Gift Certificates to customers

[John of PA]

A pizza palor gives for free thier own gift certificates as a way to reward loyal customers. I assume there is no deduction for the value of the certificate, but only the cost of printing them. Am I missing anything here? thanks.

[Zee]

You're correct...no deduction, the cost of printing and distribution would be a business expense.

[Black Bart]

Right,

No deduction (other than printing, etc.). They get it off at year's end (sort of) by a reduced merchandise inventory and increased cost of sales. But they don't really recoup the whole thing, since they're only getting the cost of merchandise used. The much higher sale price is "lost" or just never realized (an IRS guy would say you can't lose what you never had).

[Zee]

No deduction (other than printing, etc.). They get it off at year's end (sort of) by a reduced merchandise inventory and increased cost of sales. But they don't really recoup the whole thing, since they're only getting the cost of merchandise used. The much higher sale price is "lost" or just never realized (an IRS guy would say you can't lose what you never had).

That's correct. I think most questions of this nature are wondering if the coupon value (sales price reduction) can be deducted. For example, if a $20 pizza is sold for $10...can the other $10 be deducted. The answer is "no". The cost of providing an identical pizza with a selling price of $10, or $20 is the same. The costs are always deductible. In addition, there might be the additional costs of printing, marketing, and distribution of the coupon. I hope that's more clear.

[BOB W]

In NYS, coupons are added to income for sales tax purposes. Mostly large companies comply.

[JohnH]

Discarded food

I try to explain this concept (often unsuccessfully), by pointing out to clients why restaurants can't write off the unserved food they discard. Their COGS is exactly the same whether they sell the food to customers or throw it in the garbage can.

[BOB W]

I try to explain this concept (often unsuccessfully), by pointing out to clients why restaurants can't write off the unserved food they discard. Their COGS is exactly the same whether they sell the food to customers or throw it in the garbage can.

John> they always give me a strange look and then, well, I don't know what they think they just never bring it up again.

[Black Bart]

Strange looks -- strange books

John> they always give me a strange look and then, well, I don't know what they think they just never bring it up again.

I know what y'all are talking about. I've also tried (also unsuccessfully) to explain cost of sales to clients, explaining that reduced inventory means reduced profits means reduced taxes. It's a lost cause.

From their point of view, if they can't "take off" the total of the lost sales (maybe several hundred dollars), then a few measly bucks bucks worth of pizza dough (the "reduction in inventory") is immaterial. Most small business people I see (can't speak for you) don't take an actual physical inventory at year's end. I can tell 'em they're getting a piddlin' $100 inventory reduction, but, as a practical matter, they may have already "reduced" inventory themselves with a "wing-it" estimate; varying up/down several thousand dollars depending on what they think they're going to need. So it's not hard to see why our accounting theory isn't well-received. Yes, yes, I know; all that's not kosher and isn't supposed to happen, but I'll bet you that any IRS field agent will tell you a sliding (usually downward) inventory is a much used and abused practice in small business.

[John of PA]

Ty

Thanks everyone for the confirmation. Having to pay sales tax on the value of coupons? thats crazy?

[JohnH]

That's the law in NC, too

If you go to a restaurant with a coupon for a discounted second meal when two people are ordering (usually all or a fraction of the lower-priced entree), the sales tax is figured on the total check amount before deducting the coupon allowance.

[BOB W]

If you go to a restaurant with a coupon for a discounted second meal when two people are ordering (usually all or a fraction of the lower-priced entree), the sales tax is figured on the total check amount before deducting the coupon allowance.

I'm pretty sure this "coupon/sales tax issue " happens in every state, just that most small businesses don't know about it, along with their accountants that may have forgoten about this.. Ever get a free airline ticket using mileage, what do you have to pay? Yep all taxes. It is around more than you think.

Go to any department store, give them your coupon, you will see that the coupon in rung up (scanned) last. Why, because that is when they reduce what you owe them but not for the sales tax on the coupon's value.

As far as Gift Certificates go, usually the entire purchase including sale tax is deducted from the Certificate's value. If you go over the stated value you pay the difference. In all cases full sales tax is paid.

Items on sale are treated different. You only pay sales tax on the sale price. But for some strange reason coupons have a better promotional draw that just running a sale.

Bottomline> never bring up the word "Coupon" to a sales tax auditor.

[John of PA]

Good advice

Thanks Bob, good advice.