How is the Kansas dry cleaning environmental surcharge calculated with sales tax, and how do store versus factory coupons affect the tax base?

Plain-English summary

A dry cleaner asked two questions: how to calculate the Kansas dry cleaning environmental surcharge alongside sales tax, and how coupons and discounts affect both.

Same tax base for both taxes. "[T]he surcharge and the Kansas sales tax are computed on the same tax base." The retailer uses "the same customer charges as the multiplicand for the environmental surcharge that you use for sales tax." The practical effect: "sales tax [is] not being computed on the environmental surcharge amount and the environmental surcharge [is] not being computed on the sales tax amount." Neither tax is stacked on top of the other.

Store coupons and discounts reduce the base. "When a customer uses a coupon that is issued by the store, the coupon is viewed as reducing the selling price to the customer." So a store's free-cleaning coupon produces "no special sales tax or environmental tax consequences" — if that is the only garment, the customer charge is zero and so is the tax. A buy-more offer (for example, "cleaning 6 garments for the normal cost of cleaning 5") "would simply reduce the customer charge, and thus the tax base." The "twenty percent senior citizen discount" is treated the same way. In every case, "the retailer needs to compute the final customer charge after the discounts are honored and then figure the sales tax and environmental surcharges on that amount."

Factory or franchiser coupons do not reduce the base. "In the case of factory discounts or franchiser discounts, the tax base is the total charges before the coupon or other discount is honored." Kansas "views a factory coupon and rebate as a payment that is being made to the vendor by the factory or franchiser," and the retailer "will be reimbursed the amount of the coupon by the factory or franchiser." So when a coupon from a franchiser (the ruling names "Scotch or some other franchiser") is used, the base is the full charges before the coupon, for both the sales tax and the surcharge. The Department noted this policy has applied to auto rebates "for nearly a quarter century," having been published March 25, 1975 (citing CCH Kansas Tax Reporter, Transfer Binder, p. 10,278).

Bottom line: compute the surcharge and sales tax on the same customer charge, without taxing one with the other. A store discount lowers that charge (and the tax); a factory or franchiser coupon does not, because it is treated as a third-party payment that reimburses the retailer.

What this means for you

Dry cleaners and laundries

Apply the environmental surcharge and sales tax to the same customer charge, and do not compute either tax on the other. When you give a store discount or coupon, calculate the final charge after the discount and then apply both taxes to that lower amount.

Handling manufacturer or franchiser coupons

If a coupon or rebate comes from a factory or franchiser (and you get reimbursed for it), charge both taxes on the full price before the coupon. The coupon is treated as a payment made on the customer's behalf, so it does not shrink the taxable base.

Senior and promotional discounts

A store's own senior discount or "buy several, pay for fewer" promotion reduces the taxable customer charge just like any store coupon. Compute both taxes on the net amount the customer actually pays.

Common questions

Q: Is the dry cleaning environmental surcharge taxed, or does it tax the sales tax?
A: Neither. The surcharge and sales tax are computed on the same customer-charge base, so the sales tax is not computed on the surcharge and the surcharge is not computed on the sales tax.

Q: Do store coupons and discounts reduce the tax?
A: Yes. A store-issued coupon or discount reduces the selling price, so you figure the final customer charge after the discount and compute both taxes on that reduced amount.

Q: What about a factory or franchiser coupon?
A: It does not reduce the base. Kansas treats it as a payment to the retailer by the factory or franchiser, so both taxes are computed on the total charges before the coupon is honored.

Citations and references

• The ruling explains the same-base computation of the dry cleaning environmental surcharge and sales tax, and Kansas's store-coupon versus factory/franchiser-coupon rules, as established Department policy (published March 25, 1975, per CCH Kansas Tax Reporter, Transfer Binder, p. 10,278) rather than by citing a numbered K.S.A. subsection; the rules are described in prose above.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1999-219

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

October 7, 1999

XXXX
XXXX
XXXX

RE: Your letter of September 11, 1999

Dear Ms. XXXX:

This will acknowledge receipt of your letter that you sent to the department earlier last month. In it, you ask several questions about: (1) the environmental surcharge for Kansas dry cleaners and laundries; and (2) the treatment of coupons and discounts.

You first ask how the environmental surcharge should be calculated. The answer is that the surcharge and the Kansas sales tax are computed on the same tax base. This means that you should use the same customer charges as the multiplicand for the environmental surcharge that you use for sales tax. This results in sales tax not being computed on the environmental surcharge amount and the environmental surcharge not being computed on the sales tax amount.

Your next questions are how these two taxes should be computed when customers take advantage of coupons and other promotional discounts. Kansas has two basic rules that govern the treatment of coupons and discounts. One rule is for store coupons and discounts. The other governs discounts that are given by a factory or franchiser.

When a customer uses a coupon that is issued by the store, the coupon is viewed as reducing the selling price to the customer. This means that if the store provides a customer with a coupon for a garment to be cleaned free of charge, there would be no special sales tax or environmental tax consequences when the coupon is redeemed. For example, if a customer brought in only one garment, there would be no tax consequences since the customer charge is zero. If the customer brought in several garments, the coupon would reduce the total charges for cleaning them and, thus, the tax base would be reduced. Similarly, there would be no special treatment for cleaning 6 garments for the normal cost of cleaning 5 garments. This offer would simply reduce the customer charge, and thus the tax base, for cleaning several garments. The twenty percent senior citizen discount would be treated in the same manner. The 20 percent discount should be figured to arrive at the customer charge or the tax base. For all of these examples, the retailer needs to compute the final customer charge after the discounts are honored and then figure the sales tax and environmental surcharges on that amount.

When factory promotions are given, the tax consequences are different. In the case of factory discounts or franchiser discounts, the tax base is the total charges before the coupon or other discount is honored. This is because Kansas views a factory coupon and rebate as a payment that is being made to the vendor by the factory or franchiser. In the case of factory coupons, the retailer will be reimbursed the amount of the coupon by the factory or franchiser. Thus, when a coupon issued by Scotch or some other franchiser is used, the tax base would be the total charges before the coupon is honored. This would be the appropriate tax base for computing both sales tax and the environmental surcharge. This policy has been applied to auto rebates for nearly a quarter century. The Department published the policy on March 25, 1975, and has applied it ever since. See CCH Kansas Tax Reporter, Transfer Binder, p. 10,278.

This is a private letter ruling pursuant to K.A.R. 92-19-59. This ruling will be revoked by operation of law without further department action if there is a change in the controlling statutes, administrative regulations, revenue rulings or case law that materially effects this determination. I believe that this discussion answers all of your. If not, please call me at (785) 296-3081.

Sincerely,

Thomas E. Hatten

Attorney/Policy & Research

Date Composed: 10/18/1999 Date Modified: 10/10/2001

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