In November 2018, I posted about a New York State Division of Tax Appeals administrative law judge decision finding that an Apple Inc. "Back to School" promotion for sales of computers and iPads required customers to "purchase a qualifying computer or tablet in order to receive a gift card for free" and not "to purchase a gift card to receive a discount equal to the value of the card." The distinction is significant because a retailer-provided discount representing a reduction in the sales price of an item of tangible personal property is deductible when calculating the retailer's taxable receipts for New York sales tax purposes, whereas the purchase/sale of a gift card itself is not subject to New York sales tax. It is only when a gift card is used by a customer to purchase an item of tangible personal property that a gift card transaction becomes subject to New York Sales sales tax.
Apple recently "took another bite at the apple" and tried to persuade the New York Tax Appeals Tribunal that the ALJ decision was erroneous in finding that Apple's promotion "was premised on the full retail price of a qualifying device and a free gift card." Apple argued that the gift card "was purchased rather than given away," pointing to the promotion's return policy, which "required contemporaneous return of the unused gift card, otherwise only the discounted price of the qualifying device would be refunded."
In a decision dated December 24, 2019 (In the Matter of the Petition of Apple, Inc., N.Y. Tax Appeals Tribunal, Dkt. No. 827287, 12/24/2019), however, the TAT affirmed the ALJ's determination that Apple had improperly excluded gift card amounts in calculating its taxable receipts, finding that "receiving a gift card is the direct consequence of purchasing a qualifying device and otherwise complying with the terms of the promotion." In the TAT's view, "the fact that if a customer declined the gift card as a part of the [Back to School] promotion, the full price of the qualifying device with applicable tax would have been charged" was particularly significant, as were the sample invoices offered into evidence, "which indicated that the gift card could not be returned separately" and "did not clearly indicate whether the [Back to School] promotional discount was applied against the qualifying device or against the gift card."
The TAT's Apple decision once again highlights the importance of carefully choosing the words used in a sales promotion program and being mindful of their tax implications, particularly when sales tax is involved. The TAT's Apple decision reminds us that "words matter" even when the underlying economics to the customer of a retail sale transaction are effectively indistinguishable. This is an important lesson for advertisers offering gift cards or other items of value as part of a sales promotion.
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