by Andrew Johnson, Partner
When A Penny Charged is Worth Two Dollars In The Bush
I don’t think Yogi Berra ever said “a penny charged is worth two dollars in the bush”, but he might have. But I doubt even Yogi’s craziest statements could match the twisted logic used by the Wisconsin DOR in its recent Release.
The Release details the DOR’s position on how sales and use tax applies in various “buy one, get one free” scenarios. To say that it their position is Yogi-like would be to ignore or down-play just how costly it could be for the unwary seller in WI. One thing is certain though, if you are a seller in Wisconsin, you may want to seriously consider charging people for free stuff you give them. A penny charged now could save you many dollars later on.
Where were you on December 14, 2010? Of course you don’t know. Most regular folks were in the middle of the “holidays” during that time period. Going to company parties, shopping for last minute gifts, etc. Most folks were probably not putting their full attention on releases issued by the various taxing jurisdictions. But Peisner Johnson was keeping watch. The Wisconsin Department of Revenue issued a Tax Release on December 14, 2010, that could cost your company a lot of money if you’re not careful.
Do You Use “Buy One, Get One Free” Promotions?
How about buy two get one half off? How about come in for 10 lunches (oil changes, haircuts, palm readings, etc.) and the 11th is free or some such? If you do use these types of promotion, then this article is going to save you big money and headaches at least in Wisconsin.
It’s All About The Invoice
The Wisconsin DOR says: The sales and use tax treatment of buy one, get one free and similar promotions is determined by the invoice or receipt provided by the seller to the customer. If the invoice or receipt provided by the seller to the customer indicates that a second item is provided free to the customer when the customer buys the first item, then the seller is the consumer of the second item and is required to pay Wisconsin sales or use tax on its purchase of this item.
That defies most people’s logic. Wisconsin says that if you sell a shirt for $30 and give another shirt away for free, then you owe the tax on the free one. Then, what if you sell both shirts for $15? In substance, this is the same as selling one for $30 and the other for $0. But in the case where you sell each for $15, you charge tax on the $30 and owe no tax yourself. If you sell one for $30 and give one away free, you collect tax on the $30 and pay tax yourself on the cost of the other. Crazy, eh?
Query: Isn’t this purely form over substance? Answer: Yes. Query: How can states get away with this? Answer: To quote Yogi Berra: “I wish I had an answer to that because I'm tired of answering that question.” Actually, I do have an [admittedly somewhat weak] answer to this question. Sales and use tax is a transaction tax. It usually taxes discrete transactions that stand on their own. The transactions are usually represented by invoices. How the transactions are presented on the face of the invoice is usually critical. So, yes, almost always, sales/use tax is form over substance. The form or presentation controls the taxation. This can be deeply troubling to accountants who are trained to give weight to substance over form. It’s troubling to any logical person for that matter. But to paraphrase Yogi, sales tax is 90% mental and the other half is physical.
So what is Wisconsin trying to do to us? I think this is all about setting companies up to be caught on audit. Note that even if you show on the invoice a charge for both $30 shirts but then show a discount on one of the shirts such that the charge for one of the shirts ends up to be $0, you still owe the tax. So this is form over substance and then substance over form all on the same invoice. But, if you show both shirts on the invoice for $30 each and then give a $30 discount equally applied to both shirts such that the actual selling price is $15 per shirt, then you’re good. This is when you need Yogi Berra to lend his analysis.
Buy One, Get One For A Penny
Don’t despair, it’s not over til it’s over.
When I first read about this release in CCH, I asked myself, why don’t these companies sell the other “free” item for a penny? Since this is all about the form of the transaction, could a company “sell” that other item for a penny and then they wouldn’t owe any use tax on the cost of the item? This would seem to meet the technical requirements. But, would WI come back to a “substance” argument at that point and call it a sham? CCH’s paragraph explanation didn’t address this idea. But, I found it in the actual release in one of the many examples they gave. I will give you all the examples the WI DOR gave in its release, you may find one or two that apply on point to your situation..
What About Other States?
Good question, other states have their own rules as to whether sellers must charge tax on cash discounts given at the time of the transaction (yes, some states do tax those) or cash discounts if the invoice is paid in a certain time (like 2% discount if paid in 10 days), and whether tax is owed on the original sales price before a price reduction for coupons issued by the merchant and/or manufacturer, and how to treat rebates. Every state has their unique rules.
For example, in Texas a similar (but different:) issue arises in connection with the annual tax holidays. Stores like to run sales in connection with sales tax holidays. Shoe stores frequently offer the “buy one pair of shoes, get the next pair at 50% off”. Well, if you find two pairs you like that both sell for $120, then the first pair will cost $120 and the next one will cost $60. So you get two pairs for $180. Depending on how you invoice those shoes is how they are taxed to the consumer. If one pair stays at $120 on the invoice, it will be taxed because the exemption is for articles costing less than $100. If the discount applies to both items and the invoice shows each pair for $90, then neither of them is taxed since they both come under the $100 threshold. Of course, in no case, does the seller owe use tax on either pair if they end up giving one away free. But, that’s Texas, and this article is all about Wisconsin, so we limit our discussion accordingly. Just understand every state has their own peculiarities and of course, we’re here to help you get a handle on the other states too.
Read On -- The Key Is In the Details
Here are the examples given in the Release. Example 13 is the one that confirms that you can charge a penny for the second item and avoid the use tax on that item. One penny is all it takes. How many people will see this and take advantage of this?
Note that this Release addresses a law change that was effective back in October, 2009. Presumably, this treatment applies to sales made back to that date. But you can fix things going forward and hope for the best on audit. I guarantee this is an issue WI auditors will be looking for in their audits of sellers.
Examples:
The following examples illustrate this change. ( Note: In all of the following examples, the retailer's purchases and sales are made on or after October 1, 2009.)
Example 1: Taxable Item Given Away with Required Purchase of Nontaxable Item - Retailer A provides a hat free of charge to any customer that purchases a certain number of gallons of gasoline (i.e., a nontaxable item). The price of the gasoline does not vary depending on whether the hat is included in the transaction. The receipt given by Retailer A to the customer indicates the sales price of the gasoline but does not mention the hat at all. Since Retailer A is giving a hat at no charge to any customer that purchases the required number of gallons of gasoline, Retailer A is the consumer of these hats, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the hats.
Example 2: Taxable Item Given Away with Required Purchase of a Different Taxable Item - Retailer B provides a bicycle free of charge to every customer that purchases a new couch. The price of the couch does not vary depending on whether the bicycle is included in the transaction. The receipt given by Retailer B to the customer indicates that the bicycle is given to the customer for no charge. Since Retailer B is providing a bicycle free of charge to every customer that purchases a couch, Retailer B is the consumer of these bicycles, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the bicycles.
Example 3: Retailer Advertises that a Taxable Item is Included with the Purchase of a Different Taxable Item - Same as Example 2, except that Retailer B advertises that the bicycle is included with the purchase of the couch. The receipt given by Retailer B to the customer indicates that the bicycle is given to the customer for no charge. Since Retailer B is providing a bicycle free of charge to every customer that purchases a couch, Retailer B is the consumer of these bicycles, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the bicycles.
Example 4: Taxable Item Given Away with Required Purchase of Both Taxable and Nontaxable Items - Retailer C provides a soft drink free of charge to every customer that purchases $20 worth of products. The sales prices of the products in the required purchase do not vary depending on whether the soft drink is included in the transaction and the products that are purchased by the customer may or may not be subject to Wisconsin sales or use tax. The receipt given by Retailer C to the customer indicates that the soft drink is given to the customer for no charge. Since Retailer C is providing a soft drink free of charge to every customer that purchases $20 worth of products, Retailer C is the consumer of the soft drinks it provides free of charge, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of these soft drinks.
Example 5: Retailer Advertises “Two for the Price of One;” Second Item Provided Free - Retailer D has a promotion in which it advertises that a customer may buy two candy bars for the price of one. A customer may buy one candy bar for $1.00 and receive a second candy bar at no additional charge. If the customer wants only one candy bar, the customer will still have to pay $1.00. The receipt given by Retailer D to the customer indicates that the second candy bar is given to the customer for no charge. Since Retailer D is providing a candy bar free of charge to every customer that buys a candy bar, Retailer D is the consumer of the candy bars that it provides free of charge, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of these candy bars.
Example 6: Retailer Advertises “Two for the Price of One;” Retailer Charges for Second Item - Retailer E has a promotion in which it advertises that a customer may buy two candy bars for the price of one. If a customer buys a candy bar at the regular price of $1.00, the customer may receive a second candy bar free of charge. However, if a customer buys only one candy bar, the price of the candy bar is $0.79. The receipt given by Retailer E to the customer indicates a sales price of $0.79 for the first candy bar and a sales price of $0.21 for the second candy bar. Since a customer must pay an additional amount to receive the second candy bar, the second candy bar is not given away for free. Section 77.52(21), Wis. Stats., does not apply and Retailer D may purchase the candy bars that it provides to its customers in this promotion without tax for resale.
Example 7: Retailer Advertises “Buy One, Get One Free;” Discount Applied to Total Sales Price - Retailer F has a promotion in which it advertises that a customer may buy one shirt at the regular price of $30, and receive the second shirt free. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, and a $30 discount (i.e., 50% discount) applied against the $60 total sales price for the two shirts. Since the receipt given by Retailer F to the customer indicates a $30 selling price for each shirt, and the discount does not reduce the sales price of either shirt to zero, but instead is applied against the total $60 amount, sec. 77.52(21), Wis. Stats., does not apply and Retailer F may purchase both shirts without tax for resale.
Example 8: Retailer Advertises “Buy One, Get One Free;” Discount Applied Equally to Both Items - Retailer F has a promotion in which it advertises that a customer may buy one shirt at the regular price of $30, and receive the second shirt free. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, a $15 discount (i.e., 50% discount) applied to the sales price of the first shirt and a $15 discount (i.e., 50% discount) applied to the sales price of the second shirt. Since the receipt given by Retailer F to the customer indicates a $30 selling price for each shirt, and the discount does not reduce the sales price of either shirt to zero, but instead is applied equally against the sales prices of both shirts, sec. 77.52(21), Wis. Stats., does not apply and Retailer F may purchase both shirts without tax for resale.
Example 9: Retailer Advertises “Buy One, Get One Free;” Discount Applied to One Item - Retailer F has a promotion in which it advertises that a customer may buy one shirt at the regular price of $30, and receive the second shirt free. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, and a $30 discount applied against the sales price of the second shirt. Since the receipt given by Retailer F to the customer reduces the sales price of the second shirt to zero, Retailer F is the consumer of the second shirt, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the second shirt.
Example 10: Retailer Advertises “Buy Two, Get Half Off;” Discount Applied to Total Sales Price - Retailer F has a promotion in which it advertises that a customer may buy two shirts that have a regular price of $30 each, and receive half off the total sales price of the two shirts. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, and a $30 discount (i.e., 50% discount) applied against the $60 total sales price for the two shirts. Since the receipt given by Retailer F to the customer indicates a $30 selling price for each shirt, and the discount does not reduce the sales price of either shirt to zero, but instead is applied against the total $60 amount, sec. 77.52(21), Wis. Stats., does not apply and Retailer F may purchase both shirts without tax for resale.
Example 11: Retailer Advertises “Buy Two, Get Half Off;” Discount Applied Equally to Both Items - Retailer F has a promotion in which it advertises that a customer may buy two shirts that have a regular price of $30 each, and receive half off the total sales price of the two shirts. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, a $15 discount (i.e., 50% discount) applied to the sales price of the first shirt and a $15 discount (i.e., 50% discount) applied to the sales price of the second shirt. Since the receipt given by Retailer F to the customer indicates a $30 selling price for each shirt, and the discount does not reduce the sales price of either shirt to zero, but instead is applied equally against the sales prices of both shirts, sec. 77.52(21), Wis. Stats., does not apply and Retailer F may purchase both shirts without tax for resale.
Example 12: Retailer Advertises “Buy Two, Get Half Off;” Discount Applied to One Item - Retailer F has a promotion in which it advertises that a customer may buy two shirts that have a regular price of $30 each, and receive half off the total sales price of the two shirts. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, and a $30 discount applied against the sales price of the second shirt. Since the receipt given by Retailer F to the customer reduces the sales price of the second shirt to zero, Retailer F is the consumer of the second shirt, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the second shirt.
Example 13: Retailer Advertises “Buy One, Get One for a Penny” - Retailer F has a promotion in which it advertises that a customer may buy one shirt that has a regular price of $30 and receive a second shirt for a penny. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt and a sales price of $0.01 for the second shirt. Since a customer must pay an additional amount to receive the second shirt, the second shirt is not given away for free. Section 77.52(21), Wis. Stats., does not apply and Retailer F may purchase the shirts that it sells to its customers in this promotion without tax for resale.
Example 14: “Buy One, Get One Free;” Retailer Receives Reimbursement from Manufacturer - Battery Manufacturer G offers a promotion to Retailer H in which Retailer H will receive $1.00 for every package of batteries it gives away free in a buy one, get one free promotion. The receipt given by Retailer H to its customer indicates that one of the packages of batteries is given to the customer for no charge. None of the conditions in sec. 77.51(15b)(c)4.a. to c., Wis. Stats., apply to the sale of the batteries by Retailer H to its customer:
Retailer H's customer does not present a coupon, certificate, or other documentation to Retailer H to receive the free package of batteries,
Retailer H's customer does not represent himself or herself to Retailer H as a member of a group or organization that may receive the free package of batteries, and
Retailer H does not provide an invoice to its customer, and its customer does not present a coupon, certificate, or other documentation to Retailer H, that identifies the price reduction or discount as a 3rd-party price reduction or discount.
