Tax Type
Retail Sales and Use Tax
Description
Discounted sales price
Topic
Taxability of Persons and Transactions
Date Issued
11-01-1989
November 1, 1989
Re: Ruling Request / Sales and Use Tax
Dear**************
This will reply to your letter dated May 26, 1989 in which you request a ruling of the Virginia sales and use tax law as to whether an Illinois corporation doing business in Virginia may apply a discount that it grants its dealers in determining the taxable selling price for catalogs and other advertising materials sold to its dealers.
FACTS
The corporation (the "taxpayer") is a national wholesaler of various items of tangible personal property. In addition, it produces catalogs, sales promotion programs, and management and marketing services for its dealers. ********** product catalogs are the basic merchandising tool used in generating company sales. Each year, the taxpayer produces a new ******** catalog. The catalogs are sold to the taxpayer's dealers throughout the year.
As a general rule, the dealers distribute the catalogs to the end-user customer free of charge. The taxpayer charges the dealers sales tax based on the selling price of the catalogs. Those dealers who resell the catalogs to the end-user and who provide the taxpayer with a proper resale exemption certificate are not charged sales tax by the taxpayer. Dealers are not agents of the taxpayer, but are independent retailers.
As catalogs and other advertising materials are the primary source of generating sales of its products, the taxpayer desires to increase its product sales by increasing its sales of these items. As an inducement to purchase the catalogs the taxpayer is considering a new catalog discount program. Each dealer will earn a discount equal to approximately 3 percent of his monthly merchandise purchases through the catalog, if such purchases are paid within the taxpayer's current credit terms.
The discount program currently being considered would effectively provide that the dealer could only utilize the discount earned to purchase catalogs or other advertising materials. Two alternatives are currently being considered.
Alternative 1
The catalog discount earned by each dealer would be accumulated on a monthly basis. This discount could only be applied to reduce the purchase price of catalogs and other advertising materials. Invoices for catalogs and other advertising materials would reflect the normal selling price less the earned discount. At the end of the discount period (December 31), any unused discount would be forfeited unless the following applies:
To the extent that a dealer's unused discount is not greater than the amount the dealer paid for catalogs and other advertising materials during the year, the dealer will receive a credit to his account at the end of the discount period. Any unused discount in excess of the price paid for catalogs and other advertising materials ordered during the year would be forfeited.
Alternative 2
In general, Alternative 2 is the same as Alternative 1, except that in Alternative 2, any unused discount which is not greater than the amount of catalogs and other advertising materials purchased during the previous year would be credited to the dealer's account at the end of the discount period (December 31).
The taxpayer specifically requests a ruling of the Virginia sales and use tax law on the following issue:
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- In both of the alternative situations described; (1) whether sales tax should be computed on the net invoice amount (the normal selling price of the catalogs and other advertising materials less the discount), and (2) the sales tax relevance, if any, of crediting the dealer's account for unused discount.
RULING
Cash and trade discounts taken on sales are generally not includible in the sales price for purposes of computing the tax. Va. Code 58.1-602(17) defines "sales price" as not including "any cash discount allowed and taken" (Emphasis added).
In computing the amount of a discount which may be subtracted from gross sales, the discount must be allocated between sales price and sales tax. The method of allocation depends upon the method used to compute the discount; for example, whether the discount is a fixed amount or whether it varies as a percentage of sales price. The taxpayer's situation resembles Example 1 of the computation of the sales tax when a discount is applied in the enclosed copy of Virginia Regulation §630-10-18.
The accrual of unused discounts to a dealer's account will have no sales tax impact. only when the discount is applied and hence the cost of the catalogs or other advertising material is reduced will the related sales tax be reduced accordingly.
I hope the foregoing information has answered your questions. However, please contact the department if you need additional information.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner