How does a retailer calculate Retailers' Occupation Tax when a customer pays with a discount coupon, a manufacturer's coupon, a radio-station or third-party gift certificate, or a buy-one-get-one-free deal?

Plain-English summary

A restaurant owner, in the middle of a sales-tax audit covering the past couple of years, wrote to the Illinois Department of Revenue asking for a Private Letter Ruling on three different promotion types: (1) radio-station promotions where customers pay $12 for a $25 gift certificate redeemable at the restaurant, with the radio station keeping the $12 as payment for advertising; (2) third-party website deals with the same $12-for-$25 structure, where the restaurant receives $6 per certificate and gets a 1099 from the third party at year-end; and (3) discount coupons (e.g., "$10 off $60," "buy one meal get another half price") where the owner's auditor calculated tax on the pre-discount price, but the owner had observed a competitor calculating tax on the post-discount price instead. The owner asked which approach was correct and whether the discounted or "free" amounts should be treated as advertising costs.

Because the request asked the Department to apply the law to the taxpayer's own audit and specific facts, it was really a request for a binding Private Letter Ruling (PLR). The Department explained that a PLR must be denied when the identical issue is already part of an ongoing Department audit of the taxpayer's return -- which was true here, since the requester said the audit was nearing completion -- so under 2 Ill. Adm. Code 1200.110(a)(3)(C) the Department could not issue a PLR and instead issued this GIL, laying out the general rules rather than resolving the taxpayer's own audit dispute.

On the substance, the Department explained that Retailers' Occupation Tax is based on a retailer's "gross receipts," meaning the total selling price actually received for a sale (35 ILCS 120/1), and that the source of that consideration doesn't matter (citing Ogden Chrysler Plymouth, Inc. v. Bower, 348 Ill. App. 3d 944 (2004), and 86 Ill. Adm. Code 130.2125(a)). The key distinction under 86 Ill. Adm. Code 130.2125(a)-(b) is whether the retailer is reimbursed for a discount: if a retailer accepts a $1 in-store coupon with no reimbursement from anyone, gross receipts are only $9 on a $10 item (Code 130.2125(b)(1)); if a retailer accepts a $5 manufacturer's coupon and the manufacturer fully reimburses the retailer, gross receipts are the full $15 (the $10 from the customer plus the $5 from the manufacturer) (Code 130.2125(b)(2)). For buy-one-get-one-free or two-for-one deals, gross receipts are measured only by what the customer actually paid for both items -- there's no tax on the "free" item's value, because it was never really free, just part of a combined special price. Selling cards, coupons, or gift cards is itself a sale of an intangible and is not subject to Retailers' Occupation Tax; the tax attaches later, when the card or coupon is redeemed for actual tangible personal property, and if a gift card is accepted as payment the Department presumes (absent other evidence) that the retailer received gross receipts equal to the card's full face value.

What this means for you

Restaurants and retailers running gift-certificate or voucher promotions

If you sell a discounted gift certificate or voucher through a radio station, website, or other third party (the classic "$12 for a $25 certificate" deal), selling the certificate itself is not a taxable sale -- it's an intangible. Tax applies later, when the certificate is redeemed for food or merchandise, and the key question this GIL leaves open is exactly how much of your redemption revenue (the cash/credit paid plus any share you receive from the third party) counts as your gross receipts. This GIL restates the general reimbursement rule from 86 Ill. Adm. Code 130.2125 but does not walk through the radio-promotion or third-party-website fact patterns line by line to a specific dollar conclusion, because the Department issued a GIL rather than a PLR.

Retailers offering discount coupons or BOGO deals

Whether tax is due on the pre-discount or post-discount price turns on reimbursement, not on how the discount is marketed. An unreimbursed discount (a coupon or card you offer that nobody pays you back for) reduces your taxable gross receipts. A reimbursed discount (a manufacturer's coupon where the manufacturer pays you back) does not reduce gross receipts -- you owe tax on the full original price, since you actually received that full amount in total (partly from the customer, partly from the manufacturer). For buy-one-get-one-free promotions, tax is due only on what the customer actually paid for both items combined.

Accountants and tax professionals handling a sales-tax audit

Note that this GIL exists specifically because the Department is barred from issuing a binding PLR while the identical issue is under active audit for the same taxpayer (2 Ill. Adm. Code 1200.110(a)(3)(C)). If your client is mid-audit and asks a fact-specific question that overlaps with the audit, expect the same GIL-instead-of-PLR outcome; a binding, taxpayer-specific PLR would have to wait until after the audit resolves (or address an issue not already in the audit).

Common questions

Q: Do I owe Retailers' Occupation Tax on the full price of an item, or just the discounted price a customer actually pays?
A: It depends on reimbursement. If nobody reimburses you for the discount, tax applies only to the reduced amount actually received. If a manufacturer or other source reimburses you for some or all of the discount, that reimbursed amount is still part of your taxable gross receipts, so tax applies to the full original price. See 86 Ill. Adm. Code 130.2125(a)-(b).

Q: Is selling a gift card or gift certificate itself taxable?
A: No. Selling a card, coupon, or certificate redeemable for tangible personal property is a sale of an intangible, not subject to Retailers' Occupation Tax. Tax applies later, when the card or certificate is redeemed for actual goods, based on gross receipts from that redemption.

Q: How is a buy-one-get-one-free (or two-for-one) promotion taxed?
A: Gross receipts are measured only by the amount actually received from the customer for both items combined. There's no separate tax on the value of the "free" item, since the retailer is simply offering a special combined price rather than making a gift.

Q: Why did the Department issue a GIL instead of the PLR the restaurant owner requested?
A: The owner's letter said the same sales-tax issue was already part of a nearly-completed Department audit of the owner's own returns. Under 2 Ill. Adm. Code 1200.110(a)(3)(C), the Department must deny a PLR request when the identical issue is already being examined in an audit of that taxpayer, so it issued a general (non-binding) GIL instead.

Q: Can this restaurant owner (or anyone else) rely on this GIL to settle the audit dispute?
A: No. A GIL only directs taxpayers to the relevant regulations; it is not a statement of Department policy and is not binding on the Department, including as to the taxpayer who requested it. The letter does not resolve which specific method (the auditor's pre-discount calculation or the alternative post-discount calculation the owner described) applies to this owner's own transactions.

Citations and references

Statutes:

• 35 ILCS 120/1 (Retailers' Occupation Tax Act -- definition of "selling price")

Regulations:

• 86 Ill. Adm. Code 130.2125 (discounts, coupons, and trading stamps)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure, including the audit-conflict bar at 1200.110(a)(3)(C))
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedure)

Cases:

• Ogden Chrysler Plymouth, Inc. v. Bower, 348 Ill. App. 3d 944 (2004) (source of consideration received by a retailer is immaterial to gross receipts subject to tax)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2024.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2024/ST24-0010-GIL.pdf

Original ruling text

ST 24-0010-GIL 03/12/2024 RETAILERS’ OCCUPATION TAX
This letter discusses discounts and coupons. See 86 Ill. Adm. Code 130.2125.
(This is a GIL.)

March 12, 2024
COMPANY
NAME
ADDRESS
Dear Xxxx:
This letter is in response to your letter received February 5, 2024, in which you
requested information. The Department issues two types of letter rulings. Private Letter
Rulings (“PLRs”) are issued by the Department in response to specific taxpayer
inquiries concerning the application of a tax statute or rule to a particular fact situation.
A PLR is binding on the Department, but only as to the taxpayer who is the subject of
the request for ruling and only to the extent the facts recited in the PLR are correct and
complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General
Information Letter (“GIL”) is to direct taxpayers to Department regulations or other
sources of information regarding the topic about which they have inquired. A GIL is not
a statement of Department policy and is not binding on the Department. See 2 Ill. Adm.
Code 1200.120. You may access our website at https://tax.illinois.gov/ to review
regulations, letter rulings and other types of information relevant to your inquiry.
The Department will respond to all requests for private letter rulings either by
issuance of a ruling or by a letter explaining that the request for ruling will not be
honored.” 2 Ill. Adm. Code 1200.110(a)(4). The Department must deny your request
for a PLR. A private letter ruling will not be issued if, at the time the ruling is requested,
the identical issue is involved in the taxpayer’s return for an earlier period and that issue
is being examined as a part of a Department audit or is pending in litigation in a case
involving the taxpayer or a related taxpayer in which the Department is named as a
plaintiff or defendant. 2 Ill. Adm. Code 1200.110(a)(3)(C). The Department has
decided to issue a general information letter. In your letter you have stated and made
inquiry as follows:
I hope this letter finds you well. My name is NAMEn, and I am the owner
of COMPANY. In light of our recent sales tax audit for the past couple
years, which is nearing completion, I seek Private Letter Ruling from the
Department to address specific inquiries related to the application of
statutes to our particular fact situation.

Pursuant to Section 1200.110 of the Private Letter Rulings regulations, I
am submitting this request behalf of COMPANY. Please consider the
following details and questions:

1. Radio Promotions
   Customers paid $12 for a $25 Gift Certificate from the RADIO
   STATION website.
   When used at our restaurant, the Gift Certificate covers part or the
   entire bill.
   Example:
   A. Chicken Dinner $20, after tax $22.15, paid with a $25 Gift
   Certificate.
   B. Chicken Dinner + Steak Dinner, $45 total, after tax $49.84, paid with
   a $25 Gift Certificate and $24.84 cash/credit card.
   The Radio Station will keep all the $12 payments from all the
   customers as we pay them for running names on the radio. Our
   question is how to accurately record these transactions in sales, and if
   the entire bill is considered a sale, should the $22.15 (A.) and $25 (B.)
   be categorize as advertising costs?
2. Third-Party Website Deals:
   Similar to radio promotions, customers pay $12 for a $25 Gift
   Certificate. They receive a QR code via email, which is scanned and
   used as part of their payment. And will get processed the same as in
   the first scenario.
   We receive $6 from these transactions, and third parties send us a
   1099 at the year-end. We add those 1099s as extra income on the tax
   return. Our question mirrors the first scenario regarding recording and
   categorizing these transactions.
3. Discount Coupons:
   Various discounts offered through mail, magazines, or different
   sources.
   Example: $10 OFF on $60, $25 OFF on $150, Buy one meal get
   another for half price, etc.
   Auditor suggested calculating tax before the discount, but we’ve
   observed a different approach establishments like COMPANY1.
   Example:
   Chicken Dinner $20, after tax $44.3, with a discount, the price is $30.

A. In the auditor’s method, tax remains $4.3.
B. In COMPANY1 method, tax would be $3.23.
We are seeking clarification on the correct way to calculate tax in such
scenarios, and if in auditor’s method (A.), should the discounts be
considered as advertising costs? (When I bought breakfast sandwich
from COMPANY1, they sometime have deals like buy one get one for
$1, let’s say the original price for one is $4, if tax counted before
discount will be $0.86, but in a matter fact I only paid $$5.54 for the
total of two sandwiches, tax is $0.54)
We kindly request the Department’s guidance on these matters. Your
assistance will be instrumental our future sales tax compliance.
DEPARTMENT’S RESPONSE:
A retailer incurs Retailers’ Occupation Tax on its gross receipts from sales, which
is defined as the total selling price of a sale. Under Section 1 of the Retailers’
Occupation Tax, “selling price” means the consideration for a sale valued in money,
whether received in money or otherwise, including cash, credits, property, other than as
provided in the statutory definition, and services. 35 ILCS 120/1. The source of the
consideration received by a retailer is immaterial in determining the gross receipts
subject to tax. See Ogden Chrysler Plymouth, Inc. v. Bower, 348 Ill. App. 3d 944
(2004). Also see 86 Ill. Adm. Code 130.2125(a).
Use Tax is generally imposed on the selling price of tangible personal property
purchased at retail. The Retailers’ Occupation Tax Act and the Use Tax Act work
together in a complementary manner. Whether discount coupons utilized by a
purchaser for the purchase of tangible personal property constitute consideration for a
sale depends upon whether the retailer receives any reimbursement for the amount of
the discount. If the retailer receives full or partial reimbursement for the amount of the
discount, the amount of the discount that is reimbursed is considered to be part of the
selling price of the sale. The purchaser incurs tax on the entire selling price, including
the amount of the discount paid to the retailer by the issuer of the coupon. 86 Ill. Adm.
Code 130.2125(a).
For example, if a retailer sells an item for $10 and the purchaser provides the
retailer with a $1 in-store coupon for which the retailer receives no reimbursement from
the manufacturer of the item or any other source, the retailer’s gross receipts of $9 are
subject to Retailers’ Occupation Tax. See 86 Ill. Adm. Code 130.2125(b)(1). In another
example, if a retailer lists an
item for sale for $15 and the purchaser provides the retailer with a $5 manufacturer’s
coupon for

which the retailer receives full reimbursement from the manufacturer of the item, the
retailer’s gross receipts are the $10 received from the customer and the $5 received
from the manufacturer for a total of $15 that is subject to Retailers’ Occupation Tax.
See 86 Ill. Adm. Code 130.2125(b)(2).
When a retailer issues a coupon to a purchaser which entitles the purchaser to a
free item
conditioned on the purchase of a separate item (two-for-one, buy one get one free,
etc.), the retailer’s gross receipts are measured only by the amount actually received
from the purchaser for both items. Thus, tax is only incurred on the amount actually
received from the purchaser. The retailer does not incur tax based upon the value of
the free item received because technically the item was not free, and no gift was
intended. The retailer was simply offering a special price for both items sold. Likewise,
if a retailer provides a customer with a card, coupon, or other certificate later to be used
to reduce (“discount”) the purchase price of an item or items and the retailer is not to be
reimbursed for that discount from a manufacturer or any other source, the amount
representing that discount would not be subject to Retailers’ Occupation Tax liability.
See generally 86 Ill. Adm. Code 130.2125(b)(1).
Persons who are engaged in the business of selling cards or coupons, which
entitle purchasers to the right to redeem those cards for tangible personal property, are
not engaged in selling tangible personal property. Rather, they are making sales of
intangibles. Such sales are not subject to the Retailers’ Occupation Tax. However,
when those cards or coupons are redeemed for tangible personal property, retailers
transferring tangible personal property incur Retailers’ Occupation Tax liability based on
their gross receipts from sales. If a retailer accepts a gift card, the presumption is that
the retailer received gross receipts equal to the face value of the gift card, absent other
evidence.
I hope this information is helpful. If you require additional information, please
visit our website at www.tax.illinois.gov or contact the Department’s Taxpayer
Information Division at (217) 782-3336.
Very truly yours,
Richard S. Wolters
Associate Counsel
RSW:sce