Retailer H must pay sales or use tax on its purchase of the package of batteries that it gives to its customer, based on its initial purchase price of the package of batteries less the $1.00 reimbursement from Battery Manufacturer G.
Example 15: Restaurant Advertises “Buy One Meal, Get Second Meal Free” - Restaurant I runs a promotion in which a customer may buy one meal and receive a second meal free. No additional charge is made for the second meal, and the price of the first meal does not vary if the second meal is received. The receipt given by Restaurant I to the customer indicates that the second meal is given to the customer for no charge. Restaurant I buys the ingredients for the meals and prepares the meals itself. Since Restaurant I is providing a meal free of charge to customers that buy a meal, Restaurant I is the consumer of the ingredients it uses to prepare the meals it provides free of charge, as provided in sec. 77.52 (21), Wis. Stats. Most of the ingredients Restaurant I purchases to prepare the meals qualify for the exemption for food and food ingredients, and Restaurant I does not owe sales or use tax on its purchases of these items. However, to the extent that Restaurant I buys taxable items, and gives them to customers as a part of the meals it gives away for free, Restaurant I owes sales or use tax on its purchases of those taxable items. Examples of ingredients Restaurant I may buy without tax include meats, vegetables, bread, milk, and fruit. Examples of taxable purchases by Restaurant I include soft drinks, alcoholic beverages, and candy that are given away to customers as a part of the free meals.
Example 16: Restaurant Advertises “Buy One Meal, Get Second Meal Free;” Buys Meals from Caterer - Same as Example 9, except that Restaurant I does not prepare the meals that it gives away for free. Instead, Restaurant I buys these meals from Caterer J. The meals, as Restaurant I purchases them from Caterer J, are “prepared food” because they are heated. Restaurant I owes sales or use tax on its purchases of the meals that it provides to its customers for free.
Example 17: Retailer Advertises Fourth Tire Free with Purchase of Three Other Tires - Retailer K operates an automotive repair facility. Retailer K offers a promotion in which a customer is provided a free tire if the customer purchases three other tires. If the customer does not want the free tire, the price of the other three tires does not change. The receipt given by Retailer K to the customer indicates that the fourth tire is given to the customer for no charge. Retailer K is the consumer of the tires that it provides to customers for free, as provided in sec. 77.51 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of such tires.
Example 18: Retailer Offers 11th Oil Change Free - Retailer L operates an automotive oil change shop. After purchasing ten oil changes, Retailer L's customers may receive the 11th oil change free. Retailer L is the consumer of the oil and oil filters that it provides to customers for free, as provided in sec. 77.51 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of such oil and oil filters.
Example 19: Dealer Provides Free Loaner Car with Repair Service - Motor Vehicle Dealer M takes a vehicle out of its inventory and provides it free to customers who are having repair services performed on their vehicles. Motor Vehicle Dealer M does not owe use tax on its purchase of the vehicle that it took out of inventory and used as a loaner vehicle, assuming that this is the only use that Motor Vehicle Dealer M makes of the loaner vehicle, other than retention, demonstration, or display while holding it for sale, lease, or rental in the regular course of its business. The repair service that Motor Vehicle Dealer M is performing on its customers' vehicles is a service that is identified in sec. 77.52(2)(a)10., Wis. Stats. Thus, sec. 77.52(2m)(b), Wis. Stats., allows Motor Vehicle Dealer M to purchase the loaner vehicle without tax for resale, since it is considered to be sold separately from the selling, performing, or furnishing of the repair service.
Note: If Motor Vehicle Dealer M uses the vehicle that it removes from inventory for any other purpose (other than retention, demonstration, or display while holding it for sale, lease, or rental in the regular course of its business), such as picking up and dropping off customers, running for parts, etc., its purchase price of the vehicle is subject to tax.
Example 20: Retailer Offers Free Taxable Products When Customer Redeems Points; Points Received for Buying Nontaxable Services - Retailer N operates a hair salon. Retailer N's customers may accumulate points by purchasing various services and hair products. Retailer N offers customers free bottles of shampoo and conditioner after accumulating a specified number of points. The receipt given by Retailer N to the customer indicates that the bottles of shampoo and conditioner are given to the customer for no charge. Retailer N is the consumer of the shampoo and conditioner that it provides to customers for free, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of such shampoo and conditioner.
