Were free promotional tobacco products and early-payment cash discounts included in the manufacturer's sales price for Virginia's 2010 tax?

Plain-English summary

Virginia removed tax assessed on free promotional tobacco products and on cash discounts allowed and taken for early payment. For the 2010 period, the distributor calculated tobacco-products tax from the manufacturer's sales price.

The promotional items were supplied at no charge. Because there was no transfer for consideration and therefore no manufacturer's sales price, the Department found those items were not subject to the tax under the rule applied to this audit. Using list price and federal excise tax to create a value for them was improper.

The manufacturer's-sales-price definition and the Department's guidelines also excluded cash discounts that were both allowed and taken. The retailer had reduced the price by a manufacturer's early-payment discount, so Virginia removed that portion of the assessment too.

The ruling expressly warned that rules effective January 1, 2011 calculated tax on moist snuff and loose-leaf tobacco by net weight. Under those later rules, all packages in two-for-one promotions and specified free samples shipped with products for resale were taxable.

What this means for you

• Match a promotion to the law and measurement rule for its specific tax period.
• Under the 2010 price-based rule applied here, a truly free item had no manufacturer's sales price.
• A cash discount reduced the tax base only when it was allowed and actually taken.
• The ruling's favorable 2010 result did not extend unchanged to later net-weight rules for moist snuff and loose-leaf tobacco.

Common questions

Q: Could the auditor assign list price to the free 2010 promotional items?
A: No. The ruling found no sale for consideration and removed that tax.

Q: Did an early-payment discount reduce the taxable price?
A: Yes. The discount was allowed and taken, so it was excluded from the manufacturer's sales price.

Q: Did the same treatment apply after 2010?
A: Not necessarily. The ruling described different net-weight rules effective January 1, 2011 for specified products and promotions.

Citations and references

• Va. Code §§ 58.1-1021.01 and 58.1-1021.03 A.
• Virginia Public Documents 06-31 and 10-276.

Subject

Tax on promotional tobacco products and cash discounts.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-144

Original ruling text

July 22, 2013

Re: § 58.1-1821 Application: Tobacco Products Tax

Dear *:

This is in response to your letter in which you seek correction of an assessment issued to * (the "Taxpayer"), for the period January 2010 through December 2010. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is engaged in the business of selling tobacco products through seven retail locations within the Commonwealth. The Taxpayer was assessed the tobacco products tax on promotional tobacco products and cash discounts. The Taxpayer contests the audit assessment, stating the manufacturer's sales price used to calculate the tobacco products tax does not include promotional items. In addition, the Taxpayer contends that the cash discounts disallowed in the audit are exempt of the tobacco products tax because they refer to payment terms only and are not related to discounts on tobacco products. The Taxpayer states that it relied on the guidelines for the tobacco products tax issued by the Department to properly calculate its tax liability.

DETERMINATION

Pursuant to Va. Code § 58.1-1021.03 A, "[e]very distributor subject to the tax imposed under this article shall file a monthly return no later than the twentieth of each month on a form prescribed by the Department, covering the purchase of tobacco products by such distributor during the preceding month, for which tax is imposed pursuant to subsection A of § 58.1-1021.02, during the preceding month. Each return shall show the quantity and manufacturer's sales price of each tobacco product (i) brought, or caused to be brought, into the Commonwealth for sale. . . ." [Emphasis added.]

Virginia Code § 58.1-1021.01 defines the term "Manufacturer's sales price" as the actual price for which a manufacturer, manufacturer's representative, or any other person sells tobacco products to an unaffiliated distributor." [Emphasis added.]

Public Document (P.D.) 06-31 (1/1/06), effective through December 31, 2010, provides further guidance to taxpayers regarding the tobacco products tax laws. As provided in the guidelines, "Manufacturer's Sales Price" is defined as the "total amount for which tobacco products are sold, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser by the dealer, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever. Manufacturer's sales price does not include any cash discount allowed and taken or finance charges, carrying charges, services charges or interest from credit extended on sales of tobacco products. . . ."

While the term "sale" in not defined in the Tobacco Products Tax sections, Black's Law Dictionary 1364 (Eighth Edition 2004) defines "sale" as "the transfer of property or title for a price."

Keeping the above in mind, I will address the contested issues in the appeal.

Promotional Products

The auditor assessed the tobacco products tax on promotional products provided to the Taxpayer at no charge. Because there was no manufacturer's sales price, the auditor used the list price and the federal excise tax listed on the invoice for each promotional product to calculate the tobacco products tax liability.

As previously stated, the tobacco products tax is levied on the distributor's purchase of tobacco products for sale in the Commonwealth. The distributor calculates the tobacco products tax using the manufacturer's sales price of the tobacco products sold by the manufacturer. In this instance, there is no sale of promotional tobacco products for a consideration. Therefore, I find that the promotional tobacco products are not subject to the tobacco products tax. Accordingly, the tax assessed on the promotional tobacco products will be removed from the audit assessment.

Please note that effective January 1, 2011, the tobacco products tax on moist snuff and loose leaf tobacco is calculated and paid on the net weight listed by the manufacturer on the package or on the manufacturer's invoice. See P.D. 10-276 (12/17/10), which further addresses the law change on moist snuff and loose leaf tobacco products. The guidelines also address the application of the tobacco products tax on two-for-one promotions and free samples of moist snuff and loose leaf tobacco products in the following examples.

Example 7. On a two-for-one promotion, a manufacturer located outside Virginia sells 10 1-ounce cans of moist snuff. The distributor resells the 10 packages to a retail dealer in Virginia for the price of 5 cans. The distributor would pay the tobacco products tax on the 10 1-ounce cans. The same applies on two-for-one promotional offers of loose leaf tobacco products. See Example 14

Example 8. As a promotional offer, a manufacturer located outside of Virginia provides a free sample of a 1-ounce package of snus with the purchase of a 1 ounce can of moist snuff. The distributor resells the can of moist snuff to a retail dealer located in Virginia with the free sample of snus. The distributor would pay the tobacco products tax on both the 1-ounce can of moist snuff and the 1-ounce package of snus. The same applies to free samples of loose leaf tobacco. See Example 15.

Based on the examples above, the Taxpayer would pay the tobacco products tax on free samples shipped with other tobacco products for resale at the Taxpayer's retail store locations. In addition, the Taxpayer would pay the tobacco products tax on two­ - for-one promotional offers of moist snuff and/or loose tobacco products for resale based on the net weight of the packages of tobacco products. For the future, the Taxpayer will be expected to conform to the requirements reflected in P.D. 10-276 with regard to the tobacco products tax on moist snuff and loose leaf products.

Cash Discounts

In this instance, the Taxpayer calculated and paid the tobacco products tax based on the manufacturer's sales price of the tobacco products purchased less the manufacturer's discount allowed and taken for early payment.

Based on Va. Code § 58.1-1021.01 and P.D 06-31, the manufacturer's sales price does not include any cash discount allowed and taken. Therefore, the Taxpayer correctly calculated the tobacco products tax based on the manufacturer's sales price taking into consideration the cash discount taken for early payment. Accordingly, the tax assessed on the disallowed cash discounts will be removed from the audit.

CONCLUSION

The assessment will be revised in accordance with this determination. A revised bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to the address noted on the bill.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5027719712.T