South Carolina Addresses Sales Tax on Items Purchased through Loyalty Points Programs

Friday, October 07, 2011

The South Carolina Department of Revenue recently issued a private letter ruling concerning loyalty points programs offered by telecommunications companies to their subscribers. These programs allow subscribers to accumulate points over a period of time and exchange them for discounts on phones and accessories.

Property that is purchased at a discount using loyalty points is only taxable based on the actual sales price, not the retail value. For example, a cell phone that normally costs $200 but is purchased by a customer redeeming loyalty points for $175 is only subject to tax on the $175 paid by the customer.

However, purchases of property for a nominal amount or greatly reduced sale price after a customer redeems their loyalty points will be considered promotional items withdrawn from inventory and used or consumed by the company. Thus, they will be taxable at the full retail value. For example, if a customer redeems their loyalty points to purchase a $200 cell phone for one cent, the cell phone will be deemed a promotional item and the retailer will be required to pay tax on the fair market value, $200.

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