Was merchandise taxable when customers redeemed ten savings stamps for a free bottle of food supplements, and what amount formed the tax base?

Plain-English summary

The company gave a savings stamp whenever a customer bought a bottle of Double X food supplements. Ten stamps could be exchanged for a bottle described as free.

The Comptroller classified the savings stamps as trading stamps. Exchanging merchandise for the stamps was a taxable retail sale for consideration, and the tax base was the product's suggested retail selling price.

Common questions

Was the redeemed bottle tax-free because the customer paid no cash at redemption? No.

How did the Comptroller classify the program? As trading-stamp redemption rather than a free-product transaction.

What amount was taxable? The product's suggested retail selling price.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8608L0751A14

Original ruling text

August 14, 1986

Dear ***:

Thank you for your recent letter which is restated with the response
below.

CORP ABC is a manufacturer and wholesaler of personal and homecare
products.

These products are sold to independent distributors who retail them in
your State.

CORP ABC has an agreement with your State to collect and remit the
applicable sales tax on these sales on behalf of the independent distributors.

In order to promote our food supplement line, CORP ABC has instituted a
"stamp redemption program". Under this program, each time a customer
purchases a bottle of Double X food supplements (vitamins and minerals),
the customer receives a savings stamp. Upon accumulation of ten
stamps, the customer can then redeem these for a free bottle of Double
X food supplements.

In researching the sales tax law in your State, we were unable to
determine if sales tax is due on the redemption transaction.

We believe this transaction could be classified as one of the following:

1) a tie in sale (eleven bottles for the price of ten);
2) a manufacturers coupon redemption; or
3) a trading stamp redemption.

Based on the above information, we request a ruling which will set
forth the proper sales tax application.

Response:
The stamps in your redemption program will be treated as trading
stamps. The redemption of trading stamps by exchanging merchandise for
them is a sale at retail of merchandise for, a consideration and is
taxable based on your suggested retail selling price for the product.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call us at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write us at the Tax Administration Division.

Sincerely,

Tax Administration Division