What Sales Tax Owed on Free Goods and Discounted Items?

What Sales Tax Owed on Free Goods and Discounted Items?

Whether you are using Paper Cards, Coupons, Astro Loyalty, or your POS to keep track of your Frequent Buyer Programs how you issue the reward to your customer and what they end up paying at the close of that sale will be the same. In order to make sure you are abiding by your state's tax laws, it would be a good idea to thoroughly research those laws before issuing your first free good reward to a customer or discounting any item at your store. Your state's IRS website is a good place to start.

If the discount is sponsored by the manufacturer or the distributor and you will be reimbursed by either of these parties for offering the discount, the sales tax base is the full sales price and not the reduced sales price. As noted with manufacturer’s coupons, because the tax base is the amount of receipts you receive for selling the product, the states generally don’t distinguish whether the payment comes from the customer or by some third party. This rule is pretty uniform across the country. - Ned Lenhart, TaxJar

So what are you supposed to do if you are in a state that requires your customers to still pay the full tax owed on free or discounted items?

Adjust your POS Systems Sales Tax Settings

Your POS System should be able to help you collect the sales tax owed on free goods from the customer during a transaction so that you aren't responsible for paying it out of pocket later. How to do this is not always straightforward which can be frustrating. 

The best way to proceed here would be to contact your POS company and see if they have a way for you to add sales tax back to a sale if you 100% comp or zero out an item, or if they have a way to keep the full value of the sales tax owed intact even if a discount or coupon is applied to the sale.

Get Creative!

If there is not a straightforward way to do this with your POS there may be a creative way that other retailers have found to do so. See if you can find a blog or discussion online where other retailers using your POS system share how they are able to keep track of sales tax owed on free/discounted goods.

Shop Around for a New POS System

Yes I know, this isn't always a viable option, and it may be an investment you are not ready to make. However, if your POS company is not able to provide you with the means to abide by your state's sales tax laws, then it may be a good idea to entertain switching to a POS system that can better help you manage this. It never hurts to look and explore your options. 
DO make sure you give your current POS company the chance to help you troubleshoot this- who knows, they may be able to develop an update to manage sales tax owed on free/discounted items for you.


How to Determine the Sales Tax that Should Have Been Collected After the Fact

If you are in the midst of an audit, or you just learned about your state's tax laws too late and the IRS expects you to pay, don't worry. The first thing you will need to do is determine the dollar amount that should have been paid in sales tax over the course of the year for free or discounted items.

Since your POS is where all your sales and price and cost values are stored it is always best to start there before creating extra work for yourself.

You may be able to generate a report in your POS that will tell you what items you zeroed out over a certain period of time. You might be able to manipulate this report to show the tax that was owed before those items were zeroed out.

You also may be able to generate a report that will show you the total monetary value of all discounts given to customers over the course of the year. Then all you need to do is multiply that number by your state's sales tax to determine the tax that should have been paid by your customers over the course of that year.

Reach out to your POS company and explain to them what happened and what you are trying to determine and see what advice they can give you. 

Astro was not designed to keep track of things like sales tax, and we are not involved in how you apply a frequent buyer reward to a sale. This is what your POS was designed to do. Astro was designed to help you report the rewards that you give to your customers to your distributors so you are able to be reimbursed. The reports generated in Astro are not meant to help you determine what sales tax was owed, they also only show you the items that were discounted as a result of an earned reward in Astro. If you ran your own promotions in your store or had a sale on items you were hoping to clear out of your inventory Astro would have no record of this. Your best ally if you find yourself in this situation is your Point of Sale since it can generate reports that will include cost, sell price, and zeroed out or discounted items.