Tax Relief Blog
Payments made by retailer in connection with sales promotion weren’t taxable – PLR 200816027
The IRS has privately ruled that payments made by a retailer in connection with a sales promotion were nontaxable purchase price adjustments and they weren’t subject to reporting or withholding.
Facts. Taxpayer, which owns retail stores, advertised Promotion on Date 1. Under its terms and conditions, customers would be entitled to a payment of Amount if:
- they purchased qualifying merchandise from Taxpayer during the period beginning Date 1 and ending Date 2,
- they took delivery of the merchandise on or before Date 3,
- Event occurred, and
- they submitted claims for the payment on or before Date 4.
Amount could not be greater than the price that the customers paid to purchase the qualifying merchandise.
There was no fee to participate in Promotion. The prices charged by Taxpayer for all items of qualifying merchandise sold during the promotional period were Taxpayer’s customary retail prices, which were subject to any generally applicable coupons, discounts, or special pricing arrangements. Taxpayer did not specially increase or decrease the prices of any items of qualifying merchandise for the promotional period.
On Date 5, Event occurred, and customers who satisfied Promotion’s terms and conditions became entitled to a payment of Amount.
Payments are nontaxable. Subject to exceptions, gross income includes all income from whatever source derived. (Code Sec. 61) The concept of gross income encompasses accessions to wealth, clearly realized, over which taxpayers have complete dominion.
Purchase price adjustments are one exception to the broad definition of gross income. Generally, when a payment is made by a seller to a customer as an inducement to purchase property, the payment does not constitute income but instead is an adjustment to the cost or purchase price of acquiring the property. (Rev Rul 76-96, 1976-1 CB 23) The payment is, in effect, a means by which the buyer and seller reach an agreed upon price.
The IRS noted that Promotion was intended to induce customers to purchase qualifying merchandise during the period beginning Date 1 and ending Date 2. Taxpayer allowed only the customers who purchased qualifying merchandise and satisfied Promotion’s terms and conditions to receive a payment of the Amount. The Amount could not be greater than the price that the customers paid to purchase the qualifying merchandise. Accordingly, IRS concluded that each payment represented a reduction in the purchase price that the customer paid for the qualifying merchandise with respect to which the payment was made, and was not includible in the recipient’s gross income.
No reporting or withholding. Code Sec. 6041(a) provides generally that all persons engaged in a trade or business that pay another person $600 or more in any tax year of fixed or determinable income in the course of that trade or business must file an information return setting forth the amount of the payment and the recipient of the payment.
A payor is generally not required to make a return under Code Sec. 6041 for payments that are not includible in the recipient’s income, and a payor is not required to make a return if the payor does not have a basis to determine the amount of a payment that is required to be included in the recipient’s gross income.
Thus, IRS concluded that Taxpayer didn’t have a reporting requirement under Code Sec. 6041 as to the recipients for the Promotion payments made by it.
For like reasons, IRS also concluded that Taxpayer did not have any withholding obligation under Code Sec. 1441(a), Code Sec. 1442(a) or Code Sec. 3406(a) with respect to the payments made in connection with Promotion.
