Have you ever reaped the benefits of offering discounts, promo codes, and coupon deals? If so, you understand the power it has to draw customers new and old in droves. What you should also understand, is that states expect you to know how to handle the sales tax for those different types of purchases.
With few exceptions, sales tax is the gross receipts or gross selling price received from selling products or offering taxable services. Seems simple enough right? Yet, retailers are often stung for mishandling the taxes charged with these purchases.
Especially during this time of year, one of the best things to see as consumers are “BUY ON GET ONE FREE” signs blaring across the front of our favorite retail stores. In this case, the retailer must know how to apply the tax in order to comply with state sales tax laws. In most states, if a retailer advertises something for free, they owe sales or use tax on the full purchase price that the retailer paid for the item, regardless of what the customer paid or did not pay.
Unfortunately, we as consumers are seeing less of this promotion as retailers become more aware of the tax implications. Retailers are much better off offering a “buy 2 get 50% off the total” deal. Economically, this would be the same as buy one-get one free, however the tax treatment differs in both cases.
Also, quite uniform across the state laws is that if a sale is reduced by a whole dollar discount or some set percentage, you should only apply sales tax to the actual selling price after the reduction. Say you offer a 50% discount on a $200 pair of shoes. The buyer pays $100, and you should only charge sales tax on the $100 sale.
Coupons are fortunately dealt with in the same exact manner as discounts are. If a retailer offers a promo code for $5 off your next purchase of $60 or more, and you buy $60 worth of products, the cost would be $55 and sales tax is only charged on that amount of the sale.
The treatment of sales tax with rebates is rather simple because the rebate is actually issued by the manufacturer. Therefore, you should charge sales tax on the full price of the product because the rebate has no direct affect on the transaction between you and the customer other than the fact that the customer may actually choose to purchase the item solely based on him/her getting a rebate.
The laws/rules of sales tax application to promotions, coupons, and discounts can be complicated and difficult to grasp. As accountants, it is our job to research and handle these issues so that you don’t have to. Although these laws can be volatile, we’ll make sure you stay on top of things and help you understand the rules of sales tax as you run your business without having to check over your shoulder for audits.
Ricky M. Hackler