How do discounts, coupons, and promotions affect sales tax in Texas?

Like most states Texas law stipulates that “the actual selling price of taxable tangible personal property is the measure of the tax due under the terms of the Limited Sales, Excise, and Use Tax Act.”

In other words, if you reduce the amount of a sale by either a percentage or a whole dollar discount, you should only charge sales tax on the actual selling price. For example, if you offer a 10 percent discount off a $100 shirt and the buyer pays $90 for it, you should charge sales tax on the $90 sale.

In Texas, as elsewhere, sales with coupons that are issued by you are handled the same way discounts are. If you offer a coupon code for 20 percent off a sale of $100 or more, and a customer purchases $100 worth of product, their cost would be $80. So, just like with a cash discount, you should only charge sales tax on the amount of the actual sale.

When a customer plans to use a manufacturer’s rebate after the sale, you should charge the customer sales tax on the full price of the item. The rebate doesn’t affect the transaction between you and the customer because it’s the manufacturer that will issue a rebate to the customer.

Many retailers use “buy one, get one free” promotions to attract new customers. But in Texas, giving anything away for free can increase your tax liability. According to Texas law, “When a retailer gives an item away free of charge, the retailer owes sales or use tax on the purchase price the retailer paid for the item.”

Unless you want to owe tax on the items you’re giving away for free, you would be better off running a “buy one item at full price, and get the second one at half price,” sale or some other similar promotion where the customer pays for all items.

Not all states agree with Texas on this, but some do. For instance, Connecticut also requires retailers to pay use tax on free promotional items, but New Jersey and Florida do not. Wisconsin used to require the tax, but changed its law in 2011.

But here’s where Texas differs from a lot of states: Manufacturers' coupons.

When a customer presents a manufacturer’s coupon or promotion, the seller will be reimbursed for the discount by the manufacturer after the sale. Many states, such a California, take this reimbursement into consideration and ask you to charge sales tax on the full amount of the sale, because after the reimbursement you will have sold the item for full price.

But Texas doesn’t distinguish between your own coupons and manufacturer’s coupons. In fact, the State’s position is that “When coupons or certificates are accepted by retailers as a part of the selling price of any taxable item, the value of the coupon or certificate is excludable from the tax as a cash discount, regardless of whether the retailer is reimbursed for the amount represented by the coupons or certificate.” So you would treat a manufacturer's coupon the same as you would one of your own when it comes to sales tax.

Today’s customers have come to expect ecommerce stores to offer coupons and other discounts, and that makes it important to understand the related laws in each of the states you sell in.

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