Are tobacco-company buydown payments to South Carolina retailers included in taxable gross proceeds?

Plain-English summary

South Carolina Revenue Ruling #20-3 says a tobacco-company buydown based on a retailer's actual retail sales is part of taxable gross proceeds. The rule applies to retail sales on or after January 1, 2021 and extends beyond cigarettes to cigars, smoking tobacco, snuff, chewing tobacco, and other tobacco products.

In the typical arrangement, the retailer lowers the shelf price during a promotional period and the tobacco manufacturer or distributor later reimburses a stated amount for each unit actually sold. The Department treats the customer payment and the tobacco-company reimbursement as one total sales amount because both arise directly from the retail sale.

The ruling's example uses a product normally sold for $5. The customer pays $4.75 and the tobacco company later pays 25 cents based on sales. Taxable gross proceeds are $5, not $4.75.

A different result applies when the payment is genuinely based on the retailer's purchases from the tobacco company rather than its sales to customers. If the facts, contract, and payment calculations establish that purchase-based treatment, the payment is not value arising from the retail sale. In the example, taxable gross proceeds then remain $4.75.

What this means for you

Tobacco retailers

Identify what triggers each promotional payment. If reimbursement depends on units sold at retail, add it to the customer payment when reporting gross proceeds. Do not wait until the reimbursement is received to recognize that the agreed amount is part of the sales measure.

Accounting teams

Retain the promotion agreement, purchase invoices, sales reports, and payment calculations. Those records determine whether a payment is sales-based and taxable or purchase-based and outside gross proceeds.

Point-of-sale teams

South Carolina's sales tax is imposed on the retailer. The retailer may pass it to the customer, but failure or inability to collect the full tax from the customer does not remove the retailer's liability.

Common questions

Q: Does it matter that the tobacco company, rather than the customer, pays part of the price?
A: No. When the payment results from the retail sale, its source does not change its inclusion in gross proceeds.

Q: Is an ordinary cash discount taxable?
A: Gross proceeds exclude a cash discount allowed and taken. A later third-party sales-based reimbursement is different because the retailer still receives the full combined value.

Q: Are all tobacco-company payments taxable?
A: No. A payment actually based on the retailer's purchases, supported by the agreement and calculations, is not included in retail gross proceeds.

Citations and references

• S.C. Code Ann. § 12-36-90 — gross proceeds of sales
• S.C. Code Ann. §§ 12-36-910 and 12-36-1110 — sales tax and general rate
• S.C. Code Ann. § 12-36-940 — retailer responsibility for the tax
• Books-A-Million, Inc. v. South Carolina Department of Revenue, Op. No. 5721 (S.C. Ct. App. Apr. 29, 2020)
• Meyers Arnold, Inc. v. South Carolina Tax Commission, 285 S.C. 303, 328 S.E.2d 920 (Ct. App. 1985)

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR20-3.pdf

Original ruling text

STATE OF SOUTH CAROLINA

DEPARTMENT OF REVENUE
300A Outlet Pointe Blvd., Columbia, South Carolina 29210
P.O. Box 125, Columbia, South Carolina 29214-0575

SC REVENUE RULING #20-3

SUBJECT:

Buydowns - Tobacco Company Payments to Retailers
(Sales Tax)

EFFECTIVE DATE: For retail sales occurring on or after January 1, 2021.
REFERENCES:

S.C. Code Ann. Section 12-36-90 (2014)
S.C. Code Ann. Section 12-36-910 (2014)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (2014)
S.C. Code Ann. Section 1-23-10(4) (2005)
SC Revenue Procedure #09-3

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the public. It
is an advisory opinion issued to apply principles of tax law to a set of facts
or general category of taxpayers. It is the Department’s position until
superseded or modified by a change in statute, regulation, court decision,
or another Department advisory opinion.

QUESTION
Are tobacco company payments to retailers (commonly known as “buydowns”) includable in
“gross proceeds of sales” and subject to sales tax?
FACT
Under a tobacco company 1 buydown contract with retailers, the tobacco company agrees to pay
the retailer a specified amount for each pack of cigarettes 2 sold by the retailer provided the
retailer agrees to lower the price of a pack of cigarettes sold to the customer (i.e., buydown). In
return, the retailer may be required to use special displays and signs provided by the tobacco
company. At the end of the buydown period, the tobacco company reimburses the retailer the
buydown amount based on actual sales - the difference between the retailer’s usual retail sales
price and the actual discounted sales price of the cigarettes covered by the agreement.

1

For purposes of this advisory opinion, the term “tobacco company” refers to tobacco manufacturers and distributors.
The principles set forth in this advisory opinion also apply to cigars, smoking tobacco, snuff, chewing tobacco, and
other types of tobacco.

