Washington – Taxability of Distributor Discounts Received by Grocery Stores

1/22/2013

SALT Report 2065 – The Washington Department of Revenue issued an Excise Tax Advisory regarding the business and occupation tax liabilities for grocery stores that receive distributor allowances or discounts.

The determination of whether a distributor discount or allowance received by a grocery store is subject to Washington business and occupation (B&O) tax depends on whether the discount or allowance is a bona fide or non-bona fide discount or allowance.

In most cases a discount is non bona fide if it is in exchange for a service or other benefit.  It does not matter if this discount is done pursuant to a written contract, business practice, or oral agreement.  Non bona fide discounts are generally subject to B&O tax under the services classification.

Examples of discounts that are non bona fide because the person providing the allowance receives a service or benefit in return include:

  •  An advertising allowance,
  • An exclusivity allowance, and
  • A placement or slotting allowance

A bona fide discount negotiated by the grocer upon purchase of a product does nothing more than to encourage the grocer to purchase items that the grocer would have purchased even if a discