TWIST - This Week in State Tax

Welcome to TWIST for the week of May 2nd, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

Recently, the Minnesota Tax Court held that a taxpayer was not entitled to a refund of sales tax related to a credit card surcharge. The taxpayer at issue charged customers a four percent surcharge when they opted to pay for vacation rentals using a credit card. The issue before the court was whether the surcharge was part of the sales price so that it was subject to tax. The court concluded that the surcharge represented an expense of the seller’s and was part of the sales price.

In New York, the Supreme Court Appellate Division affirmed a Tax Tribunal ruling, which held that a taxpayer failed to collect the correct amount of sales tax on transactions involving the provision of free gift cards to customers that purchased qualifying items of tangible personal property. The taxpayer had argued that the gift cards were purchased and therefore it properly reduced the amount of sales tax collected on the qualifying purchases of property. The court, however, disagreed and declined to disturb the Tribunal’s conclusion that the gift cards were given away for free to qualifying customers.

Finally, legislation is pending in Oklahoma that would revise the definition of a marketplace facilitator to capture those marketplaces that facilitate sales of other than tangible personal property. Furthermore, in addition to the sales and use tax, marketplace facilitators electing to collect sales tax in lieu of complying with use tax reporting requirements would be required to collect other taxes administered by the Tax Commission that are levied by local jurisdictions. These changes would be effective January 1, 2023. 

Thank you for listening to TWIST and stay well!

Minnesota: Credit Card Surcharge Included in Sales Tax Base

Download PDF

Recently, the Minnesota Tax Court addressed whether a taxpayer was entitled to a refund of sales tax related to a credit card surcharge. The taxpayer at issue charged customers a four percent surcharge when they opted to pay for vacation rentals using a credit card.  The issue before the court was whether the “sales price” of the vacation rentals subject to sales tax included the surcharge. Under Minnesota law, the definition of “sales price” is broad and captures the total amount of consideration, including cash, credit, personal property, and services, for which personal property or services are sold, without any deduction for the seller’s cost of the property sold or any other expenses of the seller. Certain items are excluded from the “sales price,” including interest, financing, and carrying charges from credit extended on the sale of personal property or services, if the amount is separately stated on the invoice. It was undisputed that the credit card surcharge was separately stated. The taxpayer argued that it was excluded from the sales price as a finance or carrying fee. The Department of Revenue, on the other hand, argued that the fee was a cost that the taxpayer incurred, making it part of the sales price.  The court determined that the dispute centered around whether the credit card surcharge was “from credit extended on the sale of personal property or services.”  In the court’s view, this would occur only in a situation in which the seller financed the sale of property. In the instant case, the taxpayer was attempting to pass on to customers an expense for which he was ordinarily responsible for, and he was not extending the credit. Accordingly, the court ruled in the Department’s favor. Please contact Alana Purvis with questions on Martin v. Commissioner of Revenue. 

New York: Gift Card Promotion Resulted in Under Collected Sales Taxes

Download PDF

A New York court recently held that a taxpayer erred when it failed to collect the proper amount of sales tax on transactions involving the provision of free gift cards to customers. For the 2011 and 2012 tax years, the taxpayer offered back-to-school promotions in which students and educators could purchase qualifying items and receive a $100 or $50 gift card at no extra charge. At the time of sale, the taxpayer accounted for the gift card differently depending on whether the sale was completed online or at one of its retail stores. When a qualifying purchase was made in a retail store, the gift card’s value was listed as a separate charge on the customer’s receipt, but the card’s value was also deducted as a discount from the total amount due from the customer. For example, a purchase of a laptop for $1000 would list the laptop and a $100 gift card as separate line items. In addition, a separate $100 discount for the gift card would reduce the total amount due from the customer to $1000. The taxpayer took the position that the discount reduced the amount charged for the laptop rather than the gift card and collected tax on only $900.  Following an audit, the Department of Taxation and Finance determined that the taxpayer had given the gift cards away for free, and that sales tax should have been collected on the full, non-discounted value of the purchased items. An Administrative Law Judge and the Tax Appeals Tribunal both affirmed the assessment. The taxpayer then appealed to the New York Supreme Court, Appellate Division.

On appeal, the taxpayer argued that customers had purchased the gift cards rather than received them for free as part of the promotion. In the taxpayer’s view, if the gift card was purchased, then it properly discounted the sales price of the qualifying item purchased. The court disagreed and upheld the Tribunal’s findings, noting that the terms and conditions of the promotion, as well as the taxpayer’s advertising, indicated that the gift cards were given away for free. Further, the taxpayer’s testimony reflected that the placement of the two charges for a gift card on a customer’s receipt – one for the amount of the gift card, and the other for the discount removing that same amount – was due to the fact that the retail store point-of-sale systems could not issue a gift card for free. Finally, it was determined that the gift cards would not be subject to double taxation because sales tax would only be collected on the gift cards’ value when they were redeemed for a later purchase. The court affirmed the Department’s sales tax assessments. Please contact Judy Cheng with questions on Matter of Apple v. Tax Appeals Tribunal.

Oklahoma: Pending Legislation Would Expand Marketplace Facilitator Law

Download PDF

Under Oklahoma law, a marketplace facilitator may elect to collect and remit Oklahoma sales tax on sales to in-state customers. If no election is made, the marketplace facilitator is deemed to have elected to comply with the state’s use tax notice and reporting requirements. “Marketplace facilitator” means a person that facilitates the sale at retail of tangible personal property. A person facilitates a sale at retail if the person or an affiliated person: (a) lists or advertises tangible personal property for sale at retail in any forum, and (b) either directly or indirectly through agreements or arrangements with third parties, collects the payment from the purchaser and transmits the payment to the person selling the property.  Oklahoma Senate Bill 1339 would revise the definition of a marketplace facilitator to capture those marketplaces that facilitate sales of other than tangible personal property. Specifically, the definition of a marketplace facilitator would be revised to capture a person that facilitated a seller’s products. Products would be defined as sales of tangible personal property, taxable services, and other taxable transactions. Furthermore, in addition to the sales and use tax, electing marketplace facilitators would be required to collect other taxes administered by the Tax Commission that are levied by local jurisdictions, such as county and municipal sales taxes and lodging taxes. These changes would be effective January 1, 2023.  The bill is currently back in the Senate to approve House amendments. Please stay tuned to TWIST for additional marketplace facilitator updates.