PS 96(2)

The Treatment of Early Payment Discounts

PURPOSE: The purpose of this Policy Statement is to explain the Department's new policy on early payment discounts for sales and use tax purposes.

BACKGROUND: In Conn. Gen. Stat. §12-407(8), the term sales price is defined as the "total amount for which tangible personal property is sold or the total amount received for any service." That statute further states that sales price does not include "cash discounts allowed and taken on sales." In the past, the phrase allowed and taken has been interpreted such that only cash discounts allowed by a retailer and taken by a customer at the time of the sale are excluded from the sales price. See Ruling 89-39 (8/4/89) and Bulletin 42 (3/1/89).

Early payment discounts are cash discounts that are allowed for prompt payment of a bill. Therefore, early payment discounts are dependent upon an event occurring after the close of the sale. Trade, wholesale, volume, and employee discounts are distinguished from early payment discounts. Trade, wholesale, volume, and employee discounts are irrevocably applied at the time of sale and, in effect, establish a new "sales price" and are not dependent on any post-sale condition or event.

Because trade, wholesale, volume, employee and other discounts irrevocably applied at the time of sale simply establish a new "price," there is no need for a special exclusion from the sales price. However, the Department of Revenue Services has determined that, effective for sales made on or after April 1, 1996, early payment discounts may be excluded from the sales price.

STATUTORY AUTHORITY: Conn. Gen. Stat. §12-407(8).

EFFECTIVE DATE: Effective for sales made on or after April 1, 1996.

EARLY PAYMENT DISCOUNTS: Retailers, manufacturers, and wholesalers often sell goods on credit terms of 30 to 60 days, but offer a cash discount for earlier payment, i.e., early payment discounts. Early payment discounts are commonly communicated in terms that read 2/10, n/30, which is read "2, 10, net 30." These terms mean that the authorized credit period is 30 days, but that the customer may deduct 2% of the amount of the invoice if it makes payment within 10 days. The 10-day period during which the discount is available is called the discount period.

This Policy Statement is not to be read as excluding only 2/10, n/30 early payment discounts from Connecticut sales and use taxes. The 10 day discount period is a common example used in explaining cash discounts and is not intended to be viewed as a limitation in this policy statement. For example, if a retailer sold an item to a customer under the terms "2/15, n/30" and the customer paid the retailer within 15 days, that early payment discount would also be excluded from Connecticut sales and use taxes.

The following example demonstrates how early payment discounts are to be treated for sales and use tax purposes for sales made on or after April 1, 1996.

Example 1: On December 1, A Company sells merchandise for $1000 on credit to Z Inc., terms 2/10, n/30. At the time of the sale, A Company does not know if Z Inc. will take advantage of the discount by paying within the discount period; therefore, A Company must record the sale at the full price.

(To record sale to Z Inc., terms 2/10, n/30.)

Under the terms of the sale, Z Inc. has a choice between saving $20 on the price of the merchandise (2% of $1000) by paying within the discount period (10 days), or waiting a full 30 days and paying the full price. If Z Inc. makes payment on or before December 11, it is entitled to deduct 2% of $1000 or $20, and settle the obligation for $980 plus $58.80 ($980 x 6%) in tax for a total of $1038.80. If Z Inc. decided to pass up the discount, it may postpone payment until December 31 but then must pay $1000 plus $60 ($1000 x 6%) for a total of $1060.

Under the Department's former position, unless Z Inc. paid A Company at the time of the sale on December 1, Z Inc. would have been taxed on the full $1000 regardless of whether it paid within the discount period. However, for sales made on or after April 1, 1996, by paying within the discount period, Z Inc. will no longer be taxed on the full $1000. Rather, Z Inc. will be taxed on only $980, the discounted sales price, provided payment is made during the discount period.

TAX RATE CHANGE: In the event of a tax rate change, calculate the tax using the rate in effect on the date of the sale. The date of sale is the date the goods are delivered or the services are rendered regardless of the date of payment.

TRANSACTIONS THAT CROSS INTO ANOTHER REPORTING PERIOD: Early payment discounts like the one A Company offered to Z Inc. in Example 1 pose no reporting problems because they are offered and accepted in the same month. However, depending upon when a sale is made, the early payment discount period may end in a different reporting period than the one in which the sale occurred. The following example illustrates how a retailer would report such a transaction.

Example 2: Assume that A Company, a monthly sales and use taxes filer, made a sale to Z Inc. under the same terms as in Example 1, except that the sale was made on December 22 instead of December 1. According to the terms of the sale (2/10, n/30), if Z Inc. pays A Company within 10 days of the sale, it will be entitled to a 2% discount, otherwise it remains liable for the full sales price of $1000. The discount period in this example crosses over from December into January, because Z Inc. has until January 1 to take advantage of the discount.

Because taxpayers have one month after the close of a reporting period in which to file Form OS-114, Sales and Use Tax Return, A Company has until January 31 in which to file its Form OS-114 for December. A Company will know by January 1 whether or not Z Inc. will take advantage of the discount. Therefore, A Company will have all the information it needs with respect to its transaction with Z Inc. in time to include the sale on its December return. There is no need for A Company to wait until it files its return for January to report the discount. A Company may make an adjustment, if Z Inc. pays within 10 days, for the cash discount on its December Form OS-114.

Dec. 22 sale (gross) $1000

Dec. 22 sale (revised) $980

Adjustment allowed on December return (amount of discount) $20

Amended Return Required: In the event that a buyer claims an early payment discount that the retailer cannot reflect on the return for the period in which the sale was made, the retailer must report the full price of the sale without allowance for the early payment discount. If payment is then made within the allowed discount period, the retailer may amend the original Form OS-114, supplying documentation (as explained in the next section) supporting the change.

RECORDKEEPING REQUIREMENTS: In order to prove that an early payment discount has been offered and taken, there are certain items that a retailer must retain. Such items include the original sales receipt with a notation about the availability and terms of the early payment discount and a receipt showing payment was made within the allowed discount period. Although the supporting documentation must be supplied to the Department when a retailer files an amended Form OS-114 (where the sale and the discount transaction are in different reporting periods), it is equally important for a retailer who offers a discount which is accepted within the same reporting period to retain accurate and complete records. Without documentation, no credit will be given nor any adjustment allowed by the Department for a cash discount.

USE TAX REPORTING: Purchasers who self-assess use tax should file their returns and make any adjustments in accordance with the terms set forth above.

REFUNDS: The Department's new position on the treatment of early payment discounts is effective for sales made on or after April 1, 1996. Accordingly, the Department will not refund tax paid on early payment discounts for sales made prior to that date under the Department's former position.

EFFECT ON OTHER DOCUMENTS: Ruling 89-39, Bulletin 42 and previous information letters adopting similar positions are revoked and may not be relied upon for sales that take place on or after April 1, 1996.

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 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 or regulations or to judicial decisions. 

PS 96(2)
Sales and Use Taxes
Cash discounts
Issued: 4/2/96