Sales and Use Tax Implications of Loyalty Programs

Transcription

1 EDITED BY WALTER HELLERSTEIN, J.D. STATE & LOCAL Saes and Use Tax Impications of Loyaty Programs MARY T. BENTON, MATTHEW P. HEDSTROM, AND GREGG D. BARTON Examining a oyaty program reward s form, structure, and parameters is essentia for determining the state saes and use tax consequences. 80 J o U r n a L o f T a x a T I o n a U g U S T In today s competitive consumer environment, oyaty programs are ubiquitous with the shopping experience. Most companies offer some form of a oyaty or reward program. When consumer spending sowed as a resut of the economic downturn, consumer oyaty, and with it, oyaty programs, became even more important. For exampe, according to Jupiter Research, more than 75% of consumers today have at east one oyaty card, and the number of peope with two or more is estimated to be one-third of the shopping popuation. 1 And oyaty programs are big business according to Forbes in an artice pubished in 2011, U.S. companies spend $50 biion a year on [various] oyaty programs. And when done right, oyaty programs can generate as much as 20 percent of a company s profits. 2 Many can trace back their awareness of oyaty programs to airine frequent fyer programs and hote reward programs, but oyaty programs predate these programs and have actuay been around for more than 100 years. 3 One of the eariest oyaty programs was the S&H Green Stamps program, which began in the 1930s. 4 Under that program, consumers received stamps when making purchases, coected those stamps in a booket and ater redeemed the booket for products when the consumer accumuated the requisite number of stamps. In essence, the booket functioned as an aternative for a currency having a certain associated vaue. Whie the genera premise of the S&H Green Stamps program is sti appicabe today, oyaty programs have evoved consideraby from the trading stamps mode. And whie airine frequent fyer programs sti exist today, current oyaty programs are varied, significanty more compex, structuray diverse, and constanty evoving. State tax aws, on the other hand, have not, in many instances,

2 kept up with the evoution of oyaty programs from a business perspective. As a resut, taxpayers are often eft to appy historic precedent to modernday oyaty programs with varying degrees of success, depending on the particuar program and the appicabe state aw. Adding further chaenge, state aws are not uniform; thus, in addition to appying od precedent, taxpayers have to contend with appying non-uniform aws and interpretative guidance to their facts, which can resut in different concusions across states, even in states with identica or substantiay simiar statutes. LOYALTY PROGRAMS GENERALLY Very generay, oyaty programs are incentive-based programs whereby a company offers rewards, vouchers or simiar instruments in exchange/consideration of certain consumer behavior (e.g., purchasing, referras, etc.) that can be appied toward future purchases of products/services offered by the company (or an affiiate) (generay for purposes of this artice such programs wi be referred to as oyaty programs and the associated rewards as oyaty rewards ). Programs are aso offered by service providers, incuding airines, spas, gyms, and restaurants, to name a few. However, it is hard to generaize as to the structure of oyaty programs and it woud be unwise to do so, as today s oyaty programs are structured in a variety of ways. Usuay these programs entai rewarding certain consumer behaviors, incuding, rewarding prior purchases, incentivizing future purchases, rewarding the competion of a survey, referring a friend, and hosting events with the oyaty program sponsor, by way of exampes. Loyaty programs are aso offered through third party arrangements (i.e., offered by a third party different than the one with whom it wi be redeemed). Such programs are often structured as credit card reward programs, rewards sponsored by the reated affiiate, franchisee-operated programs, and empoyee-sponsored reward programs. As noted, the rewards themseves are offered in any number of forms, incuding but not imited to, cards, points, certificates, vouchers, credits, codes, and coupons. The business-to-business industry has aso deveoped in this area whereby third-party instruments are used to fund the retaiers programs, or to augment them. Whie there are severa discrete saes and use tax issues that arise in connection with an anaysis of a oyaty program, the most common issue and the one that wi be examined in this artice reates to the ramification of the redemption of an award in exchange for a taxabe item. Specificay, when rewards are exchanged for discounts on the sae of tangibe persona property, is the vaue of the reward considered part of the saes price subject to the tax? The form of the reward, the program s structure and the parameters of the reward are criticay important in anayzing the state saes and use tax consequences. 