United States: IRS Determines ‘Hybrid Coupons' Are Not Premium Coupons

The IRS has determined in Generic Legal Advice Memoranda (GLAM 2017-002) that a taxpayer cannot deduct from sales the amount of merchandise used for redemption during the year, plus future redemptions under the Treas. Reg. Sec. 1.451-4 methodology.

The GLAM centered on the treatment of hybrid coupons, which the IRS determined should be treated as discount coupons instead of premium coupons. The taxpayer used a points-based loyalty rewards program that allows customers to accumulate points that may be redeemed toward the purchase of products. If sufficient points are redeemed, the purchased product is free to the redeeming customer. If insufficient points are presented at redemption, the purchase price is reduced according to the number of points redeemed, and the customer pays the reduced price. Thus, customers can redeem the points for discounts on future purchases or receive free merchandise for redeemed points.

Because these coupons have elements of both premium and discount coupons, they are labeled as hybrid coupons. The taxpayer proposed to apply Treas. Reg. Sec. 1.451-4 to the costs of redeeming the reward points. Treas. Reg. Sec. 1.451-4 generally applies for trading stamps or "premium coupons."

Under the now repealed Treas. Reg. Sec. 1.466-1(c)(2)(i)(1979), the term "discount coupons" was narrowly defined and specifically excluded trading stamps and premium coupons. That is, a discount coupon is a sales promotion device used to encourage the purchase of a specific product by allowing a purchaser of that product to receive a discount on its purchase price. The IRS noted at the time of enactment of Section 466, Congress did not intend that taxpayers should seek relief for discount coupons under the Treas. Reg. Sec. 1.451-4 trading stamp regulation and that Section 466 was intended to be the sole relief for qualified discount coupons.

In contrast, a premium coupon generally is issued in connection with the sale of some item and entitles the holder to tender it in exchange for a product. These coupons are used to promote the sale of the product with which the coupon is issued by allowing the consumer to collect coupons in order to acquire a different product.

The IRS reasoned that hybrid coupons, by their very nature, promote not just the sales of the products with which the coupons are issued, but also the sales of the products bought in the future at a discount. Thus, by definition, hybrid coupons are not premium coupons and should be viewed as discount coupons. Bifurcating hybrid coupons into premium coupons and discount coupons contradicts congressional intent for the application of Section 466 and Treas. Reg. Sec. 1.451-4. Section 466 would then supersede Treas. Reg. Sec. 1.451-4 and Section 466 would be the "sole" method of accounting for qualified discount coupons.

Accordingly, the IRS concluded that a taxpayer's points that may be redeemed for a product or used as a discount on a future purchase of a product are not premium coupons and the more favorable method provided in Treas. Reg. Sec. 1.451-4 cannot be used.

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