The New York State Department of Taxation and Finance has issued a Tax Bulletin addressing the application of sales tax to items purchased at a discount with customer loyalty cards. Customer Loyalty Cards, TB-ST-145 (N.Y.S. Dep’t of Tax’n & Fin., Sept. 29, 2011). The Bulletin outlines the steps that businesses must take to properly inform customers of the type of discount they are receiving when they purchase an item with a customer loyalty card. It generally follows the policy set forth in the Department’s recent pronouncement, “Tax Department Policy on Manufacturer’s Discounts Received Using Store Loyalty Cards,” TSB-M-11(10)S (N.Y.S. Dep’t of Tax’n & Fin., June 29, 2011), discussed in the August 2011 issue of New York Tax Insights.

Whether the seller must charge sales tax on the full price or the discounted price of a purchase made with a customer loyalty card hinges on whether the seller is reimbursed for the discount it offers the customer. In general, if the seller is reimbursed for the discount then sales tax is due on the full, undiscounted price of the item. If the seller is not reimbursed for the discount, then sales tax is due on the discounted price of the item.

For example, when a store discount is offered through use of a customer loyalty card, the store itself is providing the discount and is not reimbursed; therefore, the seller only needs to collect sales tax on the discounted price. On the other hand, when a manufacturer’s discount is offered through the use of a customer loyalty card, the manufacturer reimburses the seller for the discount, and the store must collect sales tax on the full price of the item.

If use of the loyalty card provides customers with a future discount, a discount that allows the cardholder to accumulate points for future discounts or free merchandise, or a discount on purchases from third party sellers, the taxability of the discounted item depends on whether the seller is reimbursed for the discount by a third party. If the seller receives reimbursement, sales tax must be collected on the full price; if the seller does not, sales tax is due only on the discounted price.

The new Tax Bulletin provides that if the seller fails to properly disclose to the customer that a discount is a manufacturer’s discount, the seller must only collect sales tax on the reduced price from the customer, and remains liable for the sales tax on the difference between the discounted price and the full price.

This rule applies to online sales as well as in-store sales. In order to avoid this liability the seller must: (1) identify items subject to a discount by using “Manufacturer’s” or “Mfr.” on its coupons, in-store circulars, and advertisements; or (2) use store shelf tags that are distinguishable from regular shelf tags based on their size, color and wording, and indicate by “Manufacturer’s” or “Mfr.” printed on the store tag that the discount is a manufacturer’s discount; or (3) post signs near check-out advising customers that some discounts are manufacturer’s discounts and others are store discounts and set its cash registers to indicate on the customer’s receipt which discounts are manufacturer’s discounts and which are store discounts.

Additional Insights. The sales tax rules for discounts offered through the customer’s use of a store loyalty card are similar to the rules for discounts in general – the seller must clearly indicate the type of discount being offered. In practice, however, it may be difficult to indicate the type of discount being offered when the customer receives the discount through use of a customer loyalty card because the discount received by the customer may not be promoted by coupons, circulars, or similar advertising. The new Tax Bulletin acknowledges this reality and provides the seller with the safe harbor options outlined above to avoid liability for sales tax.