5 NOTES CONSIDERATION PAID AND THE DEFINITION OF SALES PRICE As a genera matter, saes tax is imposed on the saes price of a taxabe item. Whie the reevant statutory terms may vary, the concept is the same; tax is imposed on a statutoriydefined base, be it saes price, receipts, or gross receipts. That statutory definition typicay refers to the tota amount of consideration paid for the taxabe item. By way of exampe, the Streamined Saes and Use Tax Agreement broady defines saes price as the tota amount of consideration for which persona property or services are sod, eased, or rented. 6 However, state definitions of receipts or simiar terms are not uniform. Even where simiarities exist, determining the amount of consideration paid in connection with a particuar sae when the redemption of a oyaty reward is invoved is not aways cear. Essentiay, the question becomes, does the provision of a reward constitute taxabe consideration? Often the most anaogous guidance is found in the coupon context. The typica saes and use tax scheme empoyed across the country draws a distinction first between coupons and genera price reductions, and a further distinction between retaier coupons and manufacturer coupons. With regard to purchase price reductions, [a] cash discount given by the seer at the time of the sae, and not dependent on time of payment, voume of purchases, or simiar factors, is usuay excuded from the saes tax base, on the ground that the discount is not part of the saes price. 7 When coupons are invoved, most saes and use tax schemes draw a distinction between: (1) coupons issued by the retaier to the customer for which the retaier is not reimbursed (by the manufacturer or any other third party), and (2) manufacturer coupons for which the retaier is reimbursed (by the manufacturer or other third party). 8 Across the country, it is widey hed that discount coupons for which retaiers are not reimbursed by a manufacturer or other person serve to reduce the saes tax measure. 9 In contrast, manufacturer s coupons which reduce the saes price to the consumer but for which the retaier is reimbursed by the manufacturer or distributor, are usuay hed not to reduce the state s saes tax measure on the theory that the retaier s receipts incude both what it receives from the customer and what it receives from the manufacturer or distributor for additiona background, see Heerstein and Heerstein, State Taxation (Thomson reuters, 1998), 17.06[6]. 6 SSUTa appendix C, Part I. 7 See Heerstein, State Taxation, 17.05[1]. 8 Id., 17.05[2]. 9 Id., 17.05[2][a]. 10 Id., 17.05[2][b]. 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3 The distinction between manufacturer and retaier coupons is often addressed by revenue departments in reguation and informa or forma guidance. Despite the widespread adoption of the distinction between retaier coupons and manufacturer coupons and the genera concusion that one such coupon is propery viewed as consideration, appying that framework to other fact patterns, especiay in the rewards context, eads to inconsistent and often unsatisfying resuts. 11 Indeed, the coupon framework is routiney appied to new fact patterns, which have the appearance of being simiar, but are nevertheess not a perfect fit, often resuting in itigation. DIFFERENT STATES, DIFFERENT RESULTS? Taxpayers are faced with the reaity that state saes and use tax statutes, reguations and informa guidance often do not adequatey address how to tax the purchase of taxabe goods through the redemption of a oyaty reward. A survey of three states, New York, Georgia and Washington bear out this reaity. New York Simiar to the Streamined Saes and Use Tax Agreement, New York defines receipt for saes tax purposes as: The amount of the sae price of any property vaued in money, whether received in money or otherwise, incuding any amount for which credit is aowed by the vendor to the purchaser. 12 Whie arguaby expansive, the definition does not aways provide a satisfactory answer as to whether the provision of a oyaty reward woud constitute a receipt for saes tax purposes. Is such a reward vaued in money? Is it consideration? Or is it a coupon of sorts? New York is a state that has some guidance reated to oyaty programs, so in addition to appying the statute, taxpayers must consider the guidance in determining whether certain oyaty rewards woud be considered taxabe consideration. Simiar to other states, New York has foowed the coupon framework in anayzing reward programs at east as appied to certain fact patterns. New York has addressed the saes and use tax consequences of using store oyaty cards through informa guidance. 