Retailers: Don’t Overlook Sales Tax on Rebates
Are you a retailer that sells merchandise with a manufacturer’s rebate?
If so, make sure that you are charging sales tax on the amount of the rebate as well. If you are undergoing a sales tax audit, call us to discuss rebates.
Transcript
Understanding the Sales Tax Implications
What are the sales tax implications of manufacturers’ rebates? I’m Mansoor Ansari with Nexus Tax Defense.
We’re all happy when we see the sign “rebate”, obviously, because we know we’re going to get a big discount. But the tax implications work differently.
A Common Misconception
For example:
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A machine costs $100,000
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You receive a $20,000 rebate
One would think you only need to pay tax on $80,000.
Assuming a tax rate of 8%, that would seem to equal:
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$80,000 × 8% = $6,400
The Correct Tax Calculation
But that’s not true. What you really need to do is:
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$100,000 × 8% = $8,000
From this example, you can see that you’re actually off by:
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$8,000 − $6,400 = $1,600
Why It Matters During Audits
If you are undergoing an audit for a period where you had manufacturers rebates, you want to make sure that you were charging tax on the actual amount before rebate.
Otherwise, you might end up paying those taxes yourself.
Give us a call if you have any questions.
Frequently Asked Questions
Do retailers need to charge sales tax on the full price before a manufacturer’s rebate?
Yes. Sales tax must be calculated on the original price of the item before the rebate is applied. The rebate is considered a discount from the manufacturer, not the retailer, so it does not reduce the taxable amount.
Why is charging tax only on the post-rebate price incorrect?
Because the law typically considers the rebate as a separate transaction between the manufacturer and the buyer. The retailer still receives the full purchase price before rebate, so the sales tax is due on that amount.
What could happen if sales tax is calculated incorrectly during an audit?
If you charged tax only on the post-rebate price, auditors may determine that you under-collected sales tax. In such cases, you could be held liable for the difference, including penalties and interest.
How does a rebate impact the total tax paid on a purchase?
It doesn’t reduce it. For example, a $100,000 item with a $20,000 rebate still requires sales tax on the full $100,000, not on the discounted $80,000.
What should a retailer do if they’re unsure about how rebates affect tax?
Contact a tax professional or legal advisor experienced in sales tax issues. If you’re undergoing an audit or suspect past mistakes, it’s especially important to get guidance to mitigate risk.