For a wireless carrier's points-based loyalty program, does issuing loyalty points reduce the taxable sales price of the monthly service fee, and how is tax calculated when points are redeemed for discounted phones, accessories, or other rewards?

Plain-English summary

A wireless carrier redesigned its service plans around a new points-based Loyalty Program, moving away from the old fixed-term-contract model. Customers earn Loyalty Points automatically — based on tenure, plan type, added lines, completing surveys, and other activities — at no extra charge, and can later redeem them for a discounted new phone, discounts on accessories, free ringtones, adding a line for free for a month, forgiveness of overage charges, or accelerating eligibility for a discounted phone upgrade. Points have no cash value, can't be bought or cashed out, and don't appear itemized on the customer's bill — the monthly Wireless Monthly Fee is a single lump-sum, unallocated charge. Separately, the carrier offers a percentage discount on the Wireless Monthly Fee for customers who sign up for paperless billing with automatic online payment.

The Department issued five rulings, all turning on Tennessee's "sales price" rules — total consideration paid (§ 67-6-102(81)(A)), minus any bona fide, non-third-party-reimbursed discount or coupon (§ 67-6-102(81)(B)):

1. Issuing points doesn't lower the taxed fee. Because Loyalty Points have no cash value and aren't redeemable for cash, simply earning them has no effect on the taxable sales price of the wireless service.

2. The paperless-billing/auto-pay discount DOES lower the taxed fee. That's a genuine cash discount — not reimbursed by anyone else — so it reduces the sales price subject to tax.

3. Redeeming points works like an in-store coupon. When a customer trades points for a cheaper phone, accessory, digital good, taxable service, or an early phone upgrade, the points function as a non-third-party-reimbursed coupon: the taxable sales price is whatever cash or other consideration the customer actually pays, net of the points-based discount.

4. The carrier (not the customer) bears use-tax risk on redemption inventory, but doesn't owe it automatically. Tennessee use tax isn't imposed on the carrier for giving out points-discounted merchandise — but if the carrier fails to collect the right amount of sales tax from the customer on the discounted price, the carrier itself remains liable to pay it, since the legal incidence of sales tax falls on the seller.

5. Redeeming points for something nontaxable is tax-free — unless it's bundled. If a customer redeems points purely for a nontaxable good or service, no sales tax applies. But if that nontaxable item is sold together with a taxable item for one combined charge, the entire charge becomes taxable (the classic bundling rule from Tomkats Catering, Inc. v. Johnson).

What this means for you

Businesses running points-based loyalty or rewards programs

Earning points generally doesn't trigger a tax adjustment on the underlying purchase, but redeeming points for goods or services does — treat point redemptions like coupon discounts: tax the net cash/consideration actually paid, not the pre-discount sticker price. And watch your bundling: if you ever combine a nontaxable reward with a taxable one under a single charge, the whole charge becomes taxable.

Telecom and subscription businesses with tiered billing discounts

Genuine, non-reimbursed billing discounts (like paperless-billing/auto-pay incentives) reduce your taxable sales price the same way a coupon would — distinct from loyalty points, which only matter for tax purposes at redemption, not at issuance.

Accountants and tax professionals

This pairs naturally with LR 12-01 (incentive/points rewards programs) but reaches a different structural conclusion: there, the per-point fee charged to a client company wasn't taxable because no sale occurred, while merchandise shipped to participants was a taxable retail sale measured by the per-point fee times points redeemed. Here, by contrast, the carrier sells directly to its own retail customers, so the relevant question is how points reduce the customer's taxable sales price at redemption (treated as an in-store coupon) rather than how to value a separate B2B service fee.

Common questions

Q: If a loyalty program issues points based on a percentage of a customer's purchase, does that reduce the sales tax owed on the original purchase?
A: No — under this ruling, issuing points has no effect on the taxable sales price of the transaction that earned them. Only redeeming points later reduces the sales price of that later transaction.

Q: Does a customer owe sales tax on the full retail value of a reward when redeeming points, or just what they actually pay?
A: Just what they actually pay (plus the value of any other consideration) — points act like an in-store coupon, reducing the taxable sales price to the net amount paid.

Q: Is a business liable for sales tax it fails to collect when a customer redeems points for a discounted taxable item?
A: Yes — the legal obligation to pay sales tax rests with the seller; if the seller doesn't collect it from the customer, the seller remains responsible for paying it.

Q: Can another company running a similar loyalty program rely on this letter ruling?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it was issued to. This summary is informational only, not legal or tax advice.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-102(80)(A) (2011) (definition of "sale")
• § 67-6-205(c)(3) (2011) (telecommunications services taxable)
• § 67-6-102(92)(A) (2011) (definition of "telecommunications service")
• § 67-6-201(a)(3) (2011) (services taxable under the Retailers' Sales Tax Act)
• § 67-6-102(81)(A) (2011) (definition of "sales price")
• § 67-6-102(81)(B), (B)(i) (2011) (discounts/coupons excluded from sales price)
• § 67-6-501, §§ 67-6-501 to -502 (2011) (legal incidence of sales tax on seller; collection from consumer "insofar as it can be done")
• §§ 67-6-101 to -907 (2011) (Retailers' Sales Tax Act)

Rule and case law:

• Tenn. Comp. R. & Regs. 1320-5-1-.12 (2008) (cash discounts excluded from taxable selling price of services)
• Nashville Clubhouse, Inc. v. Johnson, 27 S.W.3d 542, 544-45 (Tenn. Ct. App. 2000) (elements of a taxable sale; definition of consideration)
• Trailer Conditioners, Inc. v. Huddleston, 897 S.W.2d 728, 731 (Tenn. Ct. App. 1995) (consideration)
• Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132, 135 (Tenn. 1992) (only enumerated services taxable)
• Ryder Truck Rental, Inc. v. Huddleston, 1994 WL 420911, at *3 (Tenn. Ct. App. Aug. 12, 1994) (same)
• Long Equip. Co. v. Keeton, 736 S.W.2d 611, 613 (Tenn. Ct. App. 1987) (legal incidence of sales tax on the seller)
• Tomkats Catering, Inc. v. Johnson, 2001 WL 1090516, at *2 (Tenn. Ct. App. Sept. 19, 2001) (bundled taxable/nontaxable charges fully taxable)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/12-30.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 12-30
WARNING
Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This ruling is based on the particular facts and
circumstances presented, and is an interpretation of the law at a specific point in time. The
law may have changed since this ruling was issued, possibly rendering it obsolete. The
presentation of this ruling in a redacted form is provided solely for informational purposes,
and is not intended as a statement of Departmental policy. Taxpayers should consult with a
tax professional before relying on any aspect of this ruling.
SUBJECT
The application of the Tennessee sales and use tax to a customer loyalty incentive program.
SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon
the Department, and are applicable only to the individual taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation
or modification shall be effective retroactively unless the following conditions are met, in which
case the revocation shall be prospective only:
(A) The taxpayer must not have misstated or omitted material facts involved in
the transaction;
(B) Facts that develop later must not be materially different from the facts upon
which the ruling was based;
(C) The applicable law must not have been changed or amended;
(D) The ruling must have been issued originally with respect to a prospective or
proposed transaction; and
(E) The taxpayer directly involved must have acted in good faith in relying upon
the ruling; and a retroactive revocation of the ruling must inure to the taxpayer’s
detriment.
FACTS
[TAXPAYER] is a holding company with the following operating subsidiaries in Tennessee:
[REDACTED] (collectively, the “Taxpayer”). These operating subsidiaries are licensed to, and
do provide, wireless telecommunications services in Tennessee (including voice service, data
service, and wireless Internet access) under the trade name [TRADE NAME]. [TAXPAYER] is
a [NON-TENNESSEE] holding company that is not licensed to, and does not provide, wireless
telecommunications services.
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The Taxpayer has recently redesigned its wireless telecommunications service plans, introducing
them under the name “[PLANS].” The [PLANS] transform the relationship between the
Taxpayer and its customers from the historic contract-based relationship to a customer loyaltybased relationship. The Taxpayer introduced a points-based loyalty awards program that is
included with its [PLANS]. Over time, subscribers to these plans accrue points, which can be
exchanged for the following: a discounted new phone; discounts on phone accessories; certain
digital goods and services; an additional line; forgiveness of certain overage charges; or an
acceleration of the right to buy a discounted phone. In connection with the [PLANS], the
Taxpayer has also introduced a program under which customers will receive a discount on their
wireless service bills if they sign up for a program to receive paperless bills and automatically
pay their bills online.
In the past, the Taxpayer has offered its customers one or two-year contracts, in exchange for
which the customer was offered a discount on the purchase price of a new phone. Each month, a
customer paid a set amount, which entitled the customer to a certain number of (or in some
cases, unlimited) voice minutes, text messages, and/or data service. If a customer consumed
voice or data in excess of the contract limit, there was an extra charge (an “Overage”). When a
customer’s contract period expired, the customer had the opportunity to enter into a new one or
