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Last Updated: 11/29/2016

Rewards and Rebates

Rewards

A rewards program is an incentive to encourage customer loyalty. The incentive can include points, checks, discounts, rebates, coupons, or any similar items in return for certain customer behavior.

The facts and circumstances of the specific program determine how sales tax is applied. The retailer’s records must support the tax calculations.

When are rewards considered discounts?

Retailer rewards programs are discounts and not taxable when they:

  • Give a reward for enrolling or buying certain products and services
  • Are refunded for store credit

When a reward is a discount, charge sales tax after the price reduction is made.

A reward is a discount when it:

  • Is not purchased
  • Is not provided in exchange for services
  • Cannot be redeemed for cash
  • Is not reimbursed by a third party

Charge sales tax after the discount is applied in the following rewards programs:

  • Rewards cards – when a retailer offers rewards cards that have a barcode and the customer receives a greater discount the more they use the card.
  • Punch cards – when a retailer offers rewards by running promotional events where a customer earns seller’s cash for spending a certain amount.
  • Seller’s cash – when a retailer offers rewards by running promotional events where a customer earns seller’s cash for spending a certain amount.
  • Store credit card – when a retailer offers an incentive for customers to open a new store credit card or use an existing store card by giving them a percentage discount.

When are rewards subject to sales tax?

Retailer rewards are taxable if they:

  • Require the customer to pay cash (or other consideration) for the reward
  • Require the customer provide services in exchange for the reward
  • Are reimbursed by a third party
  • Can be redeemed for cash

The reward’s value is subject to sales tax when the reward is used to purchase taxable goods and services.

Charge sales tax before the reward is applied in the following rewards programs:

  • Secret Shoppers – a retailer hires individuals who agree to “act” as customers to evaluate services provided by employees. They receive a reward (such as a gift card) in exchange for their service.
  • Credit Card Points – a credit card company or financial institution issues points to its customers to redeem for different types of rewards. These rewards are reimbursed by a third party.
  • Bundled Rewards – when a taxable reward is combined with a nontaxable reward (discount), the whole reward is taxable unless the seller can provide documentation showing otherwise.

Rebates

Rebates can reduce the purchase price or be sent to customers as cash or credit after the sale has taken place.

When rebates are issued in the form of a check, they are treated the same as cash.

When rebates are issued in the form of a voucher to be used on subsequent purchases with the same retailer or store who provided the rebate, the rebate is not treated as cash and reduces the selling price of the subsequent purchase.

< Discounts and Coupons  Taxable Purchases and Use Tax >
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