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Sales Tax on Purchase of $0
Old 10-17-2010, 10:42 AM   #1
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Sales Tax on Purchase of $0

Recently I, in my job as curmudgeon, sent an email to the makers of Diamond Matches telling them that the strike plate on their wooden match box deteriorates rapidly. They were so grateful for my assistance, that they sent me a coupon for two free boxes of matches.

I used the coupon at the local hardware store, and the store honored it, but charged me sales tax. I didn't argue much, because it was a matter of only 26 cents, but isn't it clear that if the item costs $0, there should be no sales tax?

I told the checker "If you have a 50% off sale, do you charge sales tax on the full price?" but she didn't get it.

I've seen this before.
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Old 10-17-2010, 10:57 AM   #2
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Ok Excise taxes are on the fair market value of the transaction. if they cut the price the fair market value is lower. But your coupon was for matches so the tax is on the fair market value. Whoever offered the coupon will reimburse the store so it is clear a sale took place

Otherwise businesses would pay employees with zero face value coupons. I also pay excise taxes on coupons for free flights.
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Old 10-17-2010, 11:02 AM   #3
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Shouldn't Diamond have sent you coupons for free strike plates?

The store conducted two transactions-- a sale and a refund-- but you only had a Diamond coupon and not a California one.

Hawaii allows stores to collect excise tax on the excise tax... so Oahu's excise tax of 4.5% is actually 4.712%.
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Old 10-17-2010, 11:08 AM   #4
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Unfortunately the State in Wash also levies the sales tax on the purchase price prior to mfg coupons, and discounts. Check your total from Amazon or Costco if you are using online services. The store is required to compute the tax owed on the higher rate.
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Old 10-17-2010, 11:11 AM   #5
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Attaboy Al, keep 'em back on their heels!

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Old 10-17-2010, 11:14 AM   #6
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I've had this happen plenty of times for free after coupon items. Manufacturer coupons are still taxed at the price of the item, but in store coupons are not taxed. At least that's the way it works in Illinois.
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Old 10-17-2010, 11:39 AM   #7
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Originally Posted by TromboneAl View Post
but isn't it clear that if the item costs $0, there should be no sales tax?
There was a sale at a price greater than $0, but Diamond picked up the tab. You were their guest on the matches, and picked up the tax bill.
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Old 10-17-2010, 12:32 PM   #8
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There was a sale at a price greater than $0, but Diamond picked up the tab. You were their guest on the matches, and picked up the tax bill.
OK, that makes sense. Diamond paid $1.57 per box, and I paid the tax.
Although technically, Diamond is probably going to pay only about 30 cents for the box.
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Old 10-17-2010, 06:26 PM   #9
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As someone said, it matters in what state you live...


In Texas, you pay tax on the 'net' after coupon amount, so you would not have to pay sales tax on your transaction...

Emeritus' example is a federal excise tax, so does not apply here... and what is this with paying employees with coupons That is a federal income tax issue, not a state sales tax issue...

NWSteve seems to know that Wash taxes on the gross amount...
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Old 10-17-2010, 06:55 PM   #10
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As someone said, it matters in what state you live...


In Texas, you pay tax on the 'net' after coupon amount, so you would not have to pay sales tax on your transaction...

Emeritus' example is a federal excise tax, so does not apply here... and what is this with paying employees with coupons That is a federal income tax issue, not a state sales tax issue...

NWSteve seems to know that Wash taxes on the gross amount...
All Sales taxes are excise taxes. i.e. Event taxes I realize WIKI is not a great source but it does explain the concept

In the U.S. constitutional law sense, an excise is essentially an event tax (as opposed to a state of being tax). An example of a state of being tax is an ad valorem property tax (which is not an excise). A property tax may be imposed on the property or the person who owns that property at a certain moment on (for example) January 1 of each year based on the state of title at that given moment. The "state of title" (state of ownership) — of property by reason of its ownership — is being taxed. The next year, on January 1, another such tax is imposed again in the same way on the same property and person, even though there has been no change in the ownership (no intervening event). The amount of the tax may change from year to year, based on the change in the value of the property or a change in the tax rate, or both, but those are separate issues governing how the tax is computed. What is being taxed, fundamentally, is the state of title—and the state of title is a state of being, not an event.
By contrast, excises are generally taxes on events. A realization of income (such as a receipt of wages) is an event. A sale is an event. A transfer of title by gift is an event. A transfer of title because of death is an event. Income taxes, sales taxes, and transfer taxes are all examples of event taxes. When a person receives money as income, it is not the ownership or state of title of the money itself that is taxed, but rather the fact that an income event has occurred.