13 In that guidance, the Department of Taxation and Finance (the Department ) has taken the position that the impact of the use of the oyaty card wi be determined by appying the principes appicabe to coupons that is, if the retaier is reimbursed for the discount, the fu seing price wi be subject to tax. 14 In this regard, New York generay foows the Streamined treatment: the impact on the amount of taxabe receipts associated with the customer s purchase depends on whether the coupon is funded by the retaier or by the manufacturer of the item being purchased. 15 The rationae being that the tax is imposed on the tota receipts received by the vendor, whether those receipts come whoy from the purchaser or party from the purchaser and party from the manufacturer. 16 The framework, however, is not aways easy to appy to a compicated oyaty program fact pattern. Consider, for exampe, the treatment of a hote rewards program under New York aw. New York addressed a form of reward program in Turf House, Inc./ Hoiday Inn, TSB-A- 04(19), 9/2/04, in which the Department considered whether points earned in connection with Intercontinenta Hote Group s (IHG) reward program were subject to saes tax. After accumuating enough points, reward members woud redeem points through IHG for free hote stays. IHG woud then mai the member a voucher which instructed the member to contact IHG. IHG woud arrange for the hote stay at the participating hote. IHG woud then pay each franchisee hote a certain amount to reimburse the hote for the stay. The Department concuded that the hote at issue was required to coect tax on the amount paid to the hote by IHG, which essentiay incuded the vaue of redeemed points. 17 The New York State Tax Appeas Tribuna came to the opposite concusion, in Matter of Marriott Internationa, Inc.., DTA No (N.Y. Tax. App. Trib., 1/14/10) and effectivey revoked the Department s opinion in Turf House, Inc./Hoiday Inn. The Tribuna found that the members previousy provided the consideration for occupancy of the hote rooms by There are many types of oyaty programs, and a ruing reated to the taxation of one program may not necessariy be reevant to how the redemption of oyaty rewards pursuant to another program shoud be treated. MarY T. BenTon is a partner at aston & Bird LLP in atanta, MaTTHeW P. HeDSTroM is a senior associate at aston & Bird LLP in new York City, and gregg D. BarTon is a partner at Perkins Coie LLP in Seatte. Copyright 2015, Mary T. Benton, Matthew P. Hedstrom, and gregg D. Barton. earning rewards, and since fu saes taxes were paid by the member on the initia point-earning stays, no further saes taxes needed to be coected when the hotes were reimbursed for those stays. 18 The Tribuna, in agreeing with the Administrative Law Judge, concuded that the amounts were actuay reimbursements to [the hotes] for their periodic contributions to [the reward program]. The hotes argued that the reimbursements received are not consideration for occupancy in a hote. The state, on the other hand, maintained that hotes received consideration for the occupancy from 82 J o U r n a L o f T a x a T I o n a U g U S T S T a T e & L o C a L

4 Marriott Rewards in the form of rewards points. The ALJ stated that the reimbursement to the hotes: [d]id not entite Marriott Rewards to the right to occupy a room or the right to distribute a room. It foows that the reimbursement was not consideration for hote occupancy. Rather the method of payment supports the finding, as asserted by petitioners, that the Rewards Program was designed to reimburse the hote for participation in the Marriott Rewards Program which, in turn, was a marketing too intended to increase stays at Marriott Hotes. Therefore, the consideration received by the hotes from Marriott Rewards is not subject to saes tax. The consideration for the occupancy of the hote room was, in fact, provided by the customer who usuay earned the points through previous odgings at Marriott hotes.the Division notes that if there is no occupancy, there was no payment. This argument is without merit because it fais to recognize that it woud be erroneous to tax a transaction as consideration for a stay in a hote room when the primary purpose of the payment was reimbursement for participation in a program which was a marketing program to promote stays in a hote. The fact that the hotes are reimbursed according to a formua that factors in occupancy does not ater this concusion. 19 Interestingy, the ALJ distinguished the case from the trading stamp rue, stating that the redemption of trading stamps for tangibe persona property is subject to saes tax, which the state argued appied. The ALJ concuded that: [t]he appication of this rue to the issue presented here is dubious. As pointed out by petitioners, a centra difference is that under the trading stamp rue, the tax is coected from the individua who redeemed the stamps. In contrast, here the Division is not seeking to coect the tax sought on the discounted room from the hote patron. Rather, it is trying to coect the tax from Marriott Rewards. It foows that the trading stamp rue is not reevant to this matter. 20 What is entirey cear is that the states differ in their approaches. Thus, there is no one size fits a answer for taxpayers. One coud presumaby appy the ogic in the Marriott decision to other oyaty programs airine mies, hote rewards, retaier rewards, etc. however, as the case makes cear, the program s underying structure is critica to the anaysis, and oyaty program structures vary. Ceary, a key question in New York is whether the entity providing the taxabe good or service at issue receives reimbursement or consideration in connection with redemption of a oyaty reward. As the above suggests, an answer to this question may be quite difficut, depending on the nature of the program at issue, especiay where such a program invoves a third-party or mutipe third parties. Further, it is not cear the extent to which a taxpayer may ook to guidance deaing with one type of program to anayze a sighty different program. The presence of materia or immateria factua differences coud ead to vasty different tax resuts. Indeed, a pure/unprinciped appication of the trading stamp rue woud have rendered the Marriott reward program taxabe. 21 Georgia Georgia is an exampe of a state that does not have any direct guidance reated to oyaty programs. Thus, in order to anayze whether oyaty rewards woud be considered taxabe consideration in Georgia, one woud begin with the statutory definitions of saes price and then review the existing reguations and case aw, which dea primariy with trading stamps. Georgia saes/use tax is imposed on the saes price of taxabe tangibe persona property and services. Georgia defines saes price as the tota amount of consideration, incuding cash, credit, property, and services, for which persona property or services are sod, eased, or rented, vaued in money, whether received in money or otherwise without [certain deductions]. 22 Like many other states, Georgia excudes from the definition of NOTES 11 By way of exampe, guidance issued in connection with the saes and use taxation of discount vouchers offered by internet-based socia coupon programs focused on this type of anaysis with mixed success. for an overview of the issue see e.g., Socia Confusion: How Do Saes Taxes appy To a groupon?, (2/18/11). 12 n.y. Tax Law 1101(b)(3) (emphasis added); see aso 20 nycrr The definition of compimentary accommodations contained in 20 nycrr 527.9(f) is consistent with the notion that there must be consideration to constitute receipts/rent for saes tax purposes. 13 TSB-M-11(10)S (6/29/11). 14 Id. ( When these oyaty card discounts are given and the discounted item is subject to saes tax, the amount subject to saes tax generay depends on whether the discount refects a manufacturer s discount or a store discount. If the store is reimbursed for the amount of the discount by the manufacturer, distributor or other third party, it is a manufacturer s discount. If the store receives no reimbursement from a third party for the amount of the discount given, it is a store discount. ). 15 See 20 nycrr for a more recent exampe, see In the Matter of GRJH, Inc., DTa no (n.y. Div. Tax app., 1/15/15) in which the Division of Tax appeas considered whether the taxpayer was required to incude in its taxabe receipts the sae of gasoine that was reimbursed by a thirdparty provider pursuant to a rewards program. The taxpayer was in the business of motor fue and diese fue distribution. The taxpayer provided a discounted price based on the number of points the customer accrued by making purchases at a participating supermarket. The taxpayer received the discounted saes amount (and saes taxes) from the customer and was reimbursed for the discounted amount by Sunoco. The taxpayer did not incude the credits received from Sunoco for purposes of saes tax receipts. The alj found that the Department s anaogy of the fue discount program to a manufacturer s coupon to be fitting. [B]oth the pump price received from the customer and the credit received from Sunoco are items of vaue received by petitioner for the gasoine it ses, and both are ceary encompassed within the statutory anguage defining receipt as consisting of the sae price vaued in money, whether received in money or otherwise. 17 Compare with nyc finance Memorandum 06-2 (11/30/06). 18 The program in the Marriott case worked simiary to the IHg program at issue in Turf House, Inc./Hoiday Inn. 19 emphasis added, interna citations omitted. 20 for another exampe of the Department veering from the coupon framework, see Saes Tax Treatment Reating to the Sae and Redemption of Certain Prepaid Discount Vouchers, TSB-M-11(16)S (11/19/11), in which the Department attempts to differentiate a specifictype of Dea of the Day voucher from other discount vouchers and third-party discount coupons. Specificay, the Department concuded that when a stated face vaue voucher (a voucher with a specificay stated vaue) is redeemed, it is generay treated in the same manner as a gift card. That is, it is treated as cash up to the stated face vaue of the voucher. 21 for a discussion of a Virginia ruing addressing a simiar issue, see Heerstein, State Taxation, 17.06[6][b]. 22 o.c.g.a (34)(a). S T a T e & L o C a L a U g U S T J o U r n a L o f T a x a T I o n 83

5 saes price discounts, incuding cash, term, or coupons that are not reimbursed by a third party that are aowed by a seer and taken by a purchaser on a sae. 23 In addition, the Georgia statute provides that consideration the seer receives from third parties wi be incuded in the tax base 549 (Ga. 1967), hed that trading stamps were taxabe consideration. In Coonia Stores, a grocery store rewarded its customers for shopping at the store by issuing Sav-a-Stamps with each retai purchase, at a rate of 10 cents per stamp. The store occasionay gave away Sav-a-Stamps without requiring a retai purchase. Coectors of the stamps coud then redeem the stamps for merchandise at the store. The Supreme Court of Georgia hed that a transaction in which a customer exchanged Sav-a-Stamps for the store s merchandise was a sae subject to the saes tax. More specificay, the stamps themseves represented consideration because customers paid for the merchandise they received in exchange for the stamps during the earier transactions in which they earned the stamps. The court wrote: Thus, athough the objective of the trading stamp scheme may have been saes promotion and enticement of customers, the premium merchandise was not given away. It was paid for by the customers since the cost was incuded in the retai saes prices charged them. 27 Subsequent to Coonia Stores, the Georgia Department of Revenue issued a reguation stating that transactions redeeming trading stamps are subject to the saes tax: When a trading stamp company accepts trade stamps or a combination of trade stamps and cash in exchange for premiums, the transaction is subject to the tax and the trading stamp company sha coect the tax from the person surrendering the stamps, based on the tota vaue of the stamp book and any cash paid. The trading stamp company sha not pay the tax on the purchase of such premiums, but shoud furnish its suppiers resae certificates. 28 Notaby, the reguation contempates both that the trading stamps wi have a knowabe redemption vaue and that purchasers may suppement the redemption vaue of trading stamps with cash. Whie it is hepfu to be aware of the existing authority, the guidance reated to vouchers and trading stamps may not be particuary reevant to modern-day oyaty programs, as there are so many variations and differing fact Whether or not to incude redeemed oyaty rewards in the tax base for purposes of coecting tax on the saes transaction is a compicated question. if the seer actuay receives consideration from a party other than the purchaser and the consideration is directy reated to a price reduction or discount on the sae. 24 Therefore, in order to be treated as part of the taxabe base, oyaty rewards must constitute consideration for the sae, but if they are in the nature of a discount or retaier s coupon, they woud not be incuded. Unfortunatey, there is a dearth of authority in Georgia for purposes of determining whether the various types of oyaty rewards woud be treated as consideration or woud be excuded as some type of discount or coupon. The cosest guidance in Georgia invoves vouchers and trading stamps. Georgia taxes the fu retai vaue of an item purchased with a combination of cash and a voucher such as a Groupon or LivingSocia coupon. 25 Thus the Georgia Department of Revenue treats these vouchers as consideration constituting part of the saes price. 26 Additionay, an od Georgia Supreme Court opinion, Coonia Stores, Inc. v. Undercofer, 153 S.E.2d NOTES 23 o.c.g.a (34)(B)(i). 24 o.c.g.a (34)(C)(i). 25 See georgia Dep t of rev., Georgia Section 328 Best Practices Matrix (1/14/14). 26 Id. 27 Id. at ga. Comp. r. & regs (3). 29 rcw (1)(b), (c). 30 Washington excise Tax advisory 3191 (9/30/14); Washington Interim Statement regarding rewards Programs Comminging rewards Program awards (11/12/14). 31 See footnote 30. patterns. The ony generaization that can be drawn is that if the oyaty rewards constitute consideration for the transaction at issue, they wi be incuded in the tax base. Whether this is the case may not be entirey cear. Washington Whie Georgia s treatment of oyaty programs acks certainty, Washington has undertaken an extensive effort to be transparent in its taxation of oyaty rewards. Washington is important because it is a party to the Streamined Saes and Use Tax Agreement, having adopted the uniform meaning of saes price, 29 and because it is one of the few states to have issued specific guidance reating to oyaty programs. 