Loyalty vouchers, coupons and reward cards have been used by retailers for years, but today’s programs are complex and evolving. State tax laws, however, have not been as quick to change.
“State tax laws are not uniform, so in addition to applying old precedent, taxpayers have to contend with applying non-uniform laws and interpretative guidance to their facts,” said Mary Benton, partner in Alston & Bird’s State and Local Tax Practice. “This can result in different conclusions across states, even in states with identical or substantially similar statutes.”
Matt Hedstrom, an attorney in the firm’s State and Local Tax Practice, added: “A ruling related to the taxation of one program may not necessarily be relevant to how the redemption of loyalty rewards pursuant to another program should be treated. What is entirely clear is that the states differ in their approaches. Thus, there is no ‘one size fits all’ answer for taxpayers. This can leave taxpayers open to certain risks. Taxpayers have to contend with applying non-uniform laws and interpretative guidance to their facts, which can result in different conclusions across states, even in states with identical or substantially similar statutes. If taxpayers implement a multistate standard, they open themselves to inevitable risk.”
“However, even when a state has specific guidance, it can be difficult to apply to any one company’s reward program,” said Benton. “Minnesota’s policy presumes that the full redemption value is taxable consideration if the redeemed points that have been earned in different ways are commingled in a customer’s account.”
According to Hedstrom, states often analyze these types of programs under the “coupon framework,” since that framework is the most analogous. But applying that framework to other fact patterns, especially in the rewards context, leads to inconsistent and often unsatisfying results.
“We saw this with states attempting to analyze ‘daily deal’ discount vouchers. Indeed, retrofitting older coupon-related guidance has led to litigation,” said Hedstrom. “Other states have analogized/compared loyalty programs to: trading stamps, gift cards, rebates, two-for-one arrangements and/or taxable scrip, to name a few. The differential treatment further underscores the difficulty of complying, especially on a multistate basis.”
“It is critical that taxpayers are made aware of the risks,” Hedstrom continued. “Specifically, a taxpayer that offers a rewards program may decide not to collect any tax when loyalty rewards are redeemed on the basis that the redemption of the rewards operates akin to a retailer’s coupon and is not taxable.”
“We recommend that our clients be proactive, first by understanding the specifics of their company’s loyalty program(s),” explained Benton. Taxpayers should keep in mind that each program might be different. To this end, it is important that the tax department and the operations folks have an ongoing dialogue to fully understand what the parameters of the program are and how certain changes or variations could impact the tax considerations.”
Benton suggests taxpayers consider the extent to which its systems might allow a state-by-state approach, adding that “often this is not feasible, but it may be the only way to fully insulate a company from risk.”