Were supplier allowances funding XYZ's discount-card prices included in taxable gross proceeds?

Plain-English summary

The South Carolina Department of Revenue concluded that supplier allowances received by XYZ, Inc. did not enter its taxable gross proceeds when the payments were based on past purchases, negotiations, market share, or other factors unrelated to particular customer sales.

XYZ used most of those allowances to lower shelf prices for members of its discount-card program. Because the supplier money was not earned as a result of a cardholder buying a specific item, the Department treated it as separate from XYZ's retail sales. Sales tax therefore applied to the discounted amount paid by the customer, not to that amount plus an allocated share of the supplier allowance.

How the discount-card program worked

XYZ operated stores in South Carolina and nearby states. Its electronically readable loyalty cards identified customers and collected information about buying habits for marketing.

Cardholders received lower shelf prices on selected products. XYZ negotiated supplier allowances that could be based on the prior year's purchase volume, negotiations, market share, or combinations of those factors. Suppliers paid by check or credit memo, at different times and under different schedules.

XYZ generally used the funds to lower its cost of sales, but it retained discretion to use them for advertising or other promotions. Most importantly, a customer's use of the card did not change the amount XYZ received from a supplier.

The direct-connection test

South Carolina imposed sales tax on a retailer's “gross proceeds of sales,” meaning value received or earned from selling tangible personal property. The Department said the source of a payment did not control; the question was whether the payment was received because of a retail sale.

A manufacturer reimbursement paid when a customer buys a particular item would be connected to the sale and included in gross proceeds. By contrast, XYZ's allowances arose from its own purchases or broader negotiations, not from customer transactions, so they were excluded.

Common questions

Q: Did the supplier allowances increase XYZ's taxable sales price?

A: No. On the represented facts, they were based on purchases, negotiations, market share, or similar factors rather than retail sales.

Q: Did it matter that XYZ used the allowances to lower cardholder prices?

A: No. The ruling focused on why XYZ received the supplier money. XYZ also had discretion to use the funds for advertising and other promotions.

Q: What if a supplier pays the retailer because a customer buys a specific item?

A: The ruling's quoted guidance says that a sale-triggered manufacturer payment is included in gross proceeds along with the customer's payment.

Q: Can another retailer rely on PLR 99-4?

A: No. The ruling expressly has no precedential value and may be relied on only by its recipient for the covered transactions.

Citations and references

• S.C. Code Ann. § 12-36-910(A) (sales tax on gross proceeds)
• S.C. Code Ann. § 12-36-90 (definition of “gross proceeds of sales”)
• S.C. Code Ann. § 12-36-130 (definition cited in the ruling's reference block)
• SC Revenue Ruling #98-15 (quoted by the PLR; later superseded by RR 99-9)
• SC Revenue Ruling #99-9 (general coupon and discount-card guidance that expressly superseded RR 98-15)

Subject

Discount Card Program

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR99-4.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 #99-4

TO:

XYZ, Inc.

SUBJECT:

Discount Card Program
(Sales & Use Taxes)

DATE:

November 22, 1999

REFERENCE:

S. C. Code Ann. Section 12-36-910(A) (Supp. 1998)
S. C. Code Ann. Section 12-36-90 (Supp. 1998)
S. C. Code Ann. Section 12-36-130 (Supp. 1998)
S. C. Revenue Ruling #98-15

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 1998)
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 allowances received by XYZ, Inc. (“Retailer”) from suppliers based on past purchases,
negotiations or other factors which are not directly related to Retailer’s sales includible in
Retailer’s gross proceeds of sales and therefore subject to the sales tax?
Conclusion:
In the opinion of the Department, the allowances received by Retailer from suppliers based on
past purchases, negotiations or other factors which are not directly related to Retailer’s sales are
not includible in Retailer’s gross proceeds of sales.
Facts:
Retailer owns and operates numerous stores in South Carolina and surrounding states. Through
its stores, the taxpayer makes retail sales of a wide variety of products.

1

Retailer has developed a discount card program which is intended to improve sales by
promoting customer loyalty. Under this program, Retailer issued encoded electronicallyreadable cards to all of its existing customers and currently issues cards to any customer who
requests one. Each card carries unique information which enables Retailer to identify the
customer to whom the card was issued and to collect data related to that customer's buying
habits. The information gathered is used for marketing purposes by Retailer.
The goals of Retailer's card program are primarily accomplished by offering discounts on
specific items to cardholders in the form of lower shelf prices which establish a new sales price
for specific items during the sale period. When a cashier scans the customer's card, the
customer is identified as being enrolled in the card program and is allowed discounts which are
reflected on the sales receipt. The discounted items vary on a weekly basis and are identified
by special shelf price cards which indicate that the discounts are given to customers
participating in the program.
In order to provide discounts through its card program, Retailer negotiates with and receives
purchase allowances from its suppliers. These allowances may be based on the volume of
Retailer's purchases in the previous year, on negotiations between Retailer and the vendors, or
based on a number of other factors such as market share, or a combination of these factors.
These allowances are used to reduce the shelf prices of certain targeted products. The majority
of the allowances are provided by checks issued by suppliers; however, in some cases,
suppliers may issue credit memos which Retailer may apply against future purchases.
While the supplier allowances provide funds for Retailer to pass discounts to its cardholders,
the use of the card does not affect the amount of allowances the suppliers give to Retailer. The
allowances received are based on past purchases from the supplier, previous negotiations with
the supplier, or such factors as past market share, etc. There is no direct connection between a
customer using his or her card to buy a particular product and the amount of the allowances
Retailer receives from the product's supplier.
Supplier allowances may be dispersed either immediately upon determination or periodically
at many times throughout the year and are dispersed in many different ways. For example,
Supplier A may establish a fixed dollar amount of allowances or product purchase discounts
for Retailer during the year, but may take the entire year to disperse these allowances to
Retailer. Conversely, Supplier B may determine and disperse their allowances at the beginning
of the year. Although Retailer has decided to use most of the allowances it receives from its
suppliers to achieve a lower cost of sales, the allowances may be used, at Retailer's discretion,
for advertising and other promotional ventures.
Law/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 Code Section 12-3690, in part, as "the
value proceeding or accruing from the sale...of tangible personal property."

2

SC Revenue Ruling #98-15, which addressed supplier allowances, manufacturer's coupons, and
self-redeeming coupons1, provides:
... 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 (manufacturer's rebate') a retailer 15 cents for
each sale by the retailer of the manufacturer's product 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.
....some [supplier] allowances, unlike manufacturers' rebates which are paid to the retailer
as the result of a customer buying a particular product, are paid based on purchases made
by the 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 the
retailer, not on sales of those products by the retailer to the retailer's customers.
Therefore, these allowances are not includible in the retailer's gross proceeds of sales and
are not subject to sales tax.

1

A "manufacturer's coupon" is issued by the manufacturer and distributed to retailers' customers
via the mail or by other means. When a retailer's customer makes a purchase using this coupon,
the customer receives a discount on the purchase price. The retailer, in turn, sends the coupon to
the manufacturer for reimbursement of the discount the retailer gave to his customer.
A "self-redeeming coupon" is issued by the retailer, not the manufacturer. Therefore, the retailer
does not receive reimbursement for the discount given his customers when they use this type of
coupon.
It is the department’s opinion that the supplier allowances in this case are substantially the
same as those addressed in the above-quoted revenue ruling and should be treated the same.
The allowances are not received based on Retailer’s sales to its customers. Therefore, they
should not be included in Retailer’s gross proceeds of sales.

3