two-year contract, and had another opportunity to purchase a new phone at a discount at that
time. If a customer canceled service before the expiration of the contract, the customer was
charged an early termination fee.
Beginning [DATE], the Taxpayer unveiled the [PLANS] referenced above. At the core of the
[PLANS] is a new points-based customer loyalty program (the “Loyalty Program”). When a new
customer signs up for a [PLAN], he or she is automatically enrolled in the Loyalty Program at
the same time, for no additional charge. Under the terms of the [PLAN], the new customer signs
an initial two-year contract and has the opportunity to buy a phone for a significant discount,
sometimes for as little as one cent, at the time of enrollment. No further contract is required after
the first two-year contract commitment is completed.
The Taxpayer charges a Wireless Monthly Fee, which now includes a set number of (or in some
cases, unlimited) voice minutes and/or text and picture messages a customer is entitled to use for
the month, and, in certain plans, data access. Plans with data access include differing preset
numbers of gigabytes of data, with preset charges for excess data determined under the plan. A
portion of the data service comprises Internet access. A customer can move between different
[PLANS] for the duration of the contract. At the end of the initial [REDACTED] contract, the
customer becomes a month-to-month subscriber, and can cancel at any time without penalty.
Under the Loyalty Program, the customer has the right to purchase a new phone at a significant
discount (in some cases, for one cent) every [NUMBER OF] months, as long as he or she
remains a [PLAN] subscriber. Unlike the Taxpayer’s former practice, a customer enrolled in the
Loyalty Program is not required to sign a new [REDACTED] contract to receive this new
discounted phone. Rather, every [NUMBE OF] months, a customer in good standing is entitled
to a new discounted phone, without any further obligation to subscribe.
Other benefits of the Loyalty Program are provided through the accrual and redemption of
Loyalty Program points (“Loyalty Points”). A customer earns Loyalty Points as follows: every
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six months, based on the length of time the customer has been enrolled in the Loyalty Program;
each month, based on the [PLAN] the customer is enrolled in; for each additional line added in
certain family or business plans; for completing member profiles and online surveys; for backing
up contact and phone book information with the Taxpayer; and for referring other customers.
Also, an existing customer who signs up for a [PLAN] will receive a one-time award of “loyalty
bonus” points (although due to inadvertent programming errors, some new customers also
received these points).
Every month, a customer’s bill shows the Wireless Monthly Fee due, which is not allocated
between voice service, text messages, data or points; rather, there is simply one lump-sum charge
for the entire contract. A customer’s accrued Loyalty Points can be viewed only on the
Taxpayer’s website, and are not shown on the bill. Loyalty Points cannot be purchased with or
redeemed for cash under any circumstances. Loyalty Points can be redeemed only while the
customer’s account is active and in good standing.
Once accrued, a customer can exchange Loyalty Points for the following: a discount on a new
phone; a discount on phone accessories (e.g., cases, extra batteries, covers, etc.);1 free ringtones
and ringback services; the addition of a line to an existing multi-line plan (i.e., a family or
business plan) for the first month, at no additional cost (an “Additional Line”); forgiveness of the
charges stemming from data or voice consumption in excess of the contract limit for a given
month (“Overage Forgiveness”); or an acceleration of the right to buy a discounted phone before
the default [TIME] period expires (“Phone Acceleration”).2 Loyalty Points cannot discount the
price of phones or tangible accessories to less than one cent. The only means by which the
Taxpayer permits a customer to obtain Phone Acceleration is by redeeming Loyalty Points; the
Taxpayer does not charge for or otherwise permit a customer to accelerate a discounted phone
purchase.
A customer can redeem Loyalty Points in several ways. First, a customer can log in through a
website to select among a limited set of rewards. Alternatively, a customer can go to a Taxpayerowned store, a Taxpayer store owned by an independent agent, or call the Taxpayer to redeem
points for the full range of rewards. In each case, the customer is required to pay at least one cent
when redeeming points for phones or accessories.
The Taxpayer allocates a small portion of the Wireless Monthly Fee each month to what it has
determined relates to nontaxable Internet access service.
The Taxpayer encourages its customers to receive and pay their bills online. To this end, the
Taxpayer has introduced a program under which a customer receives a [PERCENTAGE]
discount (for payment with a debit or credit card), or a [PERCENTAGE] discount (for payment
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Accessories are shipped to the customer via mail from the Taxpayer’s third-party fulfillment center [OUTSIDE OF
TENNESSEE], even when points are redeemed at a Taxpayer owned store or an independently owned store.

