29 July 1999 GST/HST Ruling HQR0001751 - Application of the GST/HST to Proposed Discount Rewards

Dear Sir:

I refer to your facsimile message of April 22, 1999 regarding the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the proposed XXXXX[.]

Statement of Facts

Our understanding of the facts is as follows:

A XXXXX is a program that rewards customers for their current shopping by offering a gift or reward that may be redeemed in the future. It is proposed that the XXXXX program will operate as follows:

•   A customer earns XXXXX[.] Customer points are tracked in a customer database.

•   Once the customer has earned a specific number of points, he/she will be entitled to a percentage discount off his/her next purchase up to a maximum dollar amount depending upon the number of points redeemed. For example, a customer who has spent XXXXX will earn 2,500 points. 2,500 points entitles the customer to 20% off the next purchase up to a maximum discount of XXXXX. Accordingly, to reach the XXXXX maximum discount, the customer must spend XXXXX. If the customer redeems 2,500 points and spends XXXXX, he/she would receive a XXXXX discount (a customer spending XXXXX would receive the maximum XXXXX discount).

•   A customer can collect points and redeem all or a portion of them for higher discount rewards.

•   Both GST/HST taxable and zero-rated product purchases earn customer points and both GST/HST taxable and zero-rated products are eligible for the discount. For example, the customer can earn points by purchasing cosmetics, but also can redeem the points and earn a discount on a purchase of shampoo and 1 litre XXXXX bottled water.

•   The cost of the discount is absorbed by each individual XXXXX i.e., there is no third party reimbursement.

Ruling Requested

1. Under the XXXXX program would the discount offered entitle the customers to a GST/HST reduction?

2. Would the answer differ if the program indicated that the discount applied first to taxable goods?

Ruling Given

Based on the facts set out above, we rule that:

1. The amount of the discount will reduce the value of the consideration for each of the goods purchased. Therefore, where both taxable and zero-rated purchases are made the discount will apply proportionately to each.

2. The position taken would not differ if the program indicated that the discount applied first to taxable goods.

Explanation

Subsection 181(1) of the Excise Tax Act (the Act) defines "coupon" to include "a voucher, receipt, ticket or other device but does not include a gift certificate". The Department has taken the position that the definition of "coupon" encompasses intangible devices that have the characteristics of a traditional paper coupon. Therefore, the points awarded under XXXXX XXXXX would meet the definition of "coupon".

The Department has also taken the position that where points are accumulated and redeemed after certain thresholds are met subsection 181(3) of the Act does not apply. The rationale is that a "point" does not entitle the recipient of the supply to a reduction of the price of the property or service equal to a fixed dollar amount specified in the coupon or a fixed percentage specified in the coupon. These conditions are necessary in order for subsection 181(3) of the Act to apply.

Subsection 181(4) of the Act, however, would apply. Subsection 181(4) provides:

For the purposes of this Part, where a registrant accepts, in full or partial consideration for a supply of property or a service, a coupon that may be exchanged for the property or service or that entitles the recipient of the supply to a reduction of, or a discount on, the price of the property or service and subsection (2) does not apply in respect of the coupon, the value of the consideration for the supply shall be deemed to be the amount, if any, by which the value of the consideration for the supply as otherwise determined for the purposes of this Part exceeds the discount or exchange value of the coupon.

Where a customer of XXXXX purchases property and redeems points, the value of the consideration is reduced by the amount of the reduction associated with the points. Given that the XXXXX program applies to both taxable and zero-rated goods, the reduction must apply to both as well (assuming the customer purchased mixed supplies of taxable and zero-rated goods). Where a percentage amount is deducted, that percentage would apply to each item purchased. Where a maximum dollar amount is deducted, that amount would have to be prorated among each of the items purchased based upon the value of the consideration for each item.

In your letter you had proposed that the XXXXX discount apply first to taxable goods and second to zero-rated goods. In this manner, XXXXX would reduce the GST/HST to the customer equal to the lessor of i) the discount award times the GST/HST rate and ii) the total GST/HST payable. XXXXX program brochure could state that the discount is applied in this manner.

As indicated above, since the XXXXX applies to both taxable and zero-rated goods, where both taxable and zero-rated goods are purchased and points redeemed based on the total purchased, the discount must be allocated proportionately between each item.

On April 1, 1997, the harmonized sales tax (HST) replaced the goods and services tax (GST) and the provincial sales tax (PST) in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%[.] Example: Goods that are delivered or made available in a participating province are subject to the HST [t]o the extent that they are taxable supplies (which are not zero-rated), tax must be collected at the harmonized rate.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to departmental interpretative policy; and that you have fully described all necessary facts for which you requested a ruling.

Although there have been proposed amendments to subsections 181(1) and 181(4) of the Act, the current wording of those proposed amendments would not change the ruling provided herein. Any change, however, to the wording of the proposed amendments or any future proposed amendments to the Excise Tax Act, if enacted, could have an effect on this ruling.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8222.

Yours truly,

Tim A. Krawchuk
A/Senior Technical Analyst
Corporate Reorganizations Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate