You may recall that in November 2019, New York’s Attorney General, Letitia James, 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 “instant rebate” manufacturer discounts that B&H passed along to its customers. The Attorney General’s suit recently was dismissed by the Supreme Court of the State of New York, New York County, which found that B&H's instant rebate program transactions were not manufacturer coupons subject to sales tax and that B&H had not, as contended by the Attorney General, made "reverse false claims" on its tax returns by calculating instant rebate disbursements into its cost-of-goods-sold rather than reporting them as receipts subject to sales tax.

New York’s longstanding position has been that taxable receipts for sales tax purposes include the amount of any coupon or discount. Its sales tax regulations distinguish between store-sponsored discounts that manufacturers do not reimburse and discounts that are 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. 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 manufacturer reimbursement. The retailer discount, on the other hand, is simply a reduction of the sale price subject to tax, requiring that the customer pay tax only on the discounted sale price.

The Attorney General was seeking to extend New York’s position on manufacturer coupons or discounts to B&H’s “instant rebate” promotions. In its Complaint, the Attorney General asserted that B&H did not disclose to its customers that these “instant savings” were being funded by manufacturers and characterized the reimbursements for internal accounting purposes as “reductions in cost of goods sold,” which “minimized the possibility that a Tax Department audit would detect the omission of such reimbursements from B&H’s taxable receipts.” As a result, according to the Complaint, while B&H properly collected sales tax from its customers based only on the discounted prices charged to its customers, it understated its sales tax liability because it should have paid sales taxes based on the full undiscounted prices, including the reimbursement amounts received from manufacturers.

B&H countered that the Attorney General did not understand the interplay of sales tax and "instant savings" programs, citing expert analysis and state tax authority decisions to rebut her claims.  "Stripping away the bluster and inflammatory language from its complaint, the attorney general asserts that B&H owes sales tax on the pre-discounted price of on-sale items if the manufacturer provides any incentive to B&H to encourage the price reduction” and that this reasoning would require a customer buying a product for $80, after a $20 "instant savings" deducted at the register, would owe sales tax on $100. "This defies not only common sense, but New York law," B&H said in its filing.

The court found that the Attorney General did not properly account for the nature of the transactions in question and agreed with B&H that the “instant savings” were a reduction against the cost of goods sold. In a manufacturer's coupon transaction, according to the court, a customer pays the full price for an item -- a cash payment for a portion of the price and a coupon for the remainder. The coupon is a benefit given by the manufacturer directly to the customer after the customer pays the full price at the register.  It is "a negotiable instrument created by the manufacturer for the customer to use," B&H’s “instant savings” rebate, on the other hand, is a retroactive discount on the wholesale price given by a manufacturer to a retailer to encourage the retailer to sell the manufacturer's products. It is not intended to directly benefit the consumer. According to the court, "[a]dvertising 'instant savings' is merely a marketing tactic to attract customers to a storewide sale, rather than evidence of a manufacturer's coupon," and because "there is no privity between the manufacturer and the customer, B&H's “instant savings” program cannot be considered a manufacturer's coupon." The court also pointed out that its decision was consistent with two New York State Tax Department advisory opinions that had reached a similar conclusion.