Sales Tax Treatment of Coupons, Scan Cards,
Cash Equivalents, Promotional Items and Rebates
PURPOSE: In January 1990, the Department issued a revision of Bulletin 24, Sales Tax Treatment of Coupons. Since then, certain changes in the manner in which coupons are used and the adoption of new marketing techniques by retailers have necessitated revisions to the Department's policy.
In January 1998, the Department issued Policy Statement 98(1) to replace Bulletin 24. Since then, the General Assembly has changed the sales and use tax treatment of certain coupons. This Policy Statement describes the legislative change, which took effect on July 1, 1998.
This Policy Statement describes the calculation of gross receipts subject to sales and use taxes when coupons or electronic price reduction cards ("scan cards") are used to make purchases of tangible personal property or taxable services. This Policy Statement also describes the tax treatment of cash equivalents, promotional items furnished by retailers and rebates.
EFFECTIVE DATE: Effective upon issuance, except that the exclusion of the value of reimbursable coupons from sales and use taxes is effective for sales made on and after July 1, 1998.
STATUTORY AUTHORITY: Conn. Gen. Stat. §12-407(8) and (9), as amended by 1998 Conn. Pub. Acts 110, §5; Conn. Gen. Stat. §12-410(4)(a); Conn. Gen. Stat. §12-411(12)(a).
ALL COUPONS AND SCAN CARDS REDUCE TAXABLE PRICE: The terms sales price and gross receipts are defined in Conn. Gen. Stat. §12-407(8) and (9) to exclude "cash discounts allowed and taken on sales," and effective for sales made on and after July 1, 1998, to exclude "the full face value of any coupon used by a purchaser to reduce the price paid to the retailer for an item of tangible personal property, whether or not the retailer will be reimbursed for such coupon, in whole or in part, by the manufacturer of the item of tangible personal property or by a third party."
Coupons: A coupon entitles a purchaser to an immediate reduction in the sales price of an item when the coupon is presented to a retailer. No additional action is required of the purchaser. Some examples of typical coupons include "cents off," "two for the price of one," "buy one, get one free," or "one cent sale" coupons. Coupons may be issued by a manufacturer, a retailer or another third party. It does not matter whether the retailer can obtain reimbursement for the coupon from a manufacturer or another third party.
Sales and use taxes must be calculated on the sales price net of all price reductions from coupons. Any additional value assigned by the retailer, such as to double or triple the coupon, is also excludable from the sales price.
Scan cards: Like coupons, scan cards function as discounts given by the retailer that issues the cards. Therefore, a discount given by a retailer in connection with the use of the retailer's scan card is excludable from the measure of tax. Sales and use taxes must be calculated on the reduced sales price, net of all scan card price reductions.
Example: A supermarket advertises a weekly special on laundry detergent, reducing the price from $5.99 to $4.99 if the customer uses the store's scan card. A customer purchases the laundry detergent using the store's scan card and a manufacturer's coupon with a face value of $0.50. In addition, the store will triple the coupon, to increase its value by another $1.00. The final price of the detergent to the customer is $3.49. The sales tax due on the purchase of the detergent is $0.21, which is 6% of $3.49 ($5.99 minus the scan card price reduction of $1.00 and minus the $1.50 from the tripling of the face value of the coupon).
DISCOUNT FOR OPENING OR USING STORE CHARGE ACCOUNT: Some retailers offer an incentive for a customer to open a new store charge account or to use an existing store charge account by giving the customer a discount of a percentage of the customer's next purchase using the store charge card. The discount is reflected on the retailer's next bill to the customer. Because the customer is not required to take any additional action once he or she makes the purchase using the store charge account, the discount is irrevocably applied at the time of the sale and so only the reduced sales price, net of the discount, is subject to tax.
CASH EQUIVALENTS: "Cash equivalents" are items purchased that entitle a person to redeem them in the future to receive tangible personal property or services. Examples of cash equivalents include, but are not limited to, "dine out" cards, entertainment coupon books, vouchers, gift certificates and trading stamps (whether or not such items are called "coupons"). Cash equivalents are deemed to be intangible rights to acquire tangible personal property or services in the future, and thus are not taxed when acquired. However, the redemption of a cash equivalent is taxable, based on the retail price of the tangible personal property or services for which the cash equivalent is redeemed.
Example 1: An individual receives a gift certificate for her birthday, entitling her to $50.00 towards the purchase of goods at a particular store. No tax was due on the purchase of the gift certificate. When the gift certificate is redeemed to purchase a taxable item with a retail price of $48.00, the tax due is $2.88, and the individual redeeming the gift certificate must pay $0.88 in addition to surrendering the gift certificate to the retailer.
