Did PLR 98-3 include a supermarket's purchase-based supplier allowances in taxable gross proceeds when customers used its loyalty card?

Plain-English summary

South Carolina Private Letter Ruling 98-3 concluded that a supermarket retailer's promotional and purchase allowances from suppliers were not part of taxable gross proceeds from its loyalty-card sales.

The retailer issued encoded cards that let selected customers receive discounts and allowed the retailer to collect information about buying habits. Supplier allowances helped fund promotions, but the amount paid to the retailer did not change when a customer used the card or bought a particular product.

The Department distinguished purchase-based allowances from sale-based manufacturer reimbursements. The allowances here came from the retailer's past wholesale purchases or prior negotiations with suppliers, so they were not earned from the retailer's sales to customers. If a $1 item was discounted by 15 cents under the card program, the ruling measured sales tax on the 85 cents paid by the customer.

What controlled the result

• The suppliers paid allowances based on past purchases or negotiated amounts.
• The retailer could use the money for discounts or advertising, or retain it.
• A customer's card use did not affect the supplier payment.
• No direct connection existed between a particular retail sale and the allowance.
• The taxable gross proceeds therefore consisted of the discounted price received from the customer.

Common questions

Q: Would a supplier payment tied to each customer sale receive the same treatment? No. The ruling's example said a manufacturer payment earned for each sale would join the customer's payment in taxable gross proceeds.

Q: Did the retailer have to pass every allowance through as a discount? No. The facts said it could use the allowance for price reductions or advertising, or retain it.

Q: Did the loyalty card itself change the supplier allowance? No. That absence of a transaction-level connection was central to the result.

Q: Can another retailer rely on PLR 98-3? No. The ruling limits reliance to ABC, Inc. and the transactions described and says it has no precedential value.

Citations and references

• S.C. Code Ann. § 12-36-910(A) (sales tax on gross proceeds)
• S.C. Code Ann. § 12-36-90 (gross proceeds as value proceeding or accruing from a sale)
• S.C. Code Ann. § 12-36-130 (sales-price reference cited)
• SC Revenue Ruling #98-15 and SC Revenue Ruling #99-9 (later general coupon and discount-card guidance; RR 99-9 superseded RR 98-15)

Subject

ABC Card Program

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR98-3.pdf

Original ruling text

State of South Carolina
Department of Revenue
301 Gervais Street, P.O. Box 125, Columbia, South Carolina 29214

SC PRIVATE LETTER RULING #98-3

TO:

ABC, Inc.

SUBJECT:

ABC Card Program
(Sales & Use Tax)

DATE:

April 30, 1998

REFERENCE:

S. C. Code Ann. Section 12-36-910(A) (Supp. 1997)
S. C. Code Ann. Section 12-36-90 (Supp. 1997)
S. C. Code Ann. Section 12-36-130 (Supp. 1997)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 1997)
SC Revenue Procedure #97-8

SCOPE:

A Private Letter Ruling is an official advisory opinion issued by the
Department of Revenue to a specific person.

NOTE:

A Private Letter Ruling may only be relied upon by the person to whom it is
issued and only for the transaction or transactions to which it relates. A
Private Letter Ruling has no precedential value.

Question:
Are the allowances (described in the Facts) received by ABC, Inc. (“Retailer”) from suppliers
includible in Retailer’s gross proceeds of sales and therefore subject to the sales tax?
Conclusion:
The allowances described in the Facts are not includible in Retailer’s gross proceeds of sales.
Facts:
Retailer owns and operates numerous supermarkets in South Carolina and surrounding states.
Through its supermarkets, the taxpayer sells at retail a wide variety of food and other grocery
items, as well as other products.
Retailer negotiates with and receives promotional and purchase allowances from its suppliers.
Some suppliers award allowances based on past purchases and others award allowances based on
negotiated amounts.

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Retailer can use these allowances to reduce the selling prices of a supplier’s products and/or to
advertise or otherwise promote the supplier’s products. In some cases, the taxpayer may retain
the allowance and not reduce the retail price. All allowances are paid directly to Retailer by the
suppliers.
One method used by Retailer to promote certain products is the Card Program. This program
was developed by Retailer to direct discounts to a select group of customers and to promote
customer loyalty. Under this program, Retailer issues an encoded electronically-readable card
(“Card”) to its customers. The Card is similar in appearance to and functions like a bank
automatic teller card. Each Card carries unique information about each customer and enables
Retailer to collect data related to the customer’s buying habits.
When a customer makes a purchase, he or she presents the Card to the cashier. Retailer then
discounts the price of selected products purchased by the Card holder.
While the supplier allowances provide funds for Retailer to pass additional discounts to its Card
holders, the use of the Card does not affect the amount of allowances the suppliers pay to
Retailer. The allowances received are based on past purchases from, or previous negotiations
with, a supplier. There is no direct connection between a customer using his or her Card to buy a
particular product and the amount Retailer receives from the product’s supplier.
Discussion:
Code Section 12-36-910(A) imposes the South Carolina sales tax on a retailer’s “gross proceeds
of sales.” The term “gross proceeds of sales” is defined in Section 12-36-90, in part, as “the
value proceeding or accruing from the sale...of tangible personal property.”
In other words, “gross proceeds of sales” is the total amount received or earned by a retailer as a
result of selling his products. The source of the amount received or earned is irrelevant. What
matters is whether the amount is received or earned as the result of a retail sale. For example, if
a manufacturer were to pay a retailer 15 cents for each sale by the retailer of the manufacturer’s
product (“manufacturer’s rebate”) and the retailer received 85 cents from the customer, the
amount subject to the sales tax would be $1.00 - the 15 cents received from the manufacturer and
the 85 cents received from the customer.
The allowances in question, unlike manufacturer’s rebates which are paid to the retailer as the
result of a customer buying a particular product, are paid based on purchases made by Retailer
during the previous year or as a result of previous negotiations with the supplier. They are
received based on purchases of the manufacturer’s products by Retailer, not on sales of those
products by Retailer to Retailer’s customers. Therefore, the allowances are not includible in
Retailer’s gross proceeds of sales and are not subject to sales tax. In contrast to the above
“manufacturer’s rebate” example, if Retailer were to give each customer a 15 cent discount on a
product that normally sells for $1.00 when a customer uses his or her Card to buy the product,
the measure of the sales tax on the sale would be 85 cents.

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