Ruling Request No. 97-06

Declaratory Rulings

Ruling Request No. 97-06

Re: Request for Ruling Regarding Cash Discounts Allowed and Taken on Certain Sales

Request for Ruling

On behalf of your client, ("Company"), you request a Declaratory Ruling pursuant to R.I.G.L. section 42-35-8 and Regulation DR 94-01 regarding the computation of the sales tax levied upon sales of merchandise sold under the Company's "Card" Program.


The Company owns and operates numerous supermarkets in Rhode Island. The supermarkets sell at retail a wide variety of food and other grocery items, as well as other products. The Company collects and remits sales taxes on its sales of taxable merchandise in accordance with R.I.G.L. section 44-19-10.

In order to promote customer loyalty, the Company has recently developed and implemented (and is continuing to develop and implement) a retail customer-specific discount program, referred to below as the "Card" program. Under this program, the Company issued an encoded electronically-readable card (a "Card") to all of its existing check-cashing and courtesy card customers, and continues to offer Cards to any customers who request one. Each Card, which is similar in shape, appearance, and function to a bank automatic teller machine (ATM) card, carries unique information that enables the Company to identify the customer to whom the Card was issued and to use the data gathered with the Card for various marketing purposes.

When a customer purchases goods at one of the Company's supermarkets, he or she may present the identification Card for scanning at the cash register. Purchases made by a customer who has presented a Card are eligible for price discounts announced by the Company on a periodic basis; the discounts are promoted by a number of methods, including, e.g., advertising circulars distributed by direct mail and at displays located in the supermarkets themselves. Customers who do not present the card when they make their purchases do not receive the discounts. The discounts typically involve price reductions, but sometimes take other forms such as an offer of "two items for the price of one" or the like.

The promotional discounts embodied in the Card program (as well as the information gathered through use of the Card) are intended to increase sales and customer loyalty, and to provide customers with better value for their shopping dollars. The choice of products to be discounted during any particular period is accordingly based upon a number of factors that encompass that goal. In determining whether to discount a particular product, however, the Company also considers the availability of supplier price discounts and reductions, as well as other supplier promotions, allowances, or sponsorships (collectively referred to below as "supplier discount programs"). These supplier discount programs are negotiated in the ordinary course of the Company's business for the applicable products from the products' manufacturers, distributors, promoters, and other suppliers (all referred to herein as "suppliers") who desire the Company's promotional service with respect to their products. These supplier discount programs may take any number of forms, including the following:

  • "Off-Invoice" allowances, where the supplier reduces the invoice cost of a product to the Company for a limited period (e.g., a reduction from $10.00 to $8.00 in the Company's invoice cost to purchase a case of product units);
  • "Bill-back" allowances, which are similar to off-invoice allowances, except the allowance is made separately from the invoice, which reflects the usual cost of the product to the Company;
  • "Scan-buy-downs" where the supplier pays the Company a fixed amount per product unit sold to the customer are determined solely based on total product units sold (i.e., "scanned" at the register), adjusted for loss sales. Scan buy-down discounts are allowed to the Company without regard to whether the Company's retail customers present a card at the check-out counter.1

    1The underlined description of this discount program is additional statement submitted by the company on August 27, 1997, subsequent to the issuance of Ruling Request No. 97-03 dated July 7, 1997.
  • Net price product adjustments, where the supplier permanently reduces a product's invoice price to reflect a promotional allowance; and
  • Advertising sponsorships, where the supplier pays the Company a fixed amount to be featured in Company produced periodic promotional and advertising materials.

These supplier discount programs often are combined; for example, a supplier desiring to promote a particular product might grant an "off-invoice" allowance for that product for a specified period and might simultaneously pay the Company an additional sum in order to have the Company feature the product as a sale item for Card participants in the Company's weekly advertising circular.

Ruling Requested

The cash discounts resulting from the supplier discount programs received by a customer upon presentation of a card for scanning at the Company's cash registers are not included in the definition of sales price and therefore not subject to tax.

The ruling issued as a result of this request be effective January 1, 1998 in order to allow the implementation of appropriate adjustments in the company's sales tax collection systems and procedures.


Rhode Island General Law reads in pertinent part as follows:

44-28-12. "Sale price" defined -- "Sale price" means the total amount for which tangible personal property is sold or leased or rented...whether paid in money or otherwise, including the following:

(A) Any services that are part of the sale, valued in money, whether paid in money or otherwise.

(B) All receipts, cash, credits, and property of any kind.

(C) Any amount for which credit is given to the purchaser by the seller.

"Sale Price" does not include any of the following:

(A) Cash discounts allowed and taken on sales.

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44-18-13. Gross receipts defined. -- "Gross receipts" means the total amount of the sale price, as defined above, of the retail sales of retailers.

44-18-18. Sales tax imposed.-- A tax is hereby imposed upon sales at retail in this state... at the rate of [seven percent] of the gross receipts of the retailer from such sales or rental charges...

Of the various supplier discount programs set forth in the "Facts", only one program, the "scan buy-downs" are directly related to card usage. The card is used in lieu of a coupon and is akin to an "electronic coupon". Having determined that the scan buy-down is in the nature of an electronic coupon, Regulation SU 95-140 entitles "Coupons - Discounted Selling Price" is presented in pertinent part as follows:

Regulation SU 95-140

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Price Reduction Coupons

In general, sales tax treatment of purchases mad or items obtained using coupons which result in a reduced price to the consumer is based on whether or not the retailer can be reimbursed for the coupon by a manufacturer or other third party.


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"Retailer's or Store Coupons." When a retailer issues a store coupon and receives no reimbursement for the value of the coupon from any third party the tax is computed on the discounted sales price. This type of coupon is a seller's discount which is deducted from the sale price before computing the sales tax.

"Manufacturer's Coupon" is a coupon issued by a manufacturer, distributor, promoter, or any other third party.

* * *

"Manufacturer's Coupons." When a retailer accepts a manufacturer's coupon for which it receives reimbursement from any third party, the sales tax is computed on the full selling price of the item, i.e., the consideration paid to the retailer plus the face value of the coupon. The reimbursement may be in any form, including cash or credit towards the purchase of additional merchandise.

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Subsequent to the issuance of Ruling Request No. 97-03, the Company forwarded to the Division of Taxation an additional fact that was omitted in its original request -- that the scan buy-down discounts are paid to the Company based on per product unit sold to customers who purchase the item regardless whether a card is presented or not. The Company receives a payment from the supplier for each sale, simply by virtue of having sold its product. The customer's use of the card ( i.e., electronic coupon) is therefore irrelevant to the payment from the supplier to the Company. It is the sale of the item and not the use of the card which triggers the payment

There is no question that by using the card the Company reduces the price of the item to the customer. However, since the use of the card is irrelevant to the payment from the supplier, the card would be considered a "retailer's or store coupon" rather than a "manufacturer's coupon." Pursuant to Regulation SU 95-140,supra ,the tax is to be computed on the discounted selling price.


The "off-invoice allowance", "bill-back allowance", "net price product adjustments", ,"advertising sponsorships" and "scan buy-down discounts" are in the nature of cash discounts taken on sales and not includable in the sales price of the item.

The company's request to have this Ruling apply January 1, 1998 cannot be granted. Rhode Island law and regulation must be applied to existing facts. To the extent that this card program currently exists, the Ruling is effective immediately.

This Ruling amends and supercedes Ruling Request No. 97-03 issued July 7, 1997.

This Ruling may be relied upon by the Company and shall be valid until expressly revoked or until the applicable statutory provisions of law are amended in a manner that requires a different result or the underlying situations described above changes.

R. Gary Clark

Tax Administrator

August 29, 1997