State & Local Tax Blog

The “Buy One, Get One Free” Sales Promo Can End Up Costing You Big!

When A Penny Charged is Worth Two Dollars In The Bush

I don’t think Yogi Berra ever said “a penny charged is worth two dollars in the bush”, but he might have. But I doubt even Yogi’s craziest statements could match the twisted logic used by the Wisconsin DOR in its recent Release. The Release details the DOR’s position on how sales and use tax applies in various  “buy one, get one free” scenarios. To say that it their position is Yogi-like would be to ignore or down-play just how costly it could be for the unwary seller in WI. One thing is certain though, if you are a seller in Wisconsin, you may want to seriously consider charging people for free stuff you give them. A penny charged now could save you many dollars later on.

Where were you on December 14, 2010? Of course you don’t know.  Most regular folks were in the middle of the “holidays” during that time period. Going to company parties, shopping for last minute gifts, etc. Most folks were probably not putting their full attention on releases issued by the various taxing jurisdictions. But Peisner Johnson was keeping watch. The Wisconsin Department of Revenue issued a Tax Release on December 14, 2010, that could cost your company a lot of money if you’re not careful.

Do You Use “Buy One, Get One Free” Promotions?

How about buy two get one half off? How about come in for 10 lunches (oil changes, haircuts, palm readings, etc.) and the 11th is free or some such? If you do use these types of promotion, then this article is going to save you big money and headaches at least in Wisconsin.

It’s All About The Invoice

The Wisconsin DOR says: The sales and use tax treatment of buy one, get one free and similar promotions is determined by the invoice or receipt provided by the seller to the customer. If the invoice or receipt provided by the seller to the customer indicates that a second item is provided free to the customer when the customer buys the first item, then the seller is the consumer of the second item and is required to pay Wisconsin sales or use tax on its purchase of this item.

That defies most people’s logic. Wisconsin says that if you sell a shirt for $30 and give another shirt away for free, then you owe the tax on the free one. Then, what if you sell both shirts for $15? In substance, this is the same as selling one for $30 and the other for $0. But in the case where you sell each for $15, you charge tax on the $30 and owe no tax yourself. If you sell one for $30 and give one away free, you collect tax on the $30 and pay tax yourself on the cost of the other. Crazy, eh?

Query: Isn’t this purely form over substance? Answer: Yes. Query: How can states get away with this? Answer: To quote Yogi Berra: “I wish I had an answer to that because I’m tired of answering that question.” Actually, I do have an [admittedly somewhat weak] answer to this question. Sales and use tax is a transaction tax. It usually taxes discrete transactions that stand on their own. The transactions are usually represented by invoices. How the transactions are presented on the face of the invoice is usually critical. So, yes, almost always, sales/use tax is form over substance. The form or presentation controls the taxation. This can be deeply troubling to accountants who are trained to give weight to substance over form. It’s troubling to any logical person for that matter. But to paraphrase Yogi, sales tax is 90% mental and the other half is physical.

So what is Wisconsin trying to do to us? I think this is all about setting companies up to be caught on audit. Note that even if you show on the invoice a charge for both $30 shirts but then show a discount on one of the shirts such that the charge for one of the shirts ends up to be $0, you still owe the tax. So this is form over substance and then substance over form all on the same invoice. But, if you show both shirts on the invoice for $30 each and then give a $30 discount equally applied to both shirts such that the actual selling price is $15 per shirt, then you’re good. This is when you need Yogi Berra to lend his analysis.

Buy One, Get One For A Penny

Don’t despair, it’s not over til it’s over.

When I first read about this release in CCH, I asked myself, why don’t these companies sell the other “free” item for a penny? Since this is all about the form of the transaction, could a company “sell” that other item for a penny and then they wouldn’t owe any use tax on the cost of the item? This would seem to meet the technical requirements. But, would WI come back to a “substance” argument at that point and call it a sham? CCH’s paragraph explanation didn’t address this idea. But, I found it in the actual release in one of the many examples they gave.  I will give you all the examples the WI DOR gave in its release, you may find one or two that apply on point to your situation..

What About Other States?

Good question, other states have their own rules as to whether sellers must charge tax on cash discounts given at the time of the transaction (yes, some states do tax those) or cash discounts if the invoice is paid in a certain time (like 2% discount if paid in 10 days), and whether tax is owed on the original sales price before a price reduction for coupons issued by the merchant and/or manufacturer, and how to treat rebates. Every state has their unique rules.

For example, in Texas a similar (but different:) issue arises in connection with the annual tax holidays. Stores like to run sales in connection with sales tax holidays. Shoe stores frequently offer the “buy one pair of shoes, get the next pair at 50% off”. Well, if you find two pairs you like that both sell for $120, then the first pair will cost $120 and the next one will cost $60. So you get two pairs for $180. Depending on how you invoice those shoes is how they are taxed to the consumer. If one pair stays at $120 on the invoice, it will be taxed because the exemption is for articles costing less than $100. If the discount applies to both items and the invoice shows each pair for $90, then neither of them is taxed since they both come under the $100 threshold. Of course, in no case, does the seller owe use tax on either pair if they end up giving one away free. But, that’s Texas, and this article is all about Wisconsin, so we limit our discussion accordingly. Just understand every state has their own peculiarities and of course, we’re here to help you get a handle on the other states too.

Read On — The Key Is In the Details

Here are the examples given in the Release. Example 13 is the one that confirms that you can charge a penny for the second item and avoid the use tax on that item. One penny is all it takes. How many people will see this and take advantage of this?

Note that this Release addresses a law change that was effective back in October, 2009. Presumably, this treatment applies to sales made back to that date. But you can fix things going forward and hope for the best on audit. I guarantee this is an issue WI auditors will be looking for in their audits of sellers.


The following examples illustrate this change. ( Note: In all of the following examples, the retailer’s purchases and sales are made on or after October 1, 2009.)

Example 1: Taxable Item Given Away with Required Purchase of Nontaxable Item – Retailer A provides a hat free of charge to any customer that purchases a certain number of gallons of gasoline (i.e., a nontaxable item). The price of the gasoline does not vary depending on whether the hat is included in the transaction. The receipt given by Retailer A to the customer indicates the sales price of the gasoline but does not mention the hat at all. Since Retailer A is giving a hat at no charge to any customer that purchases the required number of gallons of gasoline, Retailer A is the consumer of these hats, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the hats.

Example 2: Taxable Item Given Away with Required Purchase of a Different Taxable Item – Retailer B provides a bicycle free of charge to every customer that purchases a new couch. The price of the couch does not vary depending on whether the bicycle is included in the transaction. The receipt given by Retailer B to the customer indicates that the bicycle is given to the customer for no charge. Since Retailer B is providing a bicycle free of charge to every customer that purchases a couch, Retailer B is the consumer of these bicycles, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the bicycles.

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