When a direct-selling company runs a party plan with hostess discounts and advisor award certificates, is Tennessee sales tax charged on the full price or only on the discounted price actually paid?

Plain-English summary

A direct-selling company (a "party plan" / multi-level marketing business) sells consumer products to independent Advisors at wholesale; the Advisors then resell at retail, often at in-home parties hosted by a Hostess. Under a special agreement with the Department, the company itself pre-collects and remits the Tennessee sales tax on the Advisors' anticipated retail sales, so the Advisors don't have to register. The company asked how to calculate tax in two discount situations.

1. Hostess purchases made with earned discounts. A Hostess earns various discounts (a percentage of party sales, special hostess pricing, etc.) toward her own purchases. The Department ruled that sales tax is computed on the price the Hostess actually pays — the retail price minus the discounts. Tennessee's definition of "sales price" (§ 67-6-102(82)(A)) starts from total consideration but excludes "discounts… that are not reimbursed by a third party" (§ 67-6-102(82)(B)(i)), and Rule 12 confirms bona fide cash discounts come out of the selling price.

The one exception: the plan lets a Hostess pay an extra dollar amount to receive an additional percentage discount, which she must use immediately on purchases at that same party. That extra payment is part of the taxable sales price of the merchandise she buys with it. The Department contrasted this with Barnes & Noble Superstores, Inc. v. Huddleston, where selling a discount-membership card was not taxable because it conveyed only an intangible right to a possible future discount, and the buyer wasn't obligated to buy anything. Here, by contrast, the extra payment is useless unless tied to an immediate purchase, so it's really part of the consideration for that purchase — and therefore taxable.

2. Advisor purchases of samples with an award certificate. Advisors who hit sales or recruiting goals earn an "award product certificate" redeemable on sample purchases. The Department ruled the certificate is a discount under § 67-6-102(82)(B)(i), just like the Hostess discounts. So tax on the Advisor's sample purchase is based on the wholesale price minus the certificate's value — the net the Advisor actually pays.

What this means for you

Direct-selling, party-plan, and MLM businesses

The line the Department draws is between a discount and a charge for the right to a discount. A discount the customer simply earns or is given reduces the taxable price. But when you charge a fee that the customer can only realize by buying something right then, that fee is folded back into the taxable sales price. If you sell a stand-alone discount card or membership that the customer is free to never use, that's a different (non-taxable) transaction under Barnes & Noble. Structure and document the two differently.

Accountants and tax professionals

The controlling rule is the third-party-reimbursement test in § 67-6-102(82)(B)(i): a seller-granted discount not reimbursed by anyone else reduces the sales price; a manufacturer/third-party-reimbursed coupon does not. The award-certificate holding extends the same treatment to loyalty/incentive credits issued by the seller itself. The Barnes & Noble "true object / intangible future right" distinction is the key authority for separating a taxable immediate-use discount fee from a non-taxable discount-card sale.

Common questions

Q: Is sales tax charged on the full retail price or the discounted price the customer pays?
A: On the discounted price actually paid. Seller-granted discounts that aren't reimbursed by a third party are excluded from the taxable sales price.

Q: Why was the extra fee for "an additional discount" taxable when the discounts themselves weren't?
A: Because the Hostess had to use that discount immediately on a concurrent purchase. The fee is really part of the consideration for the merchandise she buys, unlike a stand-alone discount card that only conveys an intangible right to a possible future discount.

Q: How is an Advisor's award certificate treated?
A: As a discount. Tax on the sample purchase is computed on the wholesale price minus the certificate's value.

Q: Can another business rely on this revenue ruling?
A: No — and even less so than a letter ruling. Tennessee revenue rulings are advisory only and are not binding on the Department even as to the taxpayer who requested them. This summary is informational only, not legal or tax advice.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-202(a) (sales tax on the sales price of tangible personal property sold at retail)
• § 67-6-102(82)(A) (definition of "sales price"); § 67-6-102(82)(B)(i) (discounts not reimbursed by a third party excluded from sales price)
• § 67-6-102(81)(A) (definition of "sale"); § 67-6-102(79) (definition of "retail sale"); § 67-6-102(78) (sales for resale)
• § 67-6-102(92)(A) (definition of "tangible personal property")
• § 67-6-101 et seq. (Retailers' Sales Tax Act)

Rule and case law:

• Tenn. Comp. R. & Regs. 1320-5-1-.12 (2008) ("Rule 12" — selling price excludes bona fide cash discounts actually taken); Tenn. Comp. R. & Regs. 1320-5-1-.68(2) (2008) ("Rule 68" — resale must be supported by resale certificates)
• Barnes & Noble Superstores, Inc. v. Huddleston, No. 01A01-9604-CH-00149, 1996 WL 596955 (Tenn. Ct. App. Oct. 18, 1996) (sale of a discount-membership card conveys an intangible right to a future discount and is not 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/11-18.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
REVENUE RULING 11-18

WARNING
Revenue rulings are not binding on the Department. This presentation of the ruling in a
redacted form is information only. Rulings are made in response to particular facts
presented and are not intended necessarily as statements of Departmental policy.