2

1

LAW AND DISCUSSION
The first issue at hand is whether an amount received by the retailer from a third party (i.e., the
tobacco company) is includable in the retailer’s gross proceeds of sales – the measure of South
Carolina’s sales tax.
Code Section 12-36-910(A) imposes a sales tax equal to six 3 percent of “gross proceeds of sales”
upon every person engaged within this State in the business of selling tangible personal property
at retail.
Code Section 12-36-90 defines gross proceeds of sales and reads, in part:
Gross proceeds of sales, or any similar term, means the value proceeding or accruing
from the sale, lease, or rental of tangible personal property.
(1) The term includes:

(b) the proceeds from the sale of tangible personal property without any deduction
for:
(i)

the cost of goods sold;

(ii)

the cost of materials, labor, or service;

(iii) interest paid;
(iv) losses;
(v)

transportation costs;

(vi) manufacturers or importers excise taxes imposed by the United States; or
(vii) any other expenses.
(2) The term does not include:
(a)

a cash discount allowed and taken on sales[.]

The South Carolina Court of Appeals recently held that “South Carolina case law provides that
gross proceeds of sales includes all value that comes from or is a direct result of the sale of
tangible personal property.” Books-A-Million, Inc. v. South Carolina Department of Revenue,
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Code Section 12-36-1110 increased the general sales and use tax rate to 6% from 5% in 2007. In addition, the tax
rate may be increased by applicable local sales and use taxes administered and collected by the Department on
behalf of a local jurisdiction.

2

Op. No. 5721 (S.C.Ct.App. filed April 29, 2020). This is consistent with the historical analysis
of “gross proceeds” that was established in Meyers Arnold, Inc. v. South Carolina Tax
Commission, 285 S.C. 303, 328 S.E. 2d 920 (Ct. App. 1985). In this case, the Court of Appeals,
in interpreting the definition of “gross proceeds of sales” with respect to lay away fees paid in
conjunction with lay away sales, held:
But for the lay away sales, Meyers Arnold would not receive the lay away fees.
The fees are obviously charged for the service rendered in making lay away sales.
For these reasons, this court holds the lay away fees are part of the gross proceeds
and subject to the sales tax.
Therefore, the sales tax is imposed upon a person for the privilege of being engaged in the
business of selling at retail and is measured by the amount of business done – the total amount
received or earned by a retailer as a result of selling tangible personal property at retail. The
source of the amount received or earned is irrelevant. What matters is whether the amount
received or earned is the result of a retail sale (i.e., the value proceeding or accruing from the
sale, lease, or rental of tangible personal property at retail).
Based on the above, but for the cigarettes sold by the retailer, the retailer would not receive the
buydown payments from the tobacco company. The buydown payments from the tobacco
company to the retailer based on a retailer’s sales are, therefore, part of the value proceeding or
accruing from the sale of tangible personal property. As such, the payments are includable in
“gross proceeds of sales” and subject to sales tax.
The second issue concerns the liability for remitting the sales tax when the total amount received
by the retailer as a result of selling the cigarettes comes from two sources – the customer and the
tobacco company.
As noted above, the sales tax is imposed upon every person engaged within this State in the
business of selling tangible personal property at retail. As such, South Carolina’s sales tax is a
vendor tax. Code Section 12-36-940(A), however, allows the retailer to pass the tax on by adding
the sales tax due to the total sales price of the tangible personal property sold at retail. Typically,
a retailer does this by separately stating the sales tax on the receipt provided to the customer. The
inability, impracticability, refusal, or failure to add these amounts to the sales price and collect
the tax from the purchaser, however, does not relieve the retailer from his sales tax
responsibility. See Code Section 12-36-940(B).
CONCLUSION
Buydown payments by tobacco companies to retailers that are based on a retailer’s retail sales
are includable in “gross proceeds of sales” and, therefore, subject to sales tax.
For example, assume a retailer usually sells a brand of cigarettes for $5 a pack. During the
buydown period, the retailer agrees to lower the sales price to its customers and sell this brand of
cigarettes for $4.75 a pack. The retailer receives a 25 cent per pack buydown payment from the

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tobacco company after the sale at a later date. The gross proceeds of sales, upon which the sales
tax is calculated, is $5 for each pack of cigarettes sold by the retailer (i.e., the $4.75 sales price
received from the customer and the 25 cents to be received from the tobacco company).
Note: The application of the sales tax differs for a retailer receiving tobacco company payments
based on the retailer’s purchases from a tobacco company. For example, assume a retailer
usually sells a brand of cigarettes for $5 a pack. During the buydown period, the retailer agrees
to lower the sales price to its customers and sell this brand of cigarettes for $4.75 a pack. The
retailer receives a 25 cent per pack buydown payment from the tobacco company at the time the
cigarettes are purchased from the tobacco company. If the buydown payment is actually based on
the retailer’s purchases, and not based on the retailer’s sales, as evidenced by the facts and
documentation of each payment transaction, including contracts and payment calculations, then
the buydown payment is not proceeding or accruing from the retail sale of the cigarettes by the
retailer and is not subject to sales tax. The gross proceeds of sales, upon which the sales tax is
calculated, is $4.75 for each pack of cigarettes sold by the retailer.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/W. Hartley Powell
W. Hartley Powell, Director
June 24
, 2020
Columbia, South Carolina

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