Tax treatment of store coupons and customer incentives.
The IRS has recently been taking a closer look at the tax accounting methods used by retailers establishing accruals or reserves for these types of consumer incentives. Prior to 1987, Sec. 466 provided an election through which a taxpayer could deduct 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 This election was repealed for tax years after 1986, thus hindering taxpayers, ability to currently deduct reserves established for rebates and coupon redemptions.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 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 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 expense associated with coupon production costs can also vary, depending on how the coupons are distributed. Like many states, New York 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 sales tax on the value of manufacturers, coupons, but not on the retailer's own store coupons.
From Scott Guertin, CPA, Boston, Mass., Ed Abahoonie, CPA, J.D., and Greg Lamont, CPA, New York, N.Y.