30 The guidance came about after the Department s Audit Division began taking the position that some retaiers shoud have been coecting retai saes tax on oyaty rewards when the rewards were earned by making prior purchases from the same retaier. The Department s Appeas Division initiay sustained at east one of those assessments, finding that because the member earned points by becoming a member, providing an emai address and buying goods, the retaier received benefits and, therefore, the reward redemption was for consideration and not a discount. The Department convened a sma stakehoder group to discuss the issue, and the resut was two forms of pubished guidance an Excise Tax Advisory and an Interim Statement. 31 The Excise Tax Advisory states severa important concusions, incuding: 84 J o U r n a L o f T a x a T I o n a U g U S T S T a T e & L o C a L

6 A member s provision of his or her name, teephone number, emai address or physica address does not represent consideration. Rewards provided soey for enroment in the program, or the passage of time, or soey for purchasing seer s product are excuded from the seing price. Equay important, the Excise Tax Advisory excudes from quaifying discounts: Rewards for competing surveys for the retaier. Rewards received for acting as a secret shopper. Rewards received as an empoyee for making saes exceeding a certain target. Rewards purchased for cash. Rewards earned from one retaier that are redeemabe at another retaier, and when the first retaier reimburses the second. Rewards received for purchases using a co-branded credit card when the bank reimburses the retaier. Rewards for purchases at one retaier, under a program administered by a separate company, when the separate company reimburses the retaier. Thus, such rewards woud be considered taxabe consideration. Interestingy, the Excise Tax Advisory appears to take a simpistic view of third party consideration if the retaier receives consideration from a third party, the reward is taxabe. However, whie both the Streamined Saes and Use Tax Agreement and Washington aw, provide that discounts that are not reimbursed by a third party are excuded from the saes price, both aso go on to make that conditioned on severa requirements. Under both, the term saes price incudes third party consideration ony if (1) the consideration is directy reated to a price reduction or discount, (2) the seer has an obigation to pass the price reduction through to the purchaser; (3) the amount is fixed and determinabe at the time of the sae of the item to the purchaser, and (4) (i) the purchaser presents documentation to the seer when such documentation is authorized, distributed, or granted by a third party with the understanding that the third party wi reimburse; (ii) the purchaser identifies him or hersef as a member of a group entited to a price reduction; or (iii) the price reduction is identified as a third party price reduction on the invoice received by the purchaser, or on the documentation presented by the purchaser. Therefore, it appears that severa forms of third party consideration woud not constitute part of the saes price. For exampe, a ump sum payment from a third party that does not require that the retaier pass on a price reduction, or that is not fixed and determinabe at the time of the sae of the item to the purchaser, shoud not constitute part of the retaier s saes price. The Interim Statement is intended to address a thorny practica probem for retaiers, and by its nature, is subject to further review by the Department of Revenue. Having estabished in the Excise Tax Advisory that rewards received for consideration are taxabe, but that certain rewards quaify as discounts, the Interim Statement addresses the probem that many retaiers do not trace how specific rewards are earned. Consequenty, they have comminged (taxabe and nontaxabe without the abiity to differentiate) rewards. As a generaity, the Department s position is that in the absence of the abiity to trace the rewards, they wi a be taxabe. Aternativey, the Department has offered a prepayment option whereby a retaier may prepay saes tax on taxabe rewards at the time they are issued if they wi be comminged with dis- DuCharme ad 1/3 pg, 4 coor S T a T e & L o C a L a U g U S T J o U r n a L o f T a x a T I o n 85

