New York’s Attorney General, Letitia James, has sued B&H Foto & Electronics Corp., one of the country’s largest independent photo and video equipment retailers (B&H), claiming that B&H knowingly failed to pay New York sales tax due on at least $67 million received from electronics manufacturers between 2006 and July 2017 as reimbursements for “instant rebate” manufacturer discounts B&H passed along to its customers. The case is yet another reminder of New York’s longstanding position on the treatment of manufacturer coupons or discounts for sales tax purposes and of the recordkeeping, reporting and tax payment requirements to which New York retailers (even some who do not have a physical presence in New York) are subject.

New York has consistently taken the position that taxable receipts for purposes of New York’s sales tax include the amount of any coupon or discount, and its sales tax regulations distinguish between store-sponsored discounts that manufacturers do not reimburse and discounts reimbursed by manufacturers. In the former case, “the tax is due from the purchaser only on the discounted price, which is the actual receipt,” and in the latter case, “the tax is due on the full amount of the receipt,” without regard to the discount. According to the regulations, this is because the manufacturer discount “reflects a payment or reimbursement by another party to the vendor,” and the taxable receipt thus includes the amount paid by the purchaser and the amount of the reimbursement received from the manufacturer. The regulations also specify which party is responsible for the tax on such discounts. If the retailer discloses the manufacturer discount to the customer, the customer pays; if not, the retailer must pay the tax on the discount while the customer pays tax only on the discounted sale price. In either case, however, the reimbursement received by the retailer is subject to sales tax, which the retailer must remit to New York.

In the B&H case, New York’s Attorney General, responding to a whistleblower claim filed in January 2016 under the New York False Claims Act, is seeking to apply New York’s longstanding position regarding manufacturer coupons or discounts to the “instant rebate” promotions in which B&H participated. According to the Complaint, B&H did not disclose to its customers that these “instant savings” (as B&H characterized them) were being funded by manufacturers and characterized the manufacturer reimbursements for internal accounting purposes as “reductions in cost of goods sold.” The latter practice “minimized the possibility that a Tax Department audit would detect the omission of such reimbursements from B&H’s taxable receipts.” As a result, while B&H properly collected sales tax from its customers based only on the discounted prices charged to its customers, it improperly understated the sales tax amounts it was required to remit to the New York Tax Department. In other words, it should have paid sales taxes based on the full undiscounted prices, including the reimbursement amounts received from manufacturers. Its failure to do so, according to the Complaint, resulted in a sales tax underpyament of at least $7.3 million from March 2006 through September 30, 2019.

The outcome of the B&H case may hinge on the proper characterization of the amounts it received from manufacturers in connection with the “instant rebate” promotions. Did they represent reimbursements of manufacturer discounts, as contended by the Attorney General, or were they merely reductions of the cost charged to retailers, as characterized by B&H. Stay tuned.