2

For example, a customer who received a new phone [NUMBER OF] months ago would have to wait [NUMBER]
more months for the right to buy a new phone at a discount. If the customer wanted a new phone that the Taxpayer
just began offering without paying the full price, the customer would have the option of exchanging a certain
number of Loyalty Points for the right to buy the new phone at a discount immediately, without waiting the
remaining [NUMBER OF] months. The customer would then receive whatever discount the Taxpayer was offering
on the new phone at that time.
3

by direct debit from the customer’s checking account) on the price of his or her Wireless
Monthly Fee each month if the customer sets up automatic online bill payment with paperless
billing.
RULINGS
1.

For Tennessee sales and use tax purposes, with respect to the Wireless Monthly Fee, is
the sales price decreased by the imputed value of any Loyalty Points issued to the
customer?
Ruling: No.

2.

For Tennessee sales and use tax purposes, with respect to the Wireless Monthly Fee, is
the sales price decreased by the discount for automatically paying online and accepting
paperless billing?
Ruling: Yes.

3.

For Tennessee sales and use tax purposes, when Loyalty Points are exchanged for
discounted tangible personal property, digital goods, taxable services, or the purchase of
a discounted phone at an earlier date as a result of Phone Acceleration, does the sales
price of the item equal the net amount of cash paid by the customer for the item or
service?
Ruling: Yes, the sales price equals the net amount of cash or other consideration paid by
the customer.

4.

When Loyalty Points are exchanged for discounted tangible personal property, is the
Tennessee use tax imposed on the Taxpayer with respect to such tangible personal
property?
Ruling: No, but the Taxpayer will be responsible for paying the sales tax if it fails to
collect and remit the same from its customer.

5.

Is the Tennessee sales and use tax imposed on the redemption of Loyalty Points for
nontaxable goods or services?
Ruling: No, unless the nontaxable goods or services are bundled with taxable goods or
services for a single charge.
ANALYSIS

Retail sales in Tennessee of tangible personal property and certain enumerated items and
services are subject to the sales and use tax under the Retailers’ Sales Tax Act, TENN. CODE
ANN. §§ 67-6-101 to -907 (2011), unless an exemption from taxation applies.
TENN. CODE ANN. § 67-6-102(80)(A) (2011) defines the term “sale” in pertinent part to mean
“any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or
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otherwise, in any manner or by any means whatsoever of tangible personal property for a
consideration.” Accord Nashville Clubhouse, Inc. v. Johnson, 27 S.W.3d 542, 544 (Tenn. Ct.
App. 2000) (“[T]here are three elements necessary to constitute a taxable sale: (1) the transfer of
title or possession or both, (2) of tangible personal property, and (3) for a consideration.”).
Services are also taxable under the Retailers’ Sales Tax Act. TENN. CODE ANN. § 67-6-201(a)(3)
(2011); see also TENN. CODE ANN. § 67-6-102(80)(C). But the sales tax does not apply to all
services; rather, it only applies to retail sales of those services specifically enumerated by the
statute. See Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132, 135 (Tenn. 1992); Ryder
Truck Rental, Inc. v. Huddleston, No. 91-3382-III, 1994 WL 420911, at *3 (Tenn. Ct. App. Aug.
12, 1994). One of the enumerated services taxable under the Retailers’ Sales Tax Act is “[t]he
furnishing, for a consideration, of intrastate, interstate or international telecommunications
services.” TENN. CODE ANN. § 67-6-205(c)(3) (2011). The term “telecommunications service” is
defined under TENN. CODE ANN. § 67-6-102(92)(A) as the “electronic transmission, conveyance,
or routing of voice, data, audio, video, or any other information or signals to a point, or between
or among points.”
1.

