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.
B&H Foto Responds to NYS Attorney General Allegations
In a statement issued November 21, 2019, B&H countered that the “Attorney General is trying to create a new tax on discounts to make New Yorkers pay more” and “wants consumers to pay sales tax for what they actually pay plus an additional tax on discounts they receive,” adding that “this makes no sense and there is no law that requires consumers to pay this tax on discounts.” B&H’s counsel is also quoted as saying that “New York law is clear that B&H’s treatment of ‘instant savings’ is correct” and that “[e]ven if the Attorney General is correct, the consumer is the one bearing this cost as they will be paying sales tax on an amount more than the price paid.” In its statement, B&H provided a number of examples illustrating the amounts of additional taxes that consumers would pay “with the Attorney General’s new tax on discounts” and additional examples purporting to demonstrate that other retailers who sell consumer electronics collect New York sales tax in the same manner as B&H.
As we noted in our post last week, 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. B&H seems to have characterized these amounts as reductions of the cost charged by the manufacturers to B&H. The Attorney General, on the other hand, has characterized these amounts as reimbursements of manufacturer discounts. If the Attorney General is right, B&H should have remitted to the New York Tax Department additional sales tax based on the amounts of such reimbursements. The other retailer examples cited by B&H in its statement are interesting in their presentation of the sales tax amounts charged to customers, but they do not indicate whether such other retailers remitted additional sales taxes attributable to the “instant rebate” amounts.
This will be an interesting case to watch.
Jeffrey Marks is Chair of the Frankfurt Kurnit Tax Group, and a member of the Corporate & Finance, Estate Planning, and Charitable Organizations Groups. He has decades of experience advising public corporations, closely held businesses, and individuals in a variety of industries, including financial services, media, live entertainment, and apparel. He is listed as a 2019 Super Lawyer by Super Lawyers magazine.
This column presents a general discussion of legal issues, but is not legal advice and may not be applicable in all situations. Consult your attorney. To contact Jeffrey Marks ESQ via email click here.