Companies used to pay people with "company store credits" i.e. I owe my soul to the company store. Among other things this frustrated state event taxes. So the statute normally makes clear that the EVENT is taxed. we just for convenience call it a sale


As to coupons in Texas
Coupons

A coupon for a meal should be treated as a discount, as long as the restaurant owner receives no reimbursement for the amount of the discount. For instance, if a restaurant owner places a $5 coupon in a newspaper ad and redeems the coupon toward the price of a $15 meal, then tax should be charged on $10 only.


http://www.window.state.tx.us/taxinf.../tx94_117.html

If they get reimbursed, it's taxable
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Old 10-18-2010, 08:44 AM   #11
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Originally Posted by Emeritus View Post
All Sales taxes are excise taxes. i.e. Event taxes I realize WIKI is not a great source but it does explain the concept

In the U.S. constitutional law sense, an excise is essentially an event tax (as opposed to a state of being tax). An example of a state of being tax is an ad valorem property tax (which is not an excise). A property tax may be imposed on the property or the person who owns that property at a certain moment on (for example) January 1 of each year based on the state of title at that given moment. The "state of title" (state of ownership) — of property by reason of its ownership — is being taxed. The next year, on January 1, another such tax is imposed again in the same way on the same property and person, even though there has been no change in the ownership (no intervening event). The amount of the tax may change from year to year, based on the change in the value of the property or a change in the tax rate, or both, but those are separate issues governing how the tax is computed. What is being taxed, fundamentally, is the state of title—and the state of title is a state of being, not an event.
By contrast, excises are generally taxes on events. A realization of income (such as a receipt of wages) is an event. A sale is an event. A transfer of title by gift is an event. A transfer of title because of death is an event. Income taxes, sales taxes, and transfer taxes are all examples of event taxes. When a person receives money as income, it is not the ownership or state of title of the money itself that is taxed, but rather the fact that an income event has occurred.


Companies used to pay people with "company store credits" i.e. I owe my soul to the company store. Among other things this frustrated state event taxes. So the statute normally makes clear that the EVENT is taxed. we just for convenience call it a sale


As to coupons in Texas
Coupons

A coupon for a meal should be treated as a discount, as long as the restaurant owner receives no reimbursement for the amount of the discount. For instance, if a restaurant owner places a $5 coupon in a newspaper ad and redeems the coupon toward the price of a $15 meal, then tax should be charged on $10 only.


Restaurants and the Texas Sales Tax (94-117)

If they get reimbursed, it's taxable
Herre we go again. Let the tangent begin.
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Old 10-18-2010, 09:52 AM   #12
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Texas Admin Code sec. 3.301(e) provides: When coupons or certificates are accepted by retailers as a part of the selling price of any taxable item, the value of the coupon or certificate is excludable from the tax as a cash discount, regardless of whether the retailer is reimbursed for the amount represented by the coupon or certificate.

The tax amount should have been zero. The manufacturer should have self-accrued use tax on their cost of the item (and probably did, so TX is getting extra tax here) - the technical reason is that the manufacturer has 'used' the item by giving it away. Most retailers over tax items because they just pass it through to the state and have more risk of getting audited than a customer complaining about the tax amount.

Emeritus is technically right that sales taxes are excises tax. However, it is misleading to refer to them as excises taxes because only a couple states use that language in their law and most tax professionals refer to them as transaction taxes or more generally indirect taxes. Emeritus' first post only applies to certain states. It is wrong in states that have enacted statutes and/or regulations to the contrary.

I run a mega corp tax dept that handles all indirect taxes so unfortunately I deal with this type of stuff every day.
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Old 10-18-2010, 10:03 AM   #13
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I should add that if what they gave you was really a gift certificate and not a coupon then it is treated the same as a regular payment at full price and the entire coupon analysis is irrelevant. However, in sales tax form usually beats substance and you described it as a coupon.

Also, don't rely on my analysis and then sue me. Discuss with your tax professional and perform your own due diligence.
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Old 10-18-2010, 10:28 AM   #14
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Probably should have traveled to a no sales tax state to redeem the coupons.
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Old 10-18-2010, 10:31 AM   #15
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Clearly, you should have traveled to a state without sales tax, such as Oregon, and "bought" the matches there.
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Old 10-18-2010, 10:51 AM   #16
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Originally Posted by Emeritus View Post
All Sales taxes are excise taxes. i.e. Event taxes I realize WIKI is not a great source but it does explain the concept

In the U.S. constitutional law sense, an excise is essentially an event tax (as opposed to a state of being tax). An example of a state of being tax is an ad valorem property tax (which is not an excise). A property tax may be imposed on the property or the person who owns that property at a certain moment on (for example) January 1 of each year based on the state of title at that given moment. The "state of title" (state of ownership) — of property by reason of its ownership — is being taxed. The next year, on January 1, another such tax is imposed again in the same way on the same property and person, even though there has been no change in the ownership (no intervening event). The amount of the tax may change from year to year, based on the change in the value of the property or a change in the tax rate, or both, but those are separate issues governing how the tax is computed. What is being taxed, fundamentally, is the state of title—and the state of title is a state of being, not an event.
By contrast, excises are generally taxes on events. A realization of income (such as a receipt of wages) is an event. A sale is an event. A transfer of title by gift is an event. A transfer of title because of death is an event. Income taxes, sales taxes, and transfer taxes are all examples of event taxes. When a person receives money as income, it is not the ownership or state of title of the money itself that is taxed, but rather the fact that an income event has occurred.


Companies used to pay people with "company store credits" i.e. I owe my soul to the company store. Among other things this frustrated state event taxes. So the statute normally makes clear that the EVENT is taxed. we just for convenience call it a sale


As to coupons in Texas
Coupons

A coupon for a meal should be treated as a discount, as long as the restaurant owner receives no reimbursement for the amount of the discount. For instance, if a restaurant owner places a $5 coupon in a newspaper ad and redeems the coupon toward the price of a $15 meal, then tax should be charged on $10 only.


Restaurants and the Texas Sales Tax (94-117)

If they get reimbursed, it's taxable
Being a lawyer and all, and quoting a source, it might be good to get your facts straight.

You will see that coupons are treated the same and that NO tax is due on the coupon amount.

From the Texas Sales tax site on what a state auditor is to do... I am adding BOLD..

Coupons and Premiums



Coupons redeemed by the grocer fall into two categories:
  • Those for which the grocer is reimbursed for the face value of the coupon plus a handling fee (manufacturer's coupons)
  • Those for which there is no reimbursement to the grocer (in-store coupons)
Both of the above coupons are handled in the same manner. The coupons represent a reduction of the item purchased by the customer. Tax is to be collected by the grocer on the net price (price after allowing for reduction of the face value of the coupon).
Periodically, a grocer may, as an inducement to attract customers, offer to double or triple the face value of manufacturers' coupons. These promotions would also qualify as reductions of the sales price and the tax would be due on the reduced sales price.
Verification must be made that the grocer is handling the tax implications of coupons correctly. If the taxpayer is collecting tax on the gross sales price of the item, before reducing the price for coupons, this constitutes tax collected in error, and the total amount of this tax is due and is to be allocated to the state.


A premium is an item offered by retailers to attract customers.
  • If the premium is given and there is no additional charge for the premium, the purchase of the premium by the grocer is not for resale. The grocer should pay tax to the vendor of the premium or report and pay the tax on the Taxable Purchases section of the sales and use tax report.
  • If the premium is given and there is an additional charge for the premium, the purchase of the premium is for resale. Tax is due on either the retailer's cost or the amount charged the customer, whichever is greater.
Grocery Stores Ch. 5, Miscellaneous Grocery Store Topics



Edit to add... I see that Sunsetsail already posted on this... oh well... just left mine in as it is more fun
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Old 10-18-2010, 03:34 PM   #17
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What a outrage. I'm outraged.
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Old 10-18-2010, 05:40 PM   #18
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Recently I, in my job as curmudgeon, sent an email to the makers of Diamond Matches telling them that the strike plate on their wooden match box deteriorates rapidly.
I have that same problem Al. I never thought about contacting them. I thought that I was somehow applying too much pressure when I struck the match many times.

I will contact them and look for free matches also.
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Don't be a Tax Cheat
Old 10-18-2010, 05:44 PM   #19
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Don't be a Tax Cheat

Quote:
Originally Posted by TromboneAl View Post
Recently I, in my job as curmudgeon, sent an email to the makers of Diamond Matches telling them that the strike plate on their wooden match box deteriorates rapidly. They were so grateful for my assistance, that they sent me a coupon for two free boxes of matches.

I used the coupon at the local hardware store, and the store honored it, but charged me sales tax. I didn't argue much, because it was a matter of only 26 cents, but isn't it clear that if the item costs $0, there should be no sales tax?

I told the checker "If you have a 50% off sale, do you charge sales tax on the full price?" but she didn't get it.

I've seen this before.
In addition to sales taxes, there will be income tax due.

I hope that you added the value of the promotional matches you received to your taxable income. And I presume that you will then pay a proportional income tax on this windfall at your marginal income tax rate.

We can't have you getting away with breaking the law !
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Old 10-18-2010, 05:52 PM   #20
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I hope that you added the value of the promotional matches you received to your taxable income. And I presume that you will then pay a proportional income tax on this windfall at your marginal tax rate.

We can't have you getting away with breaking the law !
I would consider this to fall within the federal <$600 de minimis threshold and TX has no income tax. Everyone has a patriotic duty to pay their fair share of taxes, but not a penny more.
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