Wireless Monthly Fee and Loyalty Points

With respect to the Wireless Monthly Fee, the sales price is not decreased by the imputed value
of any Loyalty Points that are issued to the customer. The sales price is only decreased when
Loyalty Points are redeemed.3
The provision of wireless telecommunications service in Tennessee is clearly a taxable service
under the Retailers’ Sales Tax Act. See TENN. CODE ANN. § 67-6-205(c)(3).
The “sales price” of a service is “the total amount of consideration, including cash, credit,
property, and services, for which personal property or services are sold, leased, or rented, valued
in money, whether received in money or otherwise.” TENN. CODE ANN. § 67-6-102(81)(A).
Consideration, for purposes of determining if there is a sale, is “either a benefit to the promisor
or a detriment to or obligation on the promisee.” Nashville Clubhouse, Inc. v. Johnson, 27
S.W.3d at 545 (citing Trailer Conditioners, Inc. v. Huddleston, 897 S.W.2d 728, 731 (Tenn. Ct.
App. 1995)).
Discounts, however, are excluded from the definition of sales price. See TENN. CODE ANN. § 676-102(81)(B). To further clarify this principle, TENN. COMP. R. & REGS. 1320-5-1-.12 (2008)
provides in pertinent part that “[t]he selling price of . . . [a] taxable service does not include the
amount of bona fide cash discounts actually taken by the buyer.” See also 2 JEROME R.
HELLERSTEIN & WALTER HELLERSTEIN, STATE TAXATION ¶ 17.05, at 17-17 (3d ed. 2000 &
Supp. 2012) [hereinafter “HELLERSTEIN”] (“A cash discount that the seller gives at the time of
the sale and that is not dependent on time of payment, volume of purchases, or similar factors
almost always is excluded from the sales tax base on the premise that the discount is not part of
the sales price.”); BLACK’S LAW DICTIONARY 532 (9th ed. 2009) (defining “discount” as “[a]
reduction from the full amount or value or something, esp. a price”). TENN. CODE ANN. § 67-6-

3

The effect of redeeming Loyalty Points for discounts on merchandise and services is discussed in Question #3.
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102(81)(B)(i) further provides that a discount includes “coupons that are not reimbursed by a
third party that are allowed by a seller and taken by a purchaser on a sale.”
The Taxpayer here provides its customers with Loyalty Points every six months, based on the
length of time the customer has been enrolled in the Loyalty Program; each month, based on the
[PLAN] the customer is enrolled in; for each additional line added in certain family or business
plans; for completing member profiles and online surveys; for backing up contact and phone
book information with the Taxpayer; and for referring other customers, in addition to a one-time
bonus award for signing up for a [PLAN]. These Loyalty Points cannot be purchased with or
redeemed for cash under any circumstances, and have no value if the customer cancels service
with the Taxpayer. Finally, the Taxpayer is not reimbursed by any third party for the Loyalty
Points.
Under these circumstances, the Loyalty Points are properly considered as in-store coupons. See
generally 2 HELLERSTEIN, ¶¶ 17.05-.06. Coupons are “equivalent to a cash discount given at the
time of sale,” 2 HELLERSTEIN, ¶ 17.06[1], at 17-19, and have no intrinsic value otherwise when
they have no cash value. Consequently, the issuance of Loyalty Points has no bearing on the
sales price of the telecommunications service (i.e., the Wireless Monthly Fee).
2.

Wireless Monthly Fee and Paperless Billing and Online Payment Discounts

With respect to the Wireless Monthly Fee, the sales price is decreased by the discount provided
for enrolling in paperless billing and making online payments.
As explained above, the “sales price” of a service equals the total consideration, less any
discounts allowed by the seller and taken by the purchaser on a sale which are not reimbursed by
a third party. See TENN. CODE ANN. § 67-6-102(81)(A)-(C).
In this case, the Taxpayer reduces the Wireless Monthly Fee by a percentage amount whenever
its customers pay via debit or credit card or enroll in automatic online bill payment with
paperless billing. This decrease is a reduction from the regular price, which is not reimbursed by
a third party,4 and is thus a bona fide cash discount. The sales price of the Wireless Monthly Fee,
for purposes of Tennessee sales and use tax, is therefore the net amount actually paid.
3.

Redemption of Loyalty Points

When Loyalty Points are exchanged for discounted tangible personal property, digital goods, or
taxable services, the sales price equals the net amount of cash and/or other consideration paid for
the item or service. Similarly, when Loyalty Points are exchanged for Phone Acceleration, the
sales price equals the net amount of cash and/or other consideration paid for the phone.
As explained in the response to Question #1, the sales price of tangible personal property or of a
taxable service equals the total consideration, less any discounts allowed by the seller and taken
by the purchaser on a sale which are not reimbursed by a third party. See TENN. CODE ANN. § 676-102(81).
4

See TENN. CODE ANN. § 67-6-102(81)(B)(i).
6

Whenever the Taxpayer’s customers redeem the Loyalty Points for a lower cash price on
services or merchandise, the Loyalty Points act as a discount. Specifically, the Loyalty Points
function as an in-store coupon that is not reimbursed by a third party. This discount is excluded
from the sales price under TENN. CODE ANN. § 67-6-102(81)(B)(i), and the sales price equals the
net amount of cash or other consideration paid by the customer.5
The same analysis applies to the redemption of Loyalty Points in exchange for the acceleration
of the right to buy a discounted phone before the default [NUMBER]-month period expires.
Upon redeeming Loyalty Points for Phone Acceleration, the Taxpayer’s customers immediately
purchase a discounted phone. As is the case with the other Loyalty Point redemptions previously
mentioned, the sales price of the phone will equal the total consideration, less any discounts,
whenever the Taxpayer’s customer redeems Loyalty Points for Phone Acceleration. See TENN.
CODE ANN. § 67-6-102(81).
4.

Use Tax Obligation

When Loyalty Points are exchanged for discounted tangible personal property, the Tennessee use
tax is not imposed on the Taxpayer with respect to such tangible personal property. The
Taxpayer will, however, be responsible for paying the sales tax if it fails to collect and remit the
appropriate amount of sales tax from its customer.
As stated in the response to Question #3, the sales price is established as the total amount of
consideration, less any discounts. See TENN. CODE ANN. § 67-6-102(81). The Taxpayer’s
discounted sales of tangible personal property would not generally implicate the use tax.
In one circumstance, however, the Taxpayer would be responsible for paying the sales tax on its
sale of tangible personal property. Under the Retailers’ Sales Tax Act, “[t]he legal incidence of
the sales tax is upon the seller, not upon the consumer.” Long Equip. Co. v. Keeton, 736 S.W.2d
611, 613 (Tenn. Ct. App. 1987); see also TENN. CODE ANN. §§ 67-6-501 to -502 (2011). The
retailer is permitted to collect the sales tax from the consumer “insofar as it can be done,” TENN.
CODE ANN. § 67-6-502, but the retailer remains ultimately responsible for paying the tax.
In the event that the Taxpayer fails to collect and remit the appropriate amount of sales tax as
determined in accordance with the response to Question #3 from its customer, the Taxpayer
would then be responsible for paying the appropriate amount of sales tax pursuant to TENN.
CODE ANN. § 67-6-501.
5.

Loyalty Points and Nontaxable Goods or Services

The Tennessee sales and use tax is generally not imposed on the redemption of Loyalty Points
for nontaxable goods or services, unless the nontaxable goods or services are bundled with
taxable goods or services.
5

Note that if the Taxpayer simply provides a phone to customers that subscribe to its wireless telecommunications
services, the Taxpayer will only collect sales tax on the sales price of the wireless telecommunications services,
since such price also includes the phone provided with the wireless service.

7

A nontaxable service or item may be subject to taxation when charges for the nontaxable service
or item are included in the sales price of a taxable good or service. Specifically, TENN. CODE
ANN. § 67-6-102(81)(A) provides that the sales price of a good or service equals the “total
amount of consideration . . . for which personal property or services are sold,” with no deduction
for the seller’s costs or charges by the seller for services necessary to complete the sale. Thus, if
taxable goods or services and nontaxable goods or services are sold together for a single charge,
the entire charge is generally subject to taxation. See Tomkats Catering, Inc. v. Johnson, No.
M2000-03107-COA-R3-CV, 2001 WL 1090516, at *2 (Tenn. Ct. App. Sept. 19, 2001).
Consequently, if the Taxpayer’s customer redeems Loyalty Points for a nontaxable good or
service standing alone, the transaction is not subject to sales tax. But if the Taxpayer’s customer
redeems Loyalty Points for a nontaxable good or service in conjunction with taxable goods or
services for a single charge, the entire amount paid, net of any discounts in accordance with the
reasoning set forth in Question #1, will be the “sales price” for purposes of determining the sales
tax due.

R. John Grubb II
Tax Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

November 21, 2012

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