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The New York Tax Appeals Tribunal recently affirmed an administrative law judge (ALJ) ruling that Apple Inc. should have charged sales tax on the full price of computers sold to customers, without a reduction in the sales tax base for the value of free gift cards that were included as part of a sales promotion.1
During 2011 and 2012, Apple offered a Back to School (BTS) promotion to qualified individuals, including faculty, staff, students and parents, on the purchase of qualifying products for educational purposes, such as computers and iPads.2
A customer who purchased a specific electronic Apple device would be eligible for a $50 or $100 Apple gift card for future use, depending on the type of qualifying electronic device purchased.
The issue stemmed from the limitations on Apple’s point-of-sale (POS) system for in-store purchases only. Under audit, the New York State Department of Taxation and Finance did not find any discrepancy in the computation of sales tax for Apple’s online sales during the BTS promotion.3
Due to the constraints of its in-store POS system, Apple’s invoices for BTS sales were ambiguous, making it difficult to distinguish whether the discount should be applied to the qualified product or to the gift card.
Apple’s POS system did not have the capability to process a discount on the value of the gift card. As a result, for each sale of qualified products during the BTS promotion period, the billing included a charge for the full amount of the gift card. The receipts from each transaction reflected a discount to the cost of the qualifying product in the amount of the gift card. The full gift card charge subsequently was added to the transaction. Apple argued that since the discount was applied to the qualifying product, and sales tax does not apply to the sale of gift cards,4
sales tax would only be due on the discounted price of the qualifying product – the full price of the qualifying product minus the amount of the gift card. Apple collected and remitted sales tax on this discounted tax base.
Under audit, the Department argued that the customer purchased the qualifying product at the full price and that the gift card was received for free as part of the promotion. In this instance, the Department argued, when a customer purchases the qualifying product at full price, sales tax should be charged on the full price of the qualifying item. The Department issued a notice of determination against Apple for the difference in tax due during the audit period.
On appeal to the Division of Tax Appeals, the ALJ agreed with the Department, concluding that the terms of the BTS promotion indicated that a purchase of a qualifying device was required in order to receive the gift card for free. The ALJ arrived at this conclusion in part by reasoning that the purchase of the qualifying device and the redemption of the promotional gift card were in fact two separate transactions. Accordingly, the ALJ denied Apple’s petition and sustained the Department’s assessment.
Tax Appeals Tribunal decision
On appeal to the Tax Appeals Tribunal, the issue was whether the BTS promotion required the purchase of a gift card with a discounted qualifying device or whether the gift card was given to the customer with the purchase of a qualifying device at full price. Agreeing with the ALJ, the Tribunal found that Apple did not meet its burden of proof to demonstrate that the gift card was purchased as part of the transaction and that the amount should be excluded from the tax base. Several factors supported the Tribunal’s conclusion. First, if the customer declined the gift card, the customer would be charged the full price of the qualifying electronic device and sales tax would be charged on the non-discounted sales amount. Second, Apple’s POS invoices did not clearly indicate whether the promotional discount was applied against the qualifying product or the gift card itself. Finally, the terms of the promotion required the customer to return the gift card if the qualifying product was returned for a full refund. Finding that the terms and conditions of the BTS promotion required the purchase of a qualifying device in order to receive a free gift card, the Tribunal determined that sales tax should be imposed on the full price of the qualifying device. For these reasons, the Tribunal sustained the ALJ’s decision.
While the facts and circumstances of this case are certainly unique to Apple and the BTS promotion at issue, it is important to consider the formalistic application of the terms and facts of the underlying purchase transactions in determining the applicable sales tax base for tax collection and reporting purposes. In this case, ambiguity in the terms and application of the BTS promotion combined with systemic deficiencies in the POS operating systems hindered Apple’s ability to reconcile promotional gift card discounts to the sales tax base. Ultimately these limitations affected the ability for Apple to consistently charge sales tax to customers. Even in circumstances where invoices properly itemize and order items, inherent processing limitations due to POS systems or similar logistical constraints may still lead to additional sales tax exposure.
Finally, this case serves as a reminder that New York tax law presumes all sales of tangible personal property are subject to sales tax, and places the burden of proof upon the vendor or the customer to show the contrary.5
The facts of the case created an uphill battle for Apple to prove its position by “clear and convincing evidence.” More broadly, these types of scenarios often create an extraordinary burden for taxpayers defending audit assessments made by the Department, reinforcing the importance of consistency, supporting documentation and technical expertise.
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