Sales and Use Tax Issues Relating to Loyalty and Rewards Programs

According to a recent article, accounting for loyalty programs and retail programs can be a complex process, that raise a variety of questions on taxable loyalty points, rewards and overall accounting treatment.

In general, "retailers with customer loyalty and rewards programs, including coupons or discounts and points, rewards, or bonus dollars, should be aware that they may be required to collect sales tax on the non-discounted price in some circumstances." or, ensuring the loyalty and rewards programs are in fact rewarding for everyone. 

It is noted that as the loyalty rewards program develops, so do the loyalty tax ramifications, also known as tax treatment loyalty programs. "While one type of reward may be subject to tax, another may be exempt. Understanding the business arrangements on a current basis will help a tax department stay abreast of potential changes needed in its tax reporting." 

Retails and ecommerce businesses need to care about this risk of noncompliance because it runs the risk of an audit, penalties, and lawsuits by consumers where the state has over-collected. 

Overall accounting treatment for reward points have been subject to controversy and uncertainty due to the financial accounting treatment which may result in recognition of a liability. Tax rules allow for a current deduction in more limited situations.

When addressing customer loyalty program tax treatment, any type of reward will have a different tax treatment. For example, “in Washington, generally the sales price includes rewards for completing retailer surveys, rewards purchased for cash and rewards received for purchases using a co-branded credit card, for which the bank reimburses the retailer.” 

A successful rewards program will maximize redemption rate and minimize liability. 

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