Wait…You want to REWARD me with TAX?

Let’s get real, sometimes we are too busy “multi-tasking” that we hear something in the background that just makes us turn our head in awe (like a confused puppy). Over the last week I was filing sales tax returns and had “background noise” on (the news) and I overheard a local TV station mention...

We soon could be taxed on our “rewards” that we get from various providers, vendors, grocery stores, gas stations, etc.

Wait is this true? Are they talking about sales tax? Do I owe more income tax?

I thought that the rewards program was “free” – I only signed up (with my dummy email account) to get that extra 20% off for that day or to get the $5 gift-card for my next purchase…now I’m being penalized because you wanted to reward me for my loyalty. Something doesn’t add up – it just can’t be – I didn’t ask for the rewards – you forced me into it so that I could get my prescription on autofill!

In Biden’s words – “That’s Malarkey!” So I had to get to the bottom of this and see just what we were all getting ourselves into. To my disbelief, there was actually not a ton of information (at least recent information) on the taxability of “rewards” specifically due to loyalty.

Relative to sales and use tax, very few states have issued specific guidance. Often times, the issuer of the reward is left to determine if the rules associated with “coupons” fit the facts of their rewards program. From a coupon perspective, the question is whether sales tax is applied to the total value of the transaction or the value of the transaction after the discount/reward is applied.

Minnesota was one of the few states that has issued specific guidance related to sales tax and rewards programs. In Minnesota, the value of a reward will be treated as a discount – and therefore will not be subject to sales or use tax – if the reward is not purchased, is not provided in exchange or services, cannot be redeemed for cash, and is not reimbursed by a third party. Store discount cards and punch cards that provide a price reduction after a certain number of purchases are specifically referenced.

On the sales tax side, it seems to be more of a retailer/issuer problem to manage.

On the income tax side, fortunately, as a consumer, these rewards programs are not subject to income tax reporting provided that the reward is provided in conjunction with a purchase. Rewards that are provided as a “promotion” to open a new account or to open a new credit card are potentially subject to income tax. Don’t be surprised if you get a 1099-MISC in these situations.

I wonder what the news broadcast was referencing? Perhaps state legislators want to change the fact that sales tax would be due on the entire value of the transaction rather than on the discounted value (after the reward is applied). It would be a subtle way to increase sales tax collections without increasing the sales tax rate. Those legislators can be sneaky.