SUBJECT
The application of the Tennessee sales and use tax to sales by a multi-level marketing company.
SCOPE
Revenue Rulings are statements regarding the substantive application of law and statements of
procedure that affect the rights and duties of taxpayers and other members of the public. Revenue
Rulings are advisory in nature and are not binding on the Department.
FACTS
The Taxpayer is a direct selling company that is registered to collect and remit sales tax in
Tennessee. As a direct selling company, the Taxpayer has entered into an agreement with the
Tennessee Department of Revenue to collect and remit sales tax to the state by the following
method. The Taxpayer sells consumer products to independent commissioned business owners
(the “Advisors”), who are not registered to collect and remit sales tax in Tennessee. The
Advisors purchase the products from the Taxpayer at the wholesale price of the products. At the
time of this transaction, the Taxpayer collects sales tax from the Advisors based on the
anticipated sales price to the consumer/end-user (i.e., the suggested retail selling price plus any
other taxable charges, such as shipping and handling) of its products, which it remits to the state
on behalf of the Advisors.
The Advisors generally sell the products using the “party plan” under which the Advisor holds a
party at the home of an individual (the “Hostess”). The Hostess invites individuals to her house
so that the Advisors can show the invited guests the Taxpayer’s products. The Advisors sell the
products to the guests at the suggested retail price plus sales tax. An Advisor’s profit is the
difference between her cost (i.e., the wholesale price of the products plus shipping and handling
charges) and the retail price of the products.
Hostesses are given the following incentives to hold a party:
•

A discount equal to [PERCENTAGE] of the sales at the party is usable by the Hostess
toward her purchases made at that party.

•

If the party generates a certain volume of sales and a certain number of orders from the
guests, the Hostess may pay [DOLLAR AMOUNT] and receive an additional
[PERCENTAGE] discount on her own purchases made at that party.

•

The Hostess is allowed to purchase any [NUMBER] items at a special hostess price
ranging from [DOLLAR AMOUNT] to [DOLLAR AMOUNT] each.

•

The Hostess is allowed to purchase [NUMBER] of items at [PERCENTAGE] off the
suggested retail price.

•

The Hostess is allowed to purchase an additional item at [PERCENTAGE] off the
suggested retail price if purchased at a show that was booked by an individual attending
her show.

The Taxpayer also has an awards program for its Advisors whereby an Advisor who meets
certain sales or recruiting goals will receive an “award product certificate” of a certain dollar
value. This certificate can be redeemed by the Advisor on the Advisor’s purchase of sample
products.
QUESTIONS
1.

When a Hostess purchases the Taxpayer’s products from the Advisor using the discounts
she has earned, how is the Tennessee sales tax computed?

2.

When the Taxpayer sells sample products to an Advisor who uses an award product
certificate, how is the Tennessee sales tax computed?
RULINGS

1.

The Tennessee sales tax is based on the price paid by the Hostess, i.e., the retail price
minus any discounts. However, the [DOLLAR AMOUNT] paid by the Hostess for an
additional twenty percent discount is subject to the sales tax as part of the sales price of the
merchandise that she purchases using the discount.

2.

The Tennessee sales tax is based on the price paid by the Advisor, i.e., the wholesale price
minus the value of the certificate.
ANALYSIS

Retail sales of tangible personal property and specifically enumerated services in Tennessee are
subject to sales and use tax under TENN. CODE ANN. § 67-6-101 et seq. Specifically, TENN.
CODE ANN. § 67-6-202(a) (Supp. 2010) imposes the sales tax on the sales price of each article of
tangible personal property that is sold at retail in Tennessee. TENN. CODE ANN. § 67-6-102(79)
(Supp. 2010) defines a “retail sale” as any “sale, lease, or rental for any purpose other than for
resale, sublease or subrent.” The term “sale” is defined under the Tennessee sales and use tax

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laws in part as “any transfer of title or possession, or both, exchange, barter, lease or rental,
conditional or otherwise, in any manner or by any means whatsoever of tangible personal
property for a consideration.”1 TENN. CODE ANN. § 67-6-102(81)(A).2
“Sales price” is defined in TENN. CODE ANN. § 67-6-102(82)(A) as “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.”
However, TENN. CODE ANN. § 67-6-102(82)(B)(i) excludes from the sales price “[d]iscounts,
including cash, term, or coupons that are not reimbursed by a third party that are allowed by a
seller and taken by a purchaser on a sale.”
1.

