Determining the tax base on a purchase can be a tricky business
tax base on a purchase
Coupons, rebates, credits, deductions, discounts, trade-ins and payment terms may – or may not – change the tax base on a purchase
A customer pays sales tax on the purchase price of an item. But what if the price is reduced thanks to “trade-in” credit? A Louisiana court recently considered this question as applied to video games.
GameStop, Inc. v. St. Mary Parish Sales and Use Tax Department
GameStop is a Texas-based retail chain that sells video games and related items in over 6,600 stores worldwide. GameStop is well known for accepting previously used games from customers, who can either receive cash or apply a predetermined “trade-in” value to the purchase of a new game. If the customer chooses the trade-in, he or she can either receive the discount right away or use an “Edge Card” to apply the credit at a later date.
When a customer purchases a game with an Edge Card, GameStop deducts the value of any credit from the price of the game before calculating sales tax. Thus, if a game costs $20 and a customer has $5 on his Edge Card, Game Stop only charges sales tax on $15.
St. Mary Parish, a county in Louisiana, audited the local GameStop store’s sales tax records for 2006 and 2007 and determined the company should have paid sales tax on the full, pre-discount prices of its games. The Parish’s Sales and Use Tax Department accordingly ordered GameStop to pay an additional $5,258 in sales taxes plus penalties and interest. GameStop paid the additional tax under protest and filed a lawsuit in Louisiana state court to overturn the Department’s decision.
A district court entered judgment for GameStop. The department appealed, but the Louisiana 1st Circuit Court of Appeals upheld the district court’s decision. Judge John Michael Guidry, writing for the appeals court, said under Louisiana law, sales tax is assessed on the “sales price” of an item. The law expressly states the “sales price” excludes “the market value of any article traded in.”
Here, the department argued the trade-in exclusion did not apply to the Edge Card, because it was a discount applied to a future purchase. Guidry said that did not matter. State law does not restrict the definition of “trade-in” to same-day discounts, and in Louisiana, sales tax exemptions must be construed “liberally” in favor of the taxpayer. “[T]o the extent that a trade in occurs when GameStop accepts a customer’s merchandise and stores the predetermined market value of the item and/or items on an Edge Card,” Guidry said, “we find the subsequent application of the market value of the trade in by the customer toward the purchase of a new item of tangible personal property at GameStop comes within the statutory exclusion from sales price.” The department must therefore refund GameStop the additional tax paid under protest.
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info