Example 2: An individual purchases a "dine out" card for $100.00, which entitles the bearer to receive a second meal of equal or lesser value at no charge upon purchasing a meal at a particular restaurant. No tax is due on the purchase of the "dine out" card. When the individual uses the "dine out" card to receive the "free" meal, which would ordinarily have been sold for $20.00, he must pay $1.20 in sales tax in addition to presenting the "dine out" card to the restaurant.
PROMOTIONAL ITEMS: A retailer may purchase without tax tangible personal property to be resold, without regard to the amount such retailer intends to charge for the property, as long as the retailer makes no use of the property "other than retention, demonstration or display while holding it for sale in the regular course of business" (Conn. Gen. Stat. §§12-410(4) and 12-411(12)). Thus, when a retailer will charge any amount to a customer for a promotional item (such as with a "one cent sale"), the retailer is making a retail sale of the item and may purchase the item on resale. The retailer must charge tax based on its gross receipts from such sale (unless the sale is exempt, such as when made to an exempt organization or a governmental entity).
Sometimes a retailer transfers tangible personal property at no charge to a customer, where such transfer is not in connection with a sale such as a "two for the price of one," "buy one get one free," or similar offer. The retailer may or may not require the customer to redeem a coupon in order to receive the property being given away. The retailer is making a taxable use of the item being given away and must pay use tax on its purchase price for the item.
Example 1: A convenience store gives away an ice scraper with the purchase of $10.00 worth of goods. The retailer is not making a retail sale of the item but is using it for promotional purposes. Therefore, the retailer may not purchase the ice scraper on resale. Instead, use tax is due from the retailer based on the purchase price paid by the retailer for the ice scraper.
Example 2: The same store sells two ice scrapers for the price of one, and offers a sale where if a customer buys one candy bar, a second one is "free." The retailer is making retail sales of both ice scrapers and both candy bars at discounted prices, and may purchase the items on resale.
REBATES: Retailers must collect tax on the full sales price paid for tangible personal property or taxable services, even though the purchaser may later obtain a cash rebate from the manufacturer or other third party. The terms sales price and gross receipts are defined in Conn. Gen. Stat. §12-407(8) and (9) to include "the total amount for which tangible personal property is sold . . . or the total amount received for any service rendered . . . or the total amount of payment or periodic payments received for leasing or rental of tangible personal property . . . ." Because the initial purchase of the item and the honoring of a rebate claim by the manufacturer are two separate and distinct transactions, the rebate does not reduce the sales price paid for the item.
Manufacturers of motor vehicles frequently offer cash rebates on particular models to purchasers, who then typically assign the rebates to the dealerships in order to reduce the amount that the purchasers pay for the vehicles. In addition, motor vehicle dealers may offer their own discounts on vehicles, sometimes termed "rebates." Although discounts or "rebates" offered by dealers may be excluded from the dealers’ gross receipts from sales, rebates paid by manufacturers must be included in the measure of tax even if purchasers assign them to the dealers to reduce the amount the purchasers pay for the vehicles.
Unlike coupons, discounts and other price reductions, rebates require some action by purchasers (either directly or by retailers as assignees of the purchasers) after the sales have been completed. Also unlike coupons, rebates result in cash payments to customers (either directly or to retailers as assignees of the purchasers) after the sales have been completed.
Example: An automobile manufacturer offers a $1,000 rebate on one of its models. In addition, the dealership offers a $500 discount on the same model, which it terms a "dealer rebate." A customer buying a $15,000 car assigns his right to the manufacturer's rebate to the dealership, reducing the amount he must pay for the car by a total of $1,500. The sales tax due on this transaction is 6% of $14,500 ($15,000 minus $500), or $870. Even though the manufacturer's rebate of $1,000 is applied to reduce the amount being paid by the customer, it may not be used to reduce the measure of tax.
EFFECT ON OTHER DOCUMENTS: This Policy Statement supersedes Policy Statement 98(1).
EFFECT OF THIS DOCUMENT: A Policy Statement is a document that explains in depth a current department policy or practice affecting the liability of taxpayers. Unlike a Ruling, a Policy Statement does not apply a policy or practice to a specific set of facts but it may be referred to for a general guidance by taxpayers. Unlike a Special Notice, it does not announce a new policy or practice in response to changes in state or federal laws on regulations or to judicial decisions.
FOR FURTHER INFORMATION: Please call the Department of Revenue Services during business hours, Monday through Friday:
- 1-800-382-9463 (toll-free from within Connecticut), or
- 860-297-5962 (anywhere).
FORMS AND PUBLICATIONS: Forms and publications are available all day, seven days a week:
- Telephone: use the phone numbers listed above and select Option 2 from a touch-tone phone;
- Internet: preview and download forms and publications from the DRS web site: http://www.ct.gov/drs; or
- TDD/TT (Telecommunications Device for the Deaf) users only call 860-297-4911 during business hours.
Sales and Use Taxes
Coupons and Rebates