Sales tax on discounted purchases by a Hostess

The Tennessee sales tax owed on the discounted purchases by a Hostess is based on the price
paid by the Hostess, i.e., the retail price minus any discounts.
An Advisor, when selling products to a consumer, sells the products at the retail price. As an
incentive for hosting a party to showcase the Taxpayer’s products, a Hostess can earn discounts
off her own purchase of the products. The Hostess is charged the retail price minus the
applicable discount that she receives. As noted above, TENN. CODE ANN. § 67-6-202(a) imposes
the sales tax on the “sales price” of each article of tangible personal property that is sold at retail
in Tennessee. “Sales price” is defined in TENN. CODE ANN. § 67-6-102(82)(A) as “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.” However, TENN. CODE ANN. § 67-6-102(82)(B)(i) excludes from the sales price
“discounts, including cash, term, or coupons that are not reimbursed by a third party that are
allowed by a seller and taken by a purchaser on a sale.” TENN. COMP. R. & REGS. 1320-5-1-.12
(2008) (“Rule 12”), further clarifying this principle, provides in pertinent part that “[t]he selling
price of an article of tangible personal property … does not include the amount of bona fide cash
discounts actually taken by the buyer.” Therefore, the sales price of an item that the Hostess
purchases at a discount is the retail price minus the discount.
However, in addition to the given discounts, the Hostess also has an option to pay [DOLLAR
AMOUNT] to receive an additional [PERCENTAGE] discount off her purchases made at the
party she is hosting. Because the Hostess must use the discount immediately, the [DOLLAR
AMOUNT] the Hostess pays for the additional discount is subject to the sales tax as part of the
total consideration for the merchandise she purchases with the discount.

1

TENN. CODE ANN. § 67-6-102(92)(A) defines “tangible personal property” as “personal property that can be seen,
weighed, measured, felt, or touched.”

2

TENN. CODE ANN. § 67-6-102(78) mandates that all sales for resale be in strict compliance with the rules and
regulations. TENN. COMP. R. & REGS. 1320-5-1-.68(2) (2008) (“Rule 68”) provides that “[a]ll sales for resale which
are not supported by resale certificates properly executed shall be deemed retail sales, and the dealer held liable for
the tax.”

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The purpose of the [DOLLAR AMOUNT] payment is to bestow on the Hostess an immediate
benefit that must be applied to her concurrent purchases. The [DOLLAR AMOUNT] payment
can be contrasted with the purchase of a discount membership card in Barnes & Noble
Superstores, Inc. v. Huddleston, No. 01A01-9604-CH-001491996, 1996 WL 596955 (Tenn. Ct.
App. Oct. 18, 1996). In Barnes & Noble, the court held that the taxpayer’s sale of cards that
entitled its customers to a discount on subsequent purchases of merchandise was not subject to
the Tennessee sales tax. The court rejected the state’s argument that the purchase of a discount
card was the prepayment of merchandise for the sole reason that a purchaser of the card was not
obligated to purchase any merchandise. Id at 2. The court stated that the “true object” of the
discount card transaction was to bestow upon a customer the intangible right to receive a
discount on a possible future purchase. Id.
Unlike the intangible right to receive a discount on future purchases that the cardholders in
Barnes & Noble received with the purchase of a discount card, the additional [PERCENTAGE
OF] discount that a Hostess receives upon payment of [DOLLAR AMOUNT] must be used
immediately. If the Hostess pays the [DOLLAR AMOUNT] but does not make an immediate
purchase, the discount is lost. Thus, unlike in Barnes & Noble, no intangible right to a future
discount is conveyed to the Hostess. Additionally, it is reasonable to assume that a Hostess
would not pay the [DOLLAR AMOUNT] without making an immediate purchase. The
[DOLLAR AMOUNT] payment is therefore made in conjunction with an actual, immediate
sales transaction and thus becomes part of the consideration paid in that transaction. Because the
[DOLLAR AMOUNT] payment is part of the sales transaction for purchases that the Hostess
makes for which she will receive the additional [PERCENTAGE] discount, it is therefore part of
the total consideration for such purchases. Accordingly, the [DOLLAR AMOUNT] is part of the
sales price of the purchased merchandise and as such is subject to the sales and use tax.3
2.

Sales tax on discounted purchases of samples by an Advisor

The Tennessee sales tax owed on the discounted purchases of samples by an Advisor is based on
the amount paid by the Advisor, i.e., the original price minus the value of the award product
certificate.
The award product certificate awarded to an Advisor who meets certain goals qualifies as a
discount under TENN. CODE ANN. § 67-6-102(82)(B)(i) in the same manner as the discounts
discussed in Analysis #1. Accordingly, the sales tax on purchases made by an Advisor
purchasing with an award product certificate would be computed based on the total amount paid
by the Advisor, i.e., the original price minus the value of the certificate. TENN. CODE ANN. § 676-202(a).

3

Note that under the facts provided, the Taxpayer indicates that it has entered into a special written agreement with
the Department whereby it collects and remits the sales tax on behalf of the Advisors. Pursuant to this agreement,
the Advisors do not register to collect sales tax in Tennessee; rather, the Taxpayer essentially pre-collects the sales
tax on the sales transactions. In the absence of such an agreement, the Advisors making sales in Tennessee would
be required to collect and remit the applicable tax on sales to consumers in this state.

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Elizabeth Henderson
Tax Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

6/9/11

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