Easy Tax Question

[smrst30]

What is the name of your state (only U.S. law)? Michigan

I just had a quick question concerning sales tax. I used a coupon for a free product, but I was charged sales tax on the initial price of the merchandise. Can a company do that and is it perfectly legal? Thanks in advance.

[LdiJ]

Originally Posted by smrst30

What is the name of your state (only U.S. law)? Michigan

I just had a quick question concerning sales tax. I used a coupon for a free product, but I was charged sales tax on the initial price of the merchandise. Can a company do that and is it perfectly legal? Thanks in advance.

I am not familiar with MI law, but that would be legal in my state, so I assume its likely to be legal in others as well.

[FlyingRon]

That's pretty much the way it works everywhere. You pay the sales tax on the actual value of the item. The coupon is a little instant rebate to you.

[davew128]

Originally Posted by FlyingRon

That's pretty much the way it works everywhere. You pay the sales tax on the actual value of the item. The coupon is a little instant rebate to you.

I'm going to disagree in general. This is very state specific and in MA for instance, there would be no sales tax. It may very be that in MI sales tax is assessed on transaction value, but certainly in other states it is assessed on the transaction amount.

Example under MA law: You buy a vehicle and have a trade-in vehicle credit. The sales tax on the vehicle is on the amount paid or financed, not the negotiated price of the vehicle.

I would contrast that with rebates or core exchanges on auto parts which are NOT considered in sales tax.

[TinkerBelleLuvr]

http://www.legislature.mi.gov/(S(0feb4f55pxnv4a45f2inhv45))/mileg.aspx?page=getObject&objectName=mcl-205-51

(vii) Except as otherwise provided in subparagraph (x), consideration received by the seller from third parties if all of the following conditions are met:

(A) The seller actually receives consideration from a party other than the purchaser and the consideration is directly related to a price reduction or discount on the sale.

(B) The seller has an obligation to pass the price reduction or discount through to the purchaser.

(C) The amount of the consideration attributable to the sale is fixed and determinable by the seller at the time of the sale of the item to the purchaser.

(D) One of the following criteria is met:

(I) The purchaser presents a coupon, certificate, or other documentation to the seller to claim a price reduction or discount where the coupon, certificate, or documentation is authorized, distributed, or granted by a third party with the understanding that the third party will reimburse any seller to whom the coupon, certificate, or documentation is presented.

From what I can gather, no tax should have been charged.

[LdiJ]

Originally Posted by TinkerBelleLuvr

http://www.legislature.mi.gov/(S(0feb4f55pxnv4a45f2inhv45))/mileg.aspx?page=getObject&objectName=mcl-205-51

From what I can gather, no tax should have been charged.

I see what you mean it if was a third party coupon.

Let me explain more thoroughly why it could have been "legal" in my state...because you may want to research it from a different perspective.

In my state, the freebie could be considered to be promotional material used by the company, and therefore use tax could be charged for the item.

It is not illegal to pass on that cost to the customer.

[davew128]

Originally Posted by LdiJ

I see what you mean it if was a third party coupon.

Let me explain more thoroughly why it could have been "legal" in my state...because you may want to research it from a different perspective.

In my state, the freebie could be considered to be promotional material used by the company, and therefore use tax could be charged for the item.

It is not illegal to pass on that cost to the customer.

However use tax in every state I've ever seen would be the same as the sales tax in terms of the value subject to the tax, in this case zero. Use tax only applies to an item because the transaction that changed ownership of the item or service did not occur within the taxing jurisdiction of the sales tax. If the transaction was EXEMPT from sales tax in the jurisdiction, it will similarly be exempt from use tax.

[LdiJ]

Originally Posted by davew128

However use tax in every state I've ever seen would be the same as the sales tax in terms of the value subject to the tax, in this case zero. Use tax only applies to an item because the transaction that changed ownership of the item or service did not occur within the taxing jurisdiction of the sales tax. If the transaction was EXEMPT from sales tax in the jurisdiction, it will similarly be exempt from use tax.

True, but in my state it would not be exempt from use tax. Tax would have to be paid on the amount that it should have been sold for.

Example: Buy one for 19.99, get one free. You are going to pay sales tax on the one you bought for 19.99 and use tax will be due on the freebie in the same amount.

Example: Get two for 19.99. You pay sales tax on the 19.99 and that's it.

Its all in how its promoted...and its really annoying.

[davew128]

Totally whacked. The point of the use tax is collect on transactions that escape the sales tax because of nexus issues. In your state with those examples, were the statutes written in that manner or are those revenue authority opinions?

[LdiJ]

Originally Posted by davew128

Totally whacked. The point of the use tax is collect on transactions that escape the sales tax because of nexus issues. In your state with those examples, were the statutes written in that manner or are those revenue authority opinions?

To tell you the truth, I don't know. Its been that way for so long that its just something that everyone knows.

However, I will give you an example of one audit I went through.

Distribution company. Selling decorative hardware. They gave free brochures to their customers to use in promoting the product. They considered the brochures to be part of COG and therefore did not pay sales tax on them.

They were audited and had to pay use tax. However, they were specifically told in the audit that if (for example) they promoted it as XX number of brochures were included for every XX amount of purchase, that then the brochures would be free from use tax.

Basically, if its included in the price, its free from use tax, if its given as a freebie, its subject to use tax.