In a recent decision, the New York State (NYS) Tribunal determined that Apple, Inc. had under calculated sales tax by $995,197 including penalties and interest, resulting from a back to school promotion that involved gift cards given when qualifying products were purchased from its retail or online stores or from authorized campus stores.
The main issue was whether customers actually purchased the gift card or were given a gift card as part of the promotion. The significance of this distinction directly impacted the sales tax calculation.
“... we will not disturb the Tribunal’s determination if it has a rational basis and is supported by substantial evidence ... ”
Point-of-Sale System Limitations
Generally, a gift card represents value that will be applied toward a future sale of property or services. As such, sales tax is owed when it is presented in exchange for the purchase of taxable property or services, not when it is given to a purchaser pursuant to terms of a promotion.
Although Apple collected sales tax on the entire sale for online purchases of qualifying products, such purchases made at Apple’s physical retail stores had to be set up differently because of Apple’s retail stores’ POS systems.
For the retail store sales, POS systems could not issue a gift card for free. To remedy this issue, the gift card's value was listed as a separate item on the invoice and then deducted from the total as a discount. However, the resulting effect was Apple collected and remitted sales tax for the money paid by purchasers less the stated value of the gift card on those transactions.
Notwithstanding the fact that Apple presented support for its position, the Tribunal found that a gift card was given for free, and determined that Apple failed to meet its burden of establishing that the receipts of the promotional sales included the purchase of a gift card and determined that it had under calculated sales tax owed on those receipts.