Is a car dealer's 'dealer cash' manufacturer incentive, when fully passed through to an employee-purchaser as a price cut, included in the taxable receipt?

Plain-English summary

Keyser Bros. Cadillac, Inc. asked how sales tax should be computed on a car sale involving General Motors' "dealer cash" incentive program. Under GM's Employee Option "1" Discount Program, when a GM employee buys a car, the dealer must pass through 100% of the dealer-cash incentive it receives from GM as a price reduction. In the example given, a car with a $30,000 sticker price came with $5,000 in dealer cash, and the dealer was required to sell the car to the employee for $25,000 -- unlike sales to other customers, where GM also pays dealer cash but the dealer isn't required to pass all of it through.

The Department's answer was simple: because the dealer actually reduces its selling price to the employee by the full dealer-cash amount, the sales tax is computed on the reduced price the employee actually pays -- $25,000 in the example, not the $30,000 sticker price. The dealer cash isn't extra consideration flowing to the dealer from a third party for the sale; it's simply the manufacturer's incentive being converted, dollar for dollar, into a lower price for this particular category of buyer.

What this means for you

Auto dealers running manufacturer employee-purchase or incentive programs

When a manufacturer program requires you to pass an incentive through in full as a price reduction to a specific buyer, sales tax follows the price the customer actually pays after that reduction -- you don't have to collect tax on the pre-incentive sticker price. Keep clear documentation of which incentive programs require full pass-through versus those where you keep some or all of the incentive yourself, since that distinction can change the tax result.

Employees and other buyers eligible for manufacturer incentive programs

If your purchase price already reflects a required, full pass-through of a manufacturer incentive, you should only be taxed on that final, reduced price.

Accountants and tax professionals

Contrast this ruling with the general manufacturer's-coupon-reimbursement rule (see, e.g., the loyalty-card and coupon rulings elsewhere in this corpus, like TSB-A-99(10)S): there, a dealer reimbursed by a manufacturer for a discount typically must still charge tax on the full pre-discount price, because the reimbursement is additional consideration received by the seller. Here, by contrast, the dealer cash is required to flow through 100% to the buyer as an actual price cut with no retained benefit to the dealer -- the dealer keeps none of the incentive on these sales -- which is what makes the reduced price, not the sticker price, the taxable receipt. The line between "reimbursed discount" (fully taxable at the pre-discount price) and "required pass-through price reduction" (taxed at the reduced price) turns on whether the seller actually keeps any of the third-party payment.

Common questions

Q: Is dealer cash always excluded from the taxable receipt?
A: Not necessarily -- this ruling turns on the fact that the dealer is required to pass through 100% of the incentive and keeps none of it; a dealer cash program that lets the dealer retain part of the incentive while still charging the customer full price would be analyzed differently, since the dealer would then be getting reimbursed for a discount rather than genuinely reducing its price.

Q: Does this rule apply only to General Motors' program?
A: The ruling is specific to the facts of GM's Employee Option "1" Discount Program as described, though the underlying principle (tax follows the price actually charged when an incentive is fully passed through) isn't limited to GM by its legal reasoning.

Q: What if GM pays dealer cash on a sale to a non-employee customer?
A: The ruling notes that GM pays dealer cash on other sales too, but only for GM employees is the dealer required to pass through the full incentive -- this opinion doesn't address the tax treatment where the dealer isn't required to pass the incentive through.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) (imposition of sales tax)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_88s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(88)S
Sales Tax
December 30, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S980223B

On February 23, 1998, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Keyser Bros. Cadillac, Inc., 4130 Sheridan Drive, Williamsville, New York
14221.
The issue raised by Petitioner, Keyser Bros. Cadillac, Inc., is whether for purposes of
computing the sales tax to be imposed on the purchase of an automobile, "dealer cash" paid by the
automobile manufacturer and passed through to employees as a price reduction on their purchases
of automobiles under the program described below is included in taxable receipts.
Petitioner submits the following facts as the basis for this Advisory Opinion.
General Motors (hereinafter "GM") currently has a "dealer cash" incentive program in effect
for Petitioner and other Cadillac dealers. GM makes cash incentive payments to dealers for sales
of certain car models. Under the GM Employee Option "l" Discount Program, customers who are
GM employees must receive 100% of the dealer cash incentive. For example, a GM employee
comes in to purchase a car with a manufacturer’s suggested retail price of $30,000. The dealer
receives $5,000 in dealer cash. The dealer sells the car to the employee for $25,000. Under the
"dealer cash" incentive program, GM does not make cash incentive payments only for sales to GM
employees, but makes these payments for sales to other customers as well. However, only in the
case of GM employees is the full cash incentive payment required to be passed through to the
purchaser.
Applicable Law
Section 1105(a) of the Tax Law imposes a tax on "[t]he receipts from every retail sale of
tangible personal property, except as otherwise provided in this article."
Opinion
In this case, Petitioner receives dealer cash which, under the GM Employee Option "1"
Discount Program, must be passed through by Petitioner to GM employees purchasing vehicles as
a reduction of the sales price. In Petitioner’s example, a GM employee comes in to purchase a car
with a manufacturer’s suggested retail price of $30,000. The dealer reduces its selling price by the
amount of the dealer cash ($5,000) and sells the car to the GM employee for $25,000. Therefore,

-2­
TSB-A-98(88)S
Sales Tax
December 30, 1998

the dealer cash reduces the receipts received by Petitioner on which the sales tax must be collected.
Accordingly, based on Petitioner’s example, the receipts subject to the tax imposed under Section
1105(a) of the Tax Law are in the amount of $25,000.

DATED: December 30, 1998

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.