For consumers, the difference between a coupon or a discount does not make much of a difference most of the time. As far as a consumer is concerned, both reduce the amount paid for an item or a service. However, sellers of taxable products or taxable services MUST know the differences. Otherwise and if the transaction is taxed incorrectly, the seller could be stuck paying sales tax out of his or her pocket or face a class action lawsuit.
Generally, sales tax is charged on the sales price of a taxable transaction. For instance, if I sell a car, I must charge sales tax on the price of the car. If I perform legal services for a client, then the legal services are not subject to Florida sales tax and thus I would not charge a client sales tax on my legal services.
What encompasses the “sales price” of the transaction? The term “sales price” means the total amount paid for the items sold. It also includes any coupons where the retailer is reimbursed in whole or part for the coupon by the manufacturer. In other words, tax is charged on the amount of the coupon if the retailer is reimbursed any amount by the manufacturer. Specifically provided by statute, discounts are not included in the sales price. That is to say if the seller gives a discount to a customer at the time of the sale, then the net amount paid (i.e., the sales price minus the discount) is the amount that is subject to sales tax.
The Florida Department of Revenue (“Department”) provides a few examples of instances in which a coupon is taxable.
Example 1: An automobile is sold to a customer for $5,000 with a $500 “factory rebate.” The customer pays the dealer $5,000 for the automobile. The buyer in turn receives the $500 refund directly from the manufacturer. The dealer receives $5,000. Tax is due on $5,000.
Example 2: A box of soap powder retails for $1.50. The customer applies a “manufacturer’s coupon” worth $.50 toward the purchase of the box of powder. The dealer would collect $1.00 and the full tax due on the $1.50 sale from the customer. The manufacturer would redeem the coupon from the dealer for $.50.
The Department also provides some examples of instances in which a discount is not subject to tax.
Example 3: An automobile is sold to a customer for $5,000 with a $500 “dealer’s discount.” The customer pays $5,000 less the $500 discount. The dealer receives $4,500. Tax is due on $4,500.
Example 4: A customer has a coupon issued by the dealer which allows $.50 off the sales price of a box of soap powder which retails for $1.50. The dealer collects $1.00 from the customer along with the coupon. Tax is due on $1.00, since the redemption of the coupon reduces the sales price of the product to that amount.
An important distinction between examples 1 and 2 versus example 4 is the issue of the seller being reimbursed by a manufacturer. In examples 1 and 2, the seller is reimbursed by the manufacturer for the coupon (or factory rebate), which causes the reduction attributable to the coupon to remain taxable. In example 4, the seller has issued its own coupon and is not being reimbursed by the manufacturer. Thus, the lack of a reimbursement by the seller is more akin to a discount, which reduction causes the net price paid to be taxable.
A lot of times, sellers are given the suggestion to charge tax on everything just to be safe. This is the opposite of being safe. While the seller may not incur a tax liability with the Department, the seller could be exposing himself to a class action lawsuit by customers.
BJ’s Wholesale Club (“BJ’s”) found out just how determined some customers are to sue. A class action was filed against BJ’s for charging sales tax on the full list price of discounted items. Sales tax was not charged on the net amount of the discounted item as it should have been. The reason the class action feature to the lawsuit is important is because of the ultimate cost to BJ’s. While the average lawsuit can be expensive for a business, a class action can absolutely cripple a business. As the class of plaintiffs grows larger, so does the potential liability of BJ’s. The class can be in the thousands or tens of thousands of individuals. BJ’s is not the only seller to experience a class action concerning over-collecting sales tax. Papa John’s and Pizza Hut have as well.
In conclusion, charging the correct amount of sales tax and not a lesser or higher amount is imperative for businesses. Charge too much sales tax and customers may sue your business. Charge too little sales tax and the Department may hold you liable for the uncollected sales tax. Part of figuring out the correct amount of sales tax to charge is determining whether a coupon or discount is involved in the transaction. If a coupon is being reimbursed by the manufacturer, then the amount of the coupon is still taxable in the transaction despite the amount paid by the customer still be reduced by the coupon amount. If a discount is offered by a seller or a coupon is offered in which the seller is not reimbursed by the manufacturer, then the reduction is not subject to sales tax.
About the author: David Brennan is an associate attorney with Moffa, Sutton, & Donnini, P.A. His primary practice area is multistate tax controversy. David received a B.S. in Accounting and Finance, with a minor in Computer Science, from Florida State University. He worked as an accountant for a CPA firm before attending law school at Regent University. He received his Juris Doctor in 2013 and was licensed to practice law in Florida in the same year. In 2015, David earned his Masters of Law in Taxation from Boston University. While working for the Florida Department of Revenue as a Senior Attorney, David focused on sales and use tax issues. You can read his BIO HERE.
At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended Florida businesses against the Florida Department of Revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We represent taxpayers and business owners from the entire state of Florida. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
AUTHORITY
ADDITIONAL RESOURCES
RESTAURANT BASICS TO AVOID SALES AND USE TAX AUDITS, published September 18, 2018, by Paula Savchenko, Esq.
POST-WAYFAIR - CAN YOU AFFORD TO WAIT TO REGISTER?, published August 8, 2018, by James Sutton, CPA, Esq.
FLORIDA USE TAX AUDIT LETTER?, published June 14, 2015, by James Sutton, CPA, Esq. and Jerry Donnini, Esq.
FL TAX – VOLUNTARY DISCLOSURE CAN BE THE PERFECT SOLUTION, published October 5, 2012, by Jerry Donnini, Esq.
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