Thursday, May 3, 2012

Tennessee Sales Tax Treatment of Incentive and Recognition Programs

Incentive and recognition programs are becoming a more popular tool for employers to incentivize employees. As part of these programs, employers will hire a company to run the incentive program which allows employees to earn points or credit that can be used to redeem prizes, trips or other rewards. The employer will purchase the points that will then be allocated to employees based on performance. Because many of these programs involve the transfer of tangible personal property to employees, the question is whether there are sales and use tax consequences for these transaction.

In Tennessee, the Department of Revenue recently issued a ruling addressing the sales and use tax treatment of these programs. See Tenn. Letter Rul. 12-01. The ruling concludes that the employers initial purchase of "points" is not subject to Tennessee sales and use tax because there is no sale of tangible personal property or taxable services as part of this initial transaction.

The ruling concludes, however, that when an employee redeems the points for tangible personal property, a taxable sale has occurred, and the manager of the incentive program (and not the employer) must collect Tennessee sales and use tax on the redemption of the "points." In calculating the tax that is due for the transaction, the program manager must collect tax based on the value of the points (i.e. the consideration). The Department concludes that this value is a product of the original purchase price paid by the employer for the "points" and leaves it up to the program manager whether the tax is charged to the employee or whether the program manager represents to the employee that the price of the redeemed prize includes sales and use tax.

While the facts of this particular ruling focused on "points," these programs take a variety of different forms. Providers of these incentive programs should take particular care to determine how sales and use tax may apply to their facts to avoid any sales tax exposure down the road.

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