A retailer’s protest for a refund of New York sales and use tax was denied by the New York Division of Tax Appeals since the retailer did not properly collect and remit sales tax on qualifying products sold during a Back to School (BTS) promotion. Under the terms of the BTS promotion, “Qualified Education Individuals” who purchased a qualifying product during the promotion would receive a gift card. A customer that purchased a qualifying product during the BTS promotion could decline the gift card. If the gift card was declined, the full price of the product with applicable tax was charged. Per the terms and conditions of the promotion, if a qualifying product was returned, the gift card was required to be returned with the product in order for the customer to receive a full refund. If the gift card was not returned or had been redeemed, the full value of the gift card was deducted from the refund of the product.
Upon inquiry under audit, the retailer explained that sales tax was computed on the price of the qualifying product less a discount equal to the value of the gift card received by the customer. In New York, sales tax generally is not imposed on the sale or transfer of a gift card, but rather it is imposed when the gift card is redeemed by the customer for items subject to sales tax. An Administrative Law Judge (ALJ) previously determined that if the customer purchased the gift card at its face value together with a discounted qualifying product, sales tax would only be imposed on the discounted purchase price of the qualifying product. However, if the gift card was given away for free with the purchase of a qualifying product at full price, then sales tax would be imposed on the full price of the qualifying product. The pertinent issue in the case was the terms and conditions of the BTS promotion. The ALJ concluded that the promotion’s terms and conditions as well as its description in advertisements indicated that a purchase of a qualifying product was required to receive the gift card for free. The Division of Tax Appeals concurred with the ALJ that the taxpayer did not bear its burden of establishing that the gift card was purchased and should be excluded from the value of the receipt.
While the marketing materials did not use the word “free” with respect to the gift card, the language used in the promotion’s terms and conditions, advertisements, sample invoices and online FAQ strongly implied that receiving the gift card was the direct consequence of purchasing a qualifying product. Of special note is that the customer would be charged the full price of the qualifying product with applicable tax if they declined the gift card. The invoices did not clearly indicate whether the promotional discount was applied against the qualifying product or the gift card. The Division of Tax Appeals concluded that the taxpayer did not prove that the promotional discount was applied to the qualifying product rather than the gift card. As such, the tax assessment was sustained. Retailers should take note to pay special attention to terms and conditions, invoice language, advertisements, and online communications for sales tax purposes when offering special promotions. (Apple Inc., New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No. 827287, December 24, 2019)