Rebate and Savings Dispute Gets Even More Complicated

Just when you think you’ve figured out how you’re going to be taxed on an item you purchased with a coupon or rebate, along comes a legal dispute that calls into question one state’s interpretation of its own tax laws, and a retailer’s effort to provide savings for its customers – and itself.

Now unless you happen to shop at the independent electronics and camera store in Midtown Manhattan that’s at the center of this dispute, the outcome is unlikely to affect you directly. But it could impact how and whether your own state ends up charging you sales tax on the full price of items you bought at a discount.

The owner of the B&H Photo Video Electronics store has come out swinging in response to a lawsuit filed against it late last year by the New York Attorney General’s office. The lawsuit claimed that B&H has failed for years to charge or remit sales tax for manufacturer-funded discounts, and owes the state about $7.3 million in back taxes. But B&H accuses the state of displaying a “lack of understanding of sales tax law.”

And it all seems to come down to whether the savings offered to customers come in the form of a discount, or a rebate.

In most states, including New York, the law is clear when it comes to coupons. Store coupons reduce your taxable total, but manufacturer’s coupons don’t. It gets a little more complicated when manufacturers provide a discount to retailers, who then pass along that discount to shoppers in the form of a store coupon – manufacturer-funded store coupons are subject to sales tax in the same way that manufacturer’s coupons are. The same applies to manufacturer-funded rebates.

“The tax rules concerning these arrangements have been clear for decades,” the New York Attorney General’s lawsuit reads. In the case of a manufacturer’s coupon, the retailer is paid in part by the shopper and in part by the manufacturer – therefore, the combined amount is considered the taxable selling price. In the case of a rebate, while the shopper applies for a discount directly from the manufacturer, they pay the full price up front to the retailer. So that’s considered the selling price for sales tax purposes.

But what about an “instant rebate” that’s given to a shopper on the spot?

At issue in this dispute is what B&H calls “Instant Savings.” The state calls it a rebate that “reduces the actual cost of the item to the customer,” but since B&H is reimbursed by the manufacturer, “sales tax is not limited to the discounted price, but is due on the amount ultimately paid by the customer plus the amount ultimately paid by the manufacturer.”

In a newly-filed response to the Attorney General’s lawsuit, however, B&H describes Instant Savings as “a reduction to the wholesale price that a manufacturer provides to a retailer to incentivize the retailer to put an item on sale.” It’s not a coupon, and it’s not even really a rebate – it’s essentially just putting an item on sale. By the state’s logic, B&H says, if a $100 item is on sale for $80, the customer should be charged sales tax on the original $100 selling price. “This defies not only common sense, but New York law,” B&H argues.

Consider that any time something goes on sale at your local grocery store, it’s likely because the manufacturer offered a price discount or other incentive to the retailer, who then passes along that discount to its customers to help boost demand for the product. It’s good for the manufacturer, good for the retailer, good for the customer – and perhaps not as good for the state, who gets less revenue from sales tax because only the actual purchase price, and not the regular full price, of the item is taxed.

B&H says its Instant Savings should be treated no differently. “Demonstrating their lack of understanding of sales tax law, the AG tries to equate Instant Savings with manufacturer’s coupons,” B&H argues. Because Instant Savings “are a retailer’s discount on the wholesale price of the product and are unaffected by a customer’s actions,” they are “nothing more than a storewide sale on specific items and not subject to tax.”

By the state’s logic, according to B&H, any manufacturer-funded discount should be subject to sales tax. If that logic were to be applied to supermarket shoppers, for example, you’d be paying sales tax on the full price of just about everything you buy, regardless of whether it’s on sale and regardless of whether you use any coupons at all.

“Taxing items on sale at their pre-markdown price is not industry practice, as every customer knows,” B&H’s argument concludes. The retailer is asking for the state’s case to be dismissed. This dispute is just the latest in a long line of lawsuits involving complicated arguments about sales tax, coupons and rebates. It’s now up to the judge to decide whether this case comes to a conclusion that’s just as murky as the others.

Image source: B&H Photo Video