Can a Kansas retailer buy promotional merchandise tax-free for resale, and how is tax handled when the items are given away as premiums or prizes?

Plain-English summary

A supplier of promotional merchandise asked how Kansas sales tax applies when retailers buy its products. The Department started from the imposition statute — K.S.A. 79-3603(a), which taxes "The gross receipts received from the sale of tangible personal property at retail within this state" — and then walked through how the tax works depending on what the retailer does with the goods.

Buying for resale is exempt with a certificate. Because "it is not known at the time of purchase whether the respective items will be sold over the counter at retail or given away," retailers "would be able to purchase the promotional merchandise exempt from Kansas sales/use tax, by providing you with a resale exemption certificate."

Then tax follows how the item is used — the Department gave three scenarios:

1. Sold at retail: "When the retailer sells the promotional materials over the counter at retail, the retailer would collect and remit the appropriate Kansas sales tax(es)."
2. Premium given with a taxable sale, not by chance: "When a retailer making a retail sale that is subject to tax gives a premium or prize along with the item being sold, the transaction shall be regarded as the sale of both items to the purchaser, if delivery of the premium or prize does not depend on chance." (The premium rides along with the taxed sale.)
3. Prize awarded by chance: "When the award of a premium or prize by a retailer depends on chance, the retailer's acquisition of the premium or prize shall be subject to sales tax. The retailer shall pay the tax at the time of acquisition of the premium or prize or, if the item is removed from resale inventory, shall accrue tax on the item's cost on its sales tax return."

Bottom line: the retailer buys promotional stock tax-free for resale, then either collects tax when it sells the item, folds a non-chance premium into the taxed sale it accompanies, or — for a chance-based prize — pays or accrues tax on the item's own cost.

What this means for you

Suppliers selling promotional goods to retailers

You can accept a properly completed resale exemption certificate from a retailer buying promotional merchandise, because the ultimate use isn't known at purchase. The tax consequences land on the retailer based on how the goods are later used.

Retailers: match the tax to the use

Track what happens to promotional stock. Sell it over the counter and you collect tax on the sale. Give it away as a premium tied to a taxable sale where the customer is sure to get it (no chance), and it is treated as part of that taxed sale. But award it by chance — a drawing, a game — and you owe tax on your cost of the item.

Chance-based giveaways: pay or accrue on cost

For a prize awarded by chance, remit tax when you acquire the item, or, if you take it out of resale inventory, accrue tax on its cost on your sales tax return. Don't let chance-based prizes slip out untaxed just because you bought them under resale.

Common questions

Q: Can a retailer buy promotional merchandise tax-free?
A: Yes, with a resale exemption certificate, because at purchase it is unknown whether the items will be sold at retail or given away.

Q: How is a premium given away with a sale taxed?
A: If the premium is given with a taxable sale and does not depend on chance, the transaction is treated as the sale of both items to the purchaser — the premium is covered by that taxed sale.

Q: What if the prize is awarded by chance?
A: The retailer's acquisition of the prize is subject to tax. The retailer pays tax when acquiring the item, or accrues tax on its cost if the item is removed from resale inventory.

Citations and references

• K.S.A. 79-3603(a) — imposes Kansas retailers' sales tax on the gross receipts from the sale of tangible personal property at retail in the state; the Department quoted it as the starting point for taxing promotional merchandise and its various uses.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1999-277

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

February 3, 2000

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Dear Mr. TTTTTT:

We wish to acknowledge receipt of your letter dated May 20, 1999, regarding the application of Kansas Retailers’ Sales tax. Please accept my apology for the delay in responding.

K.S.A. 79-3603(a) imposes a sales tax upon: “The gross receipts received from the sale of tangible personal property at retail within this state. . .”

Based upon the information that you have supplied in the above referenced letter, it appears that retailers in the state of Kansas would be able to purchase the promotional merchandise exempt from Kansas sales/use tax, by providing you with a resale exemption certificate. The reason being that it is not known at the time of purchase whether the respective items will be sold over the counter at retail or given away. The following situations are examples of how a retailer may use the promotional items and the sales tax treatment associated therewith.

· When the retailer sells the promotional materials over the counter at retail, the retailer would collect and remit the appropriate Kansas sales tax(es).
· When a retailer making a retail sale that is subject to tax gives a premium or prize along with the item being sold, the transaction shall be regarded as the sale of both items to the purchaser, if delivery of the premium or prize does not depend on chance.
· When the award of a premium or prize by a retailer depends on chance, the retailer’s acquisition of the premium or prize shall be subject to sales tax. The retailer shall pay the tax at the time of acquisition of the premium or prize or, if the item is removed from resale inventory, shall accrue tax on the item’s cost on its sales tax return.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially effects this private letter ruling.

If I may be of further assistance, please contact me at your earliest convenience at (785) 296-7776.

Sincerely yours,

Thomas P. Browne, Jr.
Tax Specialist

TPB

Date Composed: 03/15/2000 Date Modified: 10/11/2001

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