Is a supplier's discount that applies only if the buyer pays within a set time a nontaxable trade discount, or a taxable early-payment discount?

Plain-English summary

Bainbridge Memorial Works, Inc. buys granite from a supplier whose invoices state: "TERMS 2% 15 DAYS NET 30 UNLESS SPECIFIED / 25% 15 DAYS" (the first line printed, the second typed in below). It asked whether the discount is subject to sales tax — i.e., whether it can be deducted from the taxable price. (This is the corrected version of the opinion, replacing an earlier one.)

The Department held the discount is an early-payment discount that stays in the taxable price.

• Receipts include the price without deducting early-payment discounts. Section § 1105(a) taxes receipts from retail sales, and § 1101(b)(3) defines "receipt" as the sale price "without any deduction for expenses or early payment discounts."
• The regulation splits discounts in two. Under 20 NYCRR § 526.5(d): discounts to encourage prompt payment ("early payment discounts") are not deductible; discounts that are a true price reduction (trade, volume, cash-and-carry) are deductible.
• A trade discount vs. a cash discount. A trade discount is the gap between a seller's list price and the price it actually charges the trade; a cash discount is a deduction the seller allows for paying the bill within a certain time (Leonard v. United States).
• This discount is time-conditioned. Because the discount applies only upon payment within a specified time, it is — the supplier's "trade discount" label notwithstanding — an early-payment discount, and therefore included in the receipt subject to tax.

What this means for you

A discount's label doesn't control — its terms do. Calling something a "trade discount" won't make it deductible if, by its own terms, the buyer only earns it by paying quickly. New York looks at whether the reduction is a real price cut or a reward for prompt payment.

Prompt-pay ("2/10, net 30"-style) discounts don't reduce the taxable base. If the discount is conditioned on paying within X days, it's an early-payment discount, and the tax is computed on the pre-discount price. Volume, trade and cash-and-carry discounts that genuinely lower the price can be deducted.

This cuts both ways for buyers and sellers. Whether you're computing tax to collect or checking what you were charged, test each discount against the "conditioned on timing" line. If it hinges on when you pay, expect it to stay in the taxable receipt.

Common questions

Q: Our supplier gives a "2% 15 days" discount and calls it a trade discount. Is it deductible from the taxable price?
A: No. Because it's earned only by paying within the set time, it's an early-payment discount under § 526.5(d) and § 1101(b)(3), so it stays in the taxable receipt — regardless of the "trade discount" label.

Q: What discounts can reduce the taxable amount?
A: Genuine price reductions — trade, volume, and cash-and-carry discounts — are deductible. Discounts conditioned on prompt payment are not.

Q: How do I tell a trade discount from an early-payment discount?
A: A trade discount is a reduction from list price for the trade regardless of payment timing; an early-payment (cash) discount is allowed specifically for paying the bill within a certain time.

Citations and references

Statutes:

• Tax Law § 1105(a) — sales tax on receipts from retail sales of tangible personal property
• Tax Law § 1101(b)(3) — "receipt" is the sale price without deduction for early payment discounts

Regulations:

• 20 NYCRR § 526.5(d) — early-payment discounts not deductible; trade, volume and cash-and-carry discounts deductible

Authorities cited:

• Leonard v. United States, 7 F. Supp. 295 — trade discount vs. cash (early-payment) discount

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a83_18s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-83(18)S (Corrected)
Sales Tax
April 1, 1983

This replaces TSB-A-83(18)S, which was previously distributed and should be destroyed.
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S830215A

On February 15, 1983 a Petition for Advisory Opinion was received from Bainbridge
Memorial Works, Inc., 92 North Main Street, Bainbridge, New York 13733.
The issue raised is whether discounts offered to Petitioner by its granite supplier are subject
to sales tax.
Invoices submitted by Petitioner contain the following provision:
"TERMS 2% 15 DAYS NET 30 UNLESS SPECIFIED
25% 15 DAYS"
The first line is printed on the invoice, while the second line is typed in the space below the first line.
Section 1105(a) of the Tax Law imposes the State sales tax on the receipts from retail sales
of tangible personal property.
Section 1101(b)(3) of the Tax Law defines the term "receipt" as "the amount of the sale price
of any property . . . without any deduction for expenses or early payment discounts . . . . "
Section 526.5(d) of the Sales and Use Tax Regulations further provides that: "(1) Discounts
which are granted by a vendor for the purpose of encouraging prompt payment on an account known
as 'early payment discounts' are not deductible from receipts.
(2) Discounts which represent a reduction in price, such as a trade discount, volume discount or cash
and carry discount are deductible in computing receipts."
Petitioner contends that the discount in question is a trade discount, and has submitted a
statement from its supplier to the effect that the supplier considers the discount to be a "trade
discount." However, trade discounts "represent the difference between a seller's list prices and the
prices at which he actually sells goods to the trade, as distinguished from cash discounts which is
a deduction from the price at which goods are billed to the purchaser that the seller allows for
payment of the bill within a certain time." Leonard v. United States, 7 F. Supp. 295. The subject

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-83(18)S (Corrected)
Sales Tax
April 1, 1983

discount by its terms is applicable only upon payment within a specified time. Accordingly, the
supplier's characterization to the contrary notwithstanding, the discount constitutes not a trade
discount but an early payment discount, and as such is includible in the receipt subject to tax.

DATED: March 16, 1983

s/FRANK J. PUCCIA
Director
Technical Services Bureau