Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2013
Sales and Use Tax Annotations
280.0000 GIFTS, MARKETING AIDS, PREMIUMS AND PRIZES— Regulation 1670
280.0885 Sales Promotion Program. A taxpayer who operates a chain of supermarkets entered into an agreement to purchase a certain sales promotion program. The agreement provided that the supplier would furnish, free of cost, display banners, newspaper mats and special punches, but the punches remained the property of the seller and were to be returned upon termination of the program. The agreement provided that all program material would be shipped prepaid and all title to such articles, except for the special punches, would pass from the seller to taxpayer upon delivery to the common carrier. The cost of the program was measured by the number of punch cards which were ordered, i.e., 10 cents per card. It was agreed that all reorders would be on the same terms and conditions stipulated in the initial agreement.
The taxpayer paid $1,000 for a block of 10,000 punch cards which were programmed to award $15,000 in cash prizes on sale of merchandise totaling $1,000,000. Each punch card contained a seal under which designated amounts usually ranging between $1.00 and $100.00. The taxpayer gave the punch cards to its customers. Each time a customer purchased merchandise, his card was punched in the amount of the purchase. When the customer had purchased $100 in merchandise, her card was completely punched. At that time, the taxpayer's employee would break open the sealed portion of the card and give the customer the amount printed under the seal in cash. It also was possible for a customer to participate without making any purchases, since cardholders could have one free punch per week and could thereby complete a card in thirteen weeks and could receive the amount indicated under the seal.
The seller's representative initially gave advice with respect to such issues as to how to distribute the cards, where to keep the cards, etc., to insure that the program started correctly. The seller also furnished instruction sheets. After the program was started all that was needed to continue the program was the necessary supply of correctly programmed punch cards.
Based on the facts, it is concluded that the purchase price of the program was primarily attributable to the punch cards and only incidentally attributable to the advice and assistance given by the seller to help insure that the advertising program was successfully initiated. Accordingly, taxpayer is not purchasing a service in the form of an advertising program. Instead, the taxpayer is purchasing tangible personal property in the form of copyrighted punch cards. Thus, tax applies to purchase price of the punch cards to the taxpayer.
Additionally, in this type of program, the customer receives cash rather than premium merchandise from the retailer or a third party. The receipt of such an amount would appear to be in the nature of a gift rather than a discount, in view of the uncertainty as to the amount, and the fact that such amount has no direct relationship to the amount of the individual customer's purchases. Furthermore, the card may be punched by the store and redeemed by a person without him ever having made a purchase. Under the circumstances, there is no basis at all for considering such amounts (cash prizes) as a discount. 4/29/65.