7 count rewards. Whie the Department s purpose for offering this prepayment option is we intended, it is yet to be seen whether retaiers can and wi report using this prepayment option. So far, it appears that retaiers may have as much troube compying with the prepayment option as trying to trace how rewards are earned. Finay, neither form of guidance addresses a potentia use tax issue. An eary unpubished draft of the Excise Tax Advisory provided that if a reward constituted a bona fide discount, but the redemption reduces the saes price to zero, the retaier woud owe use tax on the product provided at no charge. This resut may be consistent with the recent case of Sprint Spectrum, LP v. State, Dept. of Revenue, 174 Wash. App. 645, 302 P.2d 1280 (Wash. App. Div., 2013), rev. denied 178 Wn.2d 1024 (2013). During the stakehoder process, attempts were made to anaogize oyaty programs with two-for-one arrangements. The Department agrees that two-for-one purchases are not subject to additiona saes tax (saes tax is simpy owed on the cash consideration paid), and furthermore, there is no use tax because the retaier has made a sae for consideration. However, the Department distinguishes oyaty programs and two-for-one arrangements because of the passage of time between the purchases in which the reward is earned and the redemption. Therefore, the use tax issue arises for the retaier with a oyaty program but not a two-for-one arrangement. It is uncear what the absence of this discussion in the fina Excise Tax Advisory means, but retaiers shoud be aware of this potentia use tax issue. RISKS FACING TAXPAYERS As the above discussion of three states iustrates, determining the tax treatment of oyaty programs is quite compex and the anaysis may often resut in uncertainty. This is true particuary because there are many types of oyaty programs, and a ruing reated to the taxation of one program may not necessariy be reevant to how the redemption of oyaty rewards pursuant to another program shoud be treated. What is entirey cear is that the states differ in their approaches. Thus, there is no one size fits a answer for taxpayers. This can eave taxpayers open to certain risks. For exampe, a company providing a oyaty program may determine that it wi not coect any tax when oyaty rewards are redeemed on the basis that the redemption of the rewards operates akin to a retaier s coupon and is not taxabe. This may very we be the case in a number of states. However, by taking a banket approach across a states, this company risks being audited and assessed by states that do not agree with its characterization. At the other end of the spectrum, a company that does not want to face the risk of audit coud take the goba position that oyaty rewards constitute consideration when redeemed and coect tax on the fu amount of the sae. In this situation, it is possibe that a company may be over-coecting in certain states and thus opening itsef up to the risk of a cass action awsuit. WHAT SHOULD TAXPAYERS DO? Given the compexities and uncertainty in this area, a company s tax department shoud make every effort to understand the specifics of the company s oyaty program. It can then examine the states in which the company has the most oyaty reward redemptions and determine the best course of action in each state. It may be advisabe to seek a ruing from the revenue department in a state where the guidance is uncear and the potentia iabiity coud be significant. It is aso vitay important for tax departments to be in constant communication with the business side of the program. In the authors experience, the business side is often reinventing, modifying, and updating a company s oyaty programs as we as deveoping new and different oyaty programs. Modifications to an existing program can affect the tax treatment of the program, and any new programs tax treatment may not be the same as the prior program. Finay, taxpayers shoud consider whether to impement a compiance system that can track appicabe data for purposes of the positions the company determines to take in each state, incuding tracking the rewards and how they are earned and redeemed. As evidenced by the ongoing discussions in Washington, this type of granuar abiity coud shape whether something is taxabe. As this artice highights, whether or not to incude redeemed oyaty rewards in the tax base for purposes of coecting tax on the saes transaction is a compicated question. The starting point for anaysis shoud be the state s definition of the base upon which the tax is imposed (i.e. saes price). Whie some states have further authority that provides direct guidance for today s oyaty programs, the specific guidance in many other states is restricted due to the factua basis of a particuar case or ruing. In other states, the reevant authority is anemic at best. Nonetheess, taxpayers shoud understand the states positions to the extent possibe, knowing that the answers wi not be uniform across state ines. The determination as to taxabiity wi aso depend in arge part on the specifics of each oyaty program, so it is important to have a working understanding of the company s oyaty program, incuding how rewards are earned and redeemed, as we as any changes or variations that are made in the program that coud affect the taxation anaysis. Taxpayers are we advised to consider their reward programs proactivey given the increasing focus such programs get both in the tax and business context. 86 J o U r n a L o f T a x a T I o n a U g U S T S T a T e & L o C a L