeemed by customers. Discount awards will not be considered bona fide discounts unless the seller maintains proper documentation, which must be available for examination by the Department. See RCW 82.32.070 and WAC 458-20-254.
Example – Prepayment method for a commingled rewards program
- Facts: ShoeSeller offers a customer loyalty rewards program to all of its Washington customers. During ShoeSeller’s quarterly reporting period, ShoeSeller issued 20,000 discount points and 100 taxable points. ShoeSeller commingles the program points and does not identify which type of points is used at the time of redemption. Because ShoeSeller awards few taxable points through its rewards program, it decides that it will use the prepayment method described in this interim statement. For purposes of this example, each point is at all times valued at $1.00.
- Application of the prepayment method: For the reporting period in question, ShoeSeller will remit retailing B&O tax and retail sales tax consistent with the address of the program members to whom the points have been awarded. For example, if ShoeSeller’s books and records kept in the ordinary course of business indicated Tacoma addresses for all program members, then ShoeSeller would remit retailing B&O tax on the $100.00 point value, and retail sales tax of $9.50 ($100.00 point value x 9.5% (the combined state and local sales tax rate)). ShoeSeller will not need to report as sales subsequent transactions associated with redemptions of these awards unless ShoeSeller receives additional taxable consideration.
The Department will continue to review this issue for purposes of developing final guidance. The Department anticipates that this interim statement will continue until final guidance is issued or the interim statement is cancelled.