TELEPHONE 954-8585
FACSIMILE 990-1233
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XXXXX
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11755-7, 11755-14(sn)
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XXXXX
The following summarizes the various telephone conversations conducted during the month of March, 1996 between XXXXX of your staff and Sara Nixon of my office with respect to the application of GST to certain transactions entered into by the XXXXX and for which XXXXX has requested an application ruling in a letter dated December 13, 1995.
Background
A detailed summary of the background information has been provided by XXXXX in its initial correspondence of December 13, 1995 and in an additional letter of March 1, 1996, as well as through several verbal discussions with representatives of XXXXX[.]
1. XXXXX has developed a sales promotion program known as the XXXXX program. Any individuals who shop at XXXXX may apply to join this program. There is no fee to join the program. Members of the program receive a XXXXX to identify them as members of the program. This card also serves as an identity card to allow the member to pay for purchases made at XXXXX by way of cheque.
2. Members of the program are entitled to benefit from two types of price reductions and a "frequent shopper" points program.
3. One type of price reduction entitles a customer to a reduction of a specified amount off of the regular shelf price of the product. For example, if the shelf price of a product is $1.79, the shelf tag will indicate that XXXXX members are entitled to purchase that item for $ .20 off of the shelf price.
4. The other type of price reduction entitles a customer to a special price on the product. For example, if the shelf price of a particular product is $1.28, the shelf tag will indicate that XXXXX members can purchase the product for $1.15 during a specific period of time, a price which will be fixed regardless of whether the regular shelf price is increased or decreased during the promotion period.
5. With respect to both price reduction programs, XXXXX estimates that approximately XXXXX of the price reductions are recovered from suppliers. Generally, participating suppliers will reimburse XXXXX for the entire amount of the price discount, however, there are some circumstances where the supplier reimburses only a portion of the price reduction and XXXXX absorbs the remaining amount, as a cost.
6. Both price reduction programs apply to zero-rated goods and goods taxed at 7%. XXXXX point of sales equipment applies the discount awarded to the specific good it relates to, at the time that regular sale price of that good is entered into the cash register.
7. For XXXXX members participating in the frequent shopper points program, when the member purchases a qualifying product, the member is credited with a certain number of points. The number of points is based on the shelf price of the product. The price charged for the product remains the same regardless of whether or not a customer is participating in the points program.
8. Once a member has accumulated a certain number of points, the member is issued a certificate for the specified monetary value which the accumulated points represent. The certificate may be used by the member as a credit towards the purchase of any goods from XXXXX (regardless of whether the goods are subject to tax at 7% or are zero-rated).
9. At the time that a member uses a certificate, the monetary value of the certificate is applied to the tax-included total of all of the goods purchased by the member.
10. With respect to the frequent shopper points program, XXXXX estimates that approximately XXXXX of the value of the frequent shopper points awarded, are reimbursed by suppliers. Participating suppliers will pay XXXXX an amount equal to XXXXX of a cent per point awarded to XXXXX members. XXXXX submits monthly statements to participating suppliers, which summarize the total points awarded for the month.
11. All participating suppliers in both the price reduction programs and the frequent shopper points program, pay a fixed amount per unit of product sold by XXXXX to XXXXX members. This amount is referred to as a "handling charge" or "marketing fee". For products sold under the points program, the fee is XXXXX per unit. For products sold under either of the price reduction programs, the fee is XXXXX per unit.
Ruling Requested
XXXXX has requested a ruling that:
1) Section 181 does not apply to the price reduction programs offered.
2) XXXXX should charge GST to its customers on the net price received from the customer after allowing for the price reduction.
3) XXXXX has not supplied any service to its suppliers in respect of the price reduction programs.
4) The amount received by XXXXX from its suppliers in respect of the price reduction programs represents an adjustment to the consideration charged by the suppliers to XXXXX such that section 232 applies.
5) With respect to the frequent shopper points program, section 181.2 does not apply to the certificates issued by XXXXX to customers who have reached a specified number of points.
6) Subsection 181(3) applies where XXXXX accepts the certificates as consideration for taxable supplies other than zero-rated supplies.
Discussion
The Department has a published interpretation as to the application of GST to "electronic discounts". Summarized, that position is that electronic discounts are to be treated in the same manner as coupons. Where retailers receive reimbursement for honouring an electronic discount, the application of tax to the electronic discount would be the same as that given to printed manufacturers' coupons pursuant to subsection 181(2).
The application of this interpretation to the two types of price reduction programs being offered by XXXXX has been discussed. There are several factors which distinguish the XXXXX price reduction programs from the electronic discount described in the published interpretation:
1) The XXXXX electronic discounts are being offered by a retailer rather than a manufacturer,
2) the XXXXX price reduction programs apply to both zero-rated and taxable at 7% goods,
3) not all of the price reductions are reimbursed, and
4) with particular reference to the second program, the guaranteed fixed price cannot be said to be a "reduction of the price of the property ... equal to a fixed dollar amount specified in the coupon" as is required by subsection 181(2).
Given the broad definition of coupon at subsection 181(1), it is reasonable that the provisions of section 181 should apply to price reduction programs such as those being offered by XXXXX since their impact on the price being paid by consumers for qualifying goods and services is generally the same as a traditional paper coupon program. However, it is important to look not only at the provisions of subsection 181(2) but also at the provisions of subsections 181(3) and 181(4) to determine the most appropriate application of tax.
The wording of subsection 181(2) states in part, that " where at any time a registrant accepts, in full or partial consideration for a taxable supply of property or service (other than a zero-rated supply) ..." A literal application of that wording to the price reduction programs being offered by XXXXX would mean that whenever a XXXXX card was accepted by XXXXX with respect to a supply taxable at 7%, the provisions of subsection 181(2) would apply but those provisions would not apply whenever a XXXXX card was accepted by XXXXX with respect to a zero-rated supply. Neither price reduction program would be screened out of the provisions of subsection 181(2) solely on the basis that the program could potentially apply to both taxable at 7% and zero-rated supplies. The screening would only occur at the time the coupon was actually accepted.
The timing mechanism created by the wording of subsection 181(2) will always function such that tax applies correctly, when a traditional paper coupon which offers a discount for one specified product, is presented by a customer and accepted by a retailer. In the particular circumstances of the XXXXX price reduction programs, where one XXXXX card is used repeatedly to obtain price reductions on both zero-rated and taxable at 7% products, the of subsection 181(2) requires that each price reduction given by XXXXX can be traced to a specific product so that the price reductions given to zero-rated products can be screened out of the provision. Although XXXXX has the point of sale equipment to do such tracing, it cannot be assumed that all persons who may honour such electronic discount cards, will also be able to make such distinctions. Therefore, as a practical matter, it would seem more appropriate to treat electronic cards which potentially allow price reductions on both zero-rated and taxable at 7% products as subsection 181(4) coupons.
Since the wording of subsection 181(2) would allow for segregation of zero-rated and taxable at 7% products, where a particular registrant can provide supporting documentation to satisfy the Department that price reductions on zero-rated products would not be included in any calculations made pursuant to subsection 181(2), the Department could allow the registrant to treat the price reductions given to taxable at 7% products as subsection 181(2) coupons.
With respect to the frequent shopper points program, when a customer uses a certificate as a credit towards payment for purchases, XXXXX is effectively treating those certificates as gift certificates by charging tax on the full amount of consideration given for the purchases before any credit is given for any certificates being presented.
The provisions of section 181.2 of the Act specifically apply to the supply and use of gift certificates. In order to qualify pursuant to these provisions, the gift certificate must be issued for consideration. It is difficult to make an argument that the certificates being issued and used by members of the XXXXX frequent shopper program, are issued for consideration. A participating member receives a certain number of points which are accumulated until they are sufficient in number for the issuance of a certificate. It might be argued that the consideration being given for the receipt of the points, is the purchase of the product. However, the price charged for the product is the same, whether or not points are awarded to the purchaser. The total amount of consideration given in respect of the product therefore relates to the product itself and no consideration can be related to the points.
But for the definition of a coupon at subsection 181(1), gift certificates would otherwise be coupons. It is therefore reasonable to look to the provisions of section 181 to apply to the frequent shopper points and their certificates after determining that the provisions of section 181.2 do not apply.
Since the certificates, when applied, cannot be attached to a specific good and since not all of the points earned towards a certificate, are reimbursed, the most appropriate provision to be applied to the frequent shopper program, is subsection 181(4). Subsection 181(4) is also the most appropriate in the event that the points can be exchanged for cash. The fact that XXXXX has effectively chosen to treat the certificates as gift certificates, and is therefore essentially collecting more tax than is required by law, is the choice of XXXXX[.] Since the tax being collected by XXXXX is identified as tax, XXXXX is obliged to remit the entire amount of tax collected pursuant to subsection 225(1).
To the extent that XXXXX is reimbursed by suppliers at the time points are awarded to members of the frequent shopper program, the provisions of paragraphs 181(5)(a) and (b) would apply such that the fee being paid would be deemed not to be consideration for a supply and the payment and receipt of the fee would be deemed not to be a financial service.
We hope that the comments provided will be of assistance to you in responding to the application ruling submitted by XXXXX In the event that you have any further questions on this matter, do not hesitate to contact a member of the Applications Team. They are: Ken Mathews (613) 952-9585 and Sara Nixon (613) 954-4397.
Yours truly,
H.L. Jones
Director
General Operations & Border Issues Division
GST Rulings & Interpretations 1647(REG)
Mitch Bloom (signoff)
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