l EDITED BY WALTER HELLERSTEIN, J.D. STATE & LOCAL Sales and Use Tax Implications of Loyalty Programs MARY T. BENTON, MATTHEW P. HEDSTROM, AND GREGG D. BARTON Examining a loyalty program reward’s form, structure, and parameters is essential for determining the state sales and use tax consequences. In today’s competitive consumer en - ward programs, but loyalty programs vironment, loyalty programs are predate these programs and have ac - ubiquitous with the shopping expe - tually been around for more than 100 rience. Most companies offer some years. 3 One of the earliest loyalty pro - form of a “loyalty” or “reward” pro - grams was the S&H Green Stamps gram. When consumer spending program, which began in the 1930s. 4 slowed as a result of the economic Under that program, consumers re - downturn, consumer loyalty, and ceived stamps when making pur - with it, loyalty programs, became chases, collected those stamps in a even more important. For example, booklet and later redeemed the book - according to Jupiter Research, more let for products when the consumer than 75% of consumers today have accumulated the requisite number of at least one loyalty card, and the stamps. In essence, the booklet func - number of people with two or more tioned as an alternative for a currency is estimated to be one-third of the having a certain associated value. shopping population. 1 And loyalty While the general premise of the programs are big business —according S&H Green Stamps program is still to Forbes in an article published in applicable today, loyalty programs 2011, “U.S. companies spend $50 bil - have evolved considerably from the lion a year on [various] loyalty pro - trading stamps model. And while air - grams. And when done right, loyalty line frequent flyer programs still exist programs can generate as much as 20 today, current loyalty programs are percent of a company’s profits.” 2 varied, significantly more complex, Many can trace back their aware - structurally diverse, and constantly ness of loyalty programs to airline fre - evolving. State tax laws, on the other quent flyer programs and hotel re - hand, have not, in many instances, 80 l JoUrnaL of TaxaTIo n l aUgUST 2015 kept up with the evolution of loyalty reward programs. As noted, the re - form. Even where similarities exist, de - programs from a business perspective. wards themselves are offered in any termining the amount of “considera - As a result, taxpayers are often left to number of forms, including but not tion” paid in connection with a par - apply historic precedent to modern- limited to, cards, points, certificates, ticular sale when the redemption of a day loyalty programs with varying vouchers, credits, codes, and coupons. loyalty reward is involved is not al - degrees of success, depending on the The business-to-business industry ways clear. Essentially, the question particular program and the applicable has also developed in this area becomes, does the provision of a re - state law. Adding further challenge, whereby third-party instruments are ward constitute taxable considera - state laws are not uniform; thus, in used to “fund” the retailers’ programs, tion? addition to applying old precedent, or to augment them. Often the most analogous guid - taxpayers have to contend with ap - While there are several discrete ance is found in the coupon context. plying non-uniform laws and inter - sales and use tax issues that arise in The typical sales and use tax scheme pretative guidance to their facts, which connection with an analysis of a loy - employed across the country draws a can result in different conclusions alty program, the most common issue distinction first between coupons and across states, even in states with iden - and the one that will be examined in general price reductions, and a further tical or substantially similar statutes. this article relates to the ramification distinction between retailer coupons of the redemption of an award in ex - and manufacturer coupons. With re - change for a taxable item. Specifically, gard to purchase price reductions, “[a] LOYALTY when rewards are exchanged for dis - cash discount given by the seller at PROGRAMS GENERALLY counts on the sale of tangible personal the time of the sale, and not depend - Very generally, loyalty programs are property, is the value of the reward ent on time of payment, volume of incentive-based programs whereby a considered part of the “sales price” purchases, or similar factors, is usually company offers rewards, vouchers or subject to the tax? The form of the re - excluded from the sales tax base, on similar instruments in exchange/con - ward, the program’s structure and the the ground that the discount is not sideration of certain consumer behav - parameters of the reward are critically part of the sales price.” 7 When ior (e.g., purchasing, referrals, etc.) that important in analyzing the state sales “coupons” are involved, most sales can be applied toward future pur - and use tax consequences. 5 and use tax schemes draw a distinc - chases of products/services offered by tion between: (1) coupons issued by the company (or an affiliate) (gener - the retailer to the customer for which ally for purposes of this article such CONSIDERATION the retailer is not reimbursed (by the programs will be referred to as “loy - PAID AND THE manufacturer or any other third alty programs” and the associated re - DEFINITION OF SALES PRICE party), and (2) manufacturer coupons wards as “loyalty rewards”). Programs As a general matter, sales tax is im - for which the retailer is reimbursed are also offered by service providers, posed on the “sales price” of a taxable (by the manufacturer or other third including airlines, spas, gyms, and item. While the relevant statutory party). 8 Across the country, it is restaurants, to name a few. However, terms may vary, the concept is the “widely held that discount coupons it is hard to generalize as to the struc - same; tax is imposed on a statutorily- for which retailers are not reimbursed ture of loyalty programs and it would defined base, be it “sales price,” “re - by a manufacturer or other person be unwise to do so, as today’s loyalty ceipts,” or “gross receipts.” That statu - serve to reduce the sales tax measure.” 9 programs are structured in a variety tory definition typically refers to the In contrast, manufacturer’s coupons of ways. Usually these programs entail total amount of “consideration” paid “which reduce the sales price to the “rewarding” certain consumer behav - for the taxable item. By way of exam - consumer but for which the retailer iors, including, rewarding prior pur - ple, the Streamlined Sales and Use Tax is reimbursed by the manufacturer or chases, incentivizing future purchases, Agreement broadly defines “sales distributor, are usually held not to re - rewarding the completion of a survey, price” as the “total amount of consid - duce the state’s sales tax measure” on referring a friend, and hosting events eration … for which personal prop - the theory that the retailer’s receipts with the loyalty program sponsor, by erty or services are sold, leased, or include both what it receives from the way of examples. rented.” 6 However, state definitions of customer and what it receives from Loyalty programs are also offered “receipts” or similar terms are not uni - the manufacturer or distributor. 10 through third party arrangements (i.e., NOTES offered by a third party different than 5 for additional background, see Hellerstein and Heller - 1 www.forbes.com/2007/01/02/frequent-flyer-miles-ent- stein, State Taxation (Thomson reuters, 1998), the one with whom it will be re - sales-cx_kw_0102whartonloyalty.html. ¶ 17.06[6]. 2 www.forbes.com/sites/mckinsey/2011/12/01/loyalty-is- deemed). Such programs are often 6 SSUTa appendix C, Part I. it-really-working-for-you/. structured as credit card reward pro - 7 See Hellerstein, State Taxation , ¶ 17.05[1]. 3 www.forbes.com/2007/01/02/frequent-flyer-miles-ent- 8 grams, rewards sponsored by the re - sales-cx_kw_0102whartonloyalty.html. Id ., ¶ 17.05[2]. 9 lated affiliate, franchisee-operated 4 www.forbes.com/2007/01/02/frequent-flyer-miles-ent- Id ., ¶ 17.05[2][a]. programs, and employee-sponsored sales-cx_kw_0102whartonloyalty.html. 10 Id ., ¶ 17.05[2][b]. STaTe & LoCaL aUgUST 2015 l JoUrnaL of TaxaTIon l 81 The distinction between manufac - taxpayers must consider the guidance ment considered whether points turer and retailer coupons is often ad - in determining whether certain loyalty earned in connection with Intercon - dressed by revenue departments in rewards would be considered taxable tinental Hotel Group’s (IHG) reward regulation and informal or formal consideration. program were subject to sales tax. guidance. Despite the widespread Similar to other states, New York After accumulating enough points, adoption of the distinction between has followed the “coupon” framework reward members would redeem retailer coupons and manufacturer in analyzing reward programs —at points through IHG for free hotel coupons and the general conclusion least as applied to certain fact patterns. stays. IHG would then mail the that one such coupon is properly New York has addressed the sales and member a voucher which instructed viewed as “consideration,” applying use tax consequences of using “store the member to contact IHG. IHG that framework to other fact patterns, loyalty cards” through informal guid - would arrange for the hotel stay at especially in the rewards context, ance. 13 In that guidance, the Depart - the participating hotel. IHG would leads to inconsistent and often unsat - ment of Taxation and Finance (the then pay each franchisee hotel a cer - isfying results. 11 Indeed, the coupon “Department”) has taken the position tain amount to “reimburse” the hotel framework is routinely applied to new that the impact of the use of the loy - for the stay.