Tax treatment of store coupons and customer incentives.Price rebates, store coupons and other promotional incentives continue to be a strong marketing tool for retailers. These types of incentives provide retailers with opportunities to build price flexibility into their current marketing strategies. The importance of these incentives will likely continue in the 1990s as retailers pursue new ways of stimulating consumer spending Consumer demand or consumption is also known as personal consumption expenditure. It is the largest part of aggregate demand or effective demand at the macroeconomic level. . The IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. has recently been taking a closer look at the tax accounting methods used by retailers establishing accruals Accruals Accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. These accounts include, among many others, accounts payable, accounts receivable, goodwill, future tax liability and future interest expense. or reserves for these types of consumer incentives. Prior to 1987, Sec. 466 provided an election through which a taxpayer could deduct de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. accruals or reserves that were established for "qualified discount coupons" (e.g., newspaper and other publicly offered coupons) redeemed within six months after year-end. This election was repealed for tax years after 1986, thus hindering taxpayers, ability to currently deduct reserves established for rebates and coupon redemptions. Reserves established for coupons and other promotional incentives distributed to the public without any purchase by the consumer cannot be deducted until the coupons are redeemed. For example, mass distribution of advertlsmg coupons to promote a new product and advertising coupons inserted in newspapers would not create deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). reserves. A deduction is available, however, for certain types of narrowly defined coupon programs, as explained in Regs. Sec. 1.451-4. If an accrual basis A method of accounting that reflects expenses incurred and income earned for Income Tax purposes for any one year. Taxpayers who use the accrual method must include in their taxable income any money that they have the right to receive as payment for services, once it taxpayer issues a coupon with a sale and such coupons are redeemable by consumers in merchandise, cash or other property, the taxpayer will be allowed a deduction for estimated redemption reserves. Rev. Rul. 78212 further explained that a taxpayer may deduct reserves only if the coupons are redeemable without any additional consideration from the consumer. Coupons that merely provide discounts on subsequent purchases do not qualify. Although many traditional coupon programs will not qualify, the deduction should be available for certain targeted incentives used as part of special promotions or to build store traffic, such as "frequent buyer" type programs rewarding selected customers with redeemable store credits for future purchases. Coupons mailed with billing statements to store credit card customers entitling them to free merchandise or a gift might also qualify. Retailers that use store coupons to stimulate sales should review their accruals or reserves to ensure that the requirements are met for deductions that are taken. If retailers discover that their tax accounting for coupons is inappropriate, they can pursue protection for prior years, tax exposure by filing for an accounting method change with the IRS. Sales tax sales tax, levy on the sale of goods or services, generally calculated as a percentage of the selling price, and sometimes called a purchase tax. It is usually collected in the form of an extra charge by the retailer, who remits the tax to the government. expense associated with coupon production costs can also vary, depending on how the coupons are distributed. Like many states, New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of imposes sales tax on the charge by a printer to a retailer for printing coupons. However, N.Y. Sales Tax Regs. Section 528.6(e) provides an exemption for advertising supplements distributed with newspapers, periodicals or shopping papers. This exemption covers coupons distributed with such media. Coupons produced by a printer and delivered to a retailer for distribution in stores, however, are subject to sales tax. An exception would generally be available for certain store coupons that are part of packaging materials, such as coupons printed on grocery bags. Sales tax collection responsibility on coupon redemptions depends, in most states, on who issues the coupon. Retailers generally must collect and remit To transmit or send. To relinquish or surrender, such as in the case of a fine, punishment, or sentence. An individual, for example, might remit money to pay bills. TO REMIT. To annul a fine or forfeiture. 2. sales tax on the value of manufacturers, coupons, but not on the retailer's own store coupons. From Scott Guertin, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , Boston, Mass., Ed Abahoonie, CPA, J.D., and Greg Lamont, CPA, New York, N.Y. |
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