daily deals, and employee discounts

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1 Tax considerations of loyalty programs, daily deals, and employee discounts December 17, 2014

2 McGladrey consumer products and retail focus Carol Lapidus Assurance Partner National Consumer Products Industry Leader McGladrey serves over 4,600 consumer products companies from across the country Specialty practices focused on food & beverage, fashion and home furnishings, heath and beauty, retail and other consumer products sectors. - To sign up for our monthly retail industry commentary or learn more about our industry focus, visit our website at carol.lapidus@mcgladrey.com - For more information on tax services, visit 1

3 Presenters Carol Lapidus Catherine Del Re Christian Wood Assurance Partner Tax Partner Tax Principal National Consumer State and Local Tax Washington National Tax Products Industry Leader 2

4 Agenda Topic Time Introduction 10 Federal income recognition: Giant Eagle case 20 Sales and use tax considerations for different discount 30 program types 3

5 Employee discounts Companies widely offer discounts on their products and services as part of the benefits packages to their employees In addition to base salary, job perks such as employee discounts are viewed as a way to recruit and retain workers Typically, consists of a flat discount - Example: Employees are entitled to a 20 percent discount on all purchases from the employer 4

6 Deal of the day instruments Deal of the day instruments (DDI) are online vouchers for consumers to take discounts on goods and services from a particular vendor - Daily deal companies make money by selling a high volume of vouchers and taking commissions Daily deal market share - Groupon (approximately 50 percent) - LivingSocial (approximately 25 percent) rivals (remaining 25 percent) 1 An estimated 35 million users were registered with Groupon in Jessica Mintz, How Many Groupon Rivals? Try 600, msnbc.com com, Aug. 26,

7 Loyalty and rewards programs Programs that allow customers to earn gift cards or various awards (points, checks, discounts, rewards, rebates or coupons) Based on a 2011 study of loyalty y programs: 1 - An estimated $48 billion in consumer loyalty rewards dispensed each year, primarily in the financial services, travel and hospitality, and retail industries - The average household has signed up for 18.4 programs (up from 14.1 in 2009) and actively participates in 8.4 programs - Approximately one-third (or $16 billion) of rewards are unredeemed d - An average participating household earns $622 of rewards a year but does not redeem $205 of those rewards 1 Colloquy, Buried Treasure: The 2011 Forecast of U.S. Consumer Loyalty Program Points Value, April

8 Loyalty programs and federal income recognition

9 US GAAP recognition of revenue for customer loyalty y programs Under US GAAP, two dominant accounting approaches have emerged to recognize and measure loyalty program revenues and costs: Cost (provision) Deferred revenue 8

10 Recent court case: Giant Eagle Petitioner offered a customer loyalty y program under which customers making qualifying purchases at Giant Eagle could earn fuelperks! - Perks were redeemable for a discount against the purchase price of gas - Perks could not be redeemed in cash Petitioner, an accrual-method taxpayer, claimed deductions for certain unredeemed fuelperks! for each year at issue Giant Eagle, Inc. v. Commissioner, T.C. Memo (July 23, 2014) 9

11 Question before the court Did petitioner properly p accrue and deduct expenses for the unredeemed fuelperks! under the allevents test of section 461? 10

12 Rationale Whether a customer paid something for the purchase of gas or nothing, petitioner's obligation to redeem fuelperks! was subject to a condition precedent that could be satisfied only after the close of petitioner's tax year 11

13 Giant Eagle s argument Reg. section (a)(1) ) provides an exception to the all-events test for taxpayers that issue trading stamps or premium coupons redeemable by the taxpayer in merchandise, cash or other property This exception allows a reduction in sales revenue from selling the trading stamps or premium coupons for the cost of redeeming the coupons 12

14 Deferred revenue approach Treat the transaction as: - Current discount on groceries - Prepayment for fuel

15 IRS Priority Guidance Plan Regulations under section 451 regarding g advance payments received for goods and services, including amounts received in exchange for the sale or issuance of gift cards, trading stamps and loyalty points that can be redeemed for goods or services 14

16 Sales and use tax considerations for different discount program types

17 General principles Receipt or sales price - Amount of value (i.e., consideration) in money or otherwise received for taxable goods or services Cash discounts - Excluded from sales price if taken at the time of sale Example: Retailer offers senior citizens a 20 percent discount - An eligible ibl customer uses the discount on a product regularly priced at $20 - Sales price subject to sales tax is $16 Retailer s coupon versus manufacturer s coupon Retailer s coupon is a true reduction (i.e., discount) in price by the seller Manufacturer s coupon does not reduce sales price from the seller s perspective because a third party reimburses the seller for the difference 16

18 Employee discounts Typically applied at the time of sale and result in a reduced d sales price - Example: Retailer offers employees a 10 percent discount on all products, applied at the time of sale Employee buys a $20 item and applies the discount Sale price subject to tax is $18 - Similar to trade, volume and wholesale discounts Qualified employee discounts are de minimis fringe benefits not included in the employee s income The employee discount is qualified - For property, if the discount = less than seller s gross profit percentage - For services, if the discount = less than 20 percent - See section 132(a)-(2), (c); Reg. section

19 Deal of the day instrument (DDI): Sales price Example: A customer pays $100 in exchange for a DDI voucher for $250 worth of goods or services from a vendor - The DDI provider keeps $50 as a commission-type fee - The vendor receives the remaining $50 Is the sale of the voucher itself subject to sales tax? - Like a gift card, the DDI voucher represents an intangible right to purchase goods or services in the future When redeemed for taxable goods or services, what is the sales price? - $100 paid by the customer? - $250 full retail value? 18

20 Deal of the day: State law developments Streamlined Sales Tax (SST) member states Example: A customer pays $100 in exchange for a DDI voucher for $250 worth of goods or services from a vendor. What is the sales price? Some member states 2 of the SST Governing Board have adopted the coupon comparison - A retailer s coupon is excludible from sales price - A manufacturer s coupon, where the seller is reimbursed, would be included in the sales price - Therefore, when a third party does not reimburse the seller for the difference, the DDI reduces the sales price - Sales price: $100 Kentucky and Iowa, both SST members, also require that the voucher indicates the discounted price, or that the local retailer retain documentation of the discounted price - See KY STF. No. 12/01/2011; Official Material: Groupons IA, 01/01/ AK, GA, ID, IA, KS, KY, MI, MN, NE, NV, NJ, NC, ND, OH, OK, RI, SD, TN, UT, VT, WA, WV, WI, WY. See state-by-state t t t info at t l t /i d h t t i 19

21 Deal of the day: State law developments Nonmember states Example: A customer pays $100 in exchange for a DDI voucher for $250 worth of goods or services from a vendor. What is the sales price? Nonmember states take alternate approaches: - California: Sales tax due on the price paid for the DDI, plus any other consideration (such as cash) paid to the retailer See CA State Board of Equalization, Special Notice L-297 Sales price: $100 - New York: Depends on whether the DDI is redeemable for either: A specifically stated product or service (e.g., 60 min. massage) - Sales price: $100 - Sales tax due on the price paid for the DDI A specifically stated face value (e.g., $250 for spa treatments) - Sales price: $250 - Equivalent to a gift card. Sales tax due on the full retail value. - See NY TSB-M-11(16)S 11(16)S, 9/19/

22 Loyalty and rewards programs: Sales price Example: Retailer offers 10 points for every $100 that customer spends on its goods - Customer receives 50 points after buying $500 worth of products - Each point is redeemable for a dollar off future purchases of retailer s products - Customer redeems 50 points on the purchase of a stereo that sells at a stated price of $200 and pays $150 in cash For sales tax purposes, should the $50 value of the points be included in the sales price? 21

23 Two different approaches to redeemed rewards Consideration paid by customer Sales price subject to sales tax is $200 (cash + points) Discount offered by retailer Sales price subject to sales tax is $150 (cash paid) 22

24 Loyalty and rewards programs: State law developments Key question: Are rewards consideration paid for by the customer or a true reduction of price? Unlike with DDIs, many states have not directly addressed the sales tax treatment of rewards programs. While the law is unsettled, certain states have issued guidance. For example: - Tennessee Applies coupon analysis for loyalty points for cell phones and wireless plans See TN LR No , 11/21/ New York Reward points are treated the same as coupons If there is a third-party reimbursement for the discount, sales tax is due on the full sales price If there is no such reimbursement, sales tax is due on the discounted price See NY TB-ST-145, 9/29/

25 Loyalty and rewards programs: State law development (cont.) - California Reward points are treated as a gift certificate (includible in sales price, same as other consideration) in cases where the retailer refunds the customer cash/credit if the value exceeds the purchase Otherwise, reward points are not includible in sales price - See CA SUTA No Washington Reward points are excluded from sales price only if they are a bona fide discount - The rewards program must either Award points solely for enrollment in the program, the passage of time or purchasing the seller s products Grant price reductions solely for membership See WA ETA , 9/30/2014 Awards provided in exchange for property, services (i.e., filling out surveys/secret shopper services), credit or cash are not bona fide discounts 24

26 Best practices Gain a thorough understanding of the loyalty y rewards programs offered by your company Review these programs from a sales tax perspective and stay aware of ongoing state t developments in this area Consider potential sales tax implications when entering into deal of the day arrangements with third parties Implement correct procedures to ensure sales tax is computed on the appropriate tax basis 25

27 Thank you Carol Lapidus Catherine Del Re Christian Wood

28 This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This document does not constitute assurance, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein. McGladrey LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person. McGladrey LLP is an Iowa limited liability partnership and the U.S. member firm of RSM International, a global network of independent accounting, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. McGladrey LLP McGladrey, the McGladrey logo, the McGladrey Classic logo, The power of being understood, Power comes from being understood, and Experience the power of being understood are registered trademarks of McGladrey LLP McGladrey LLP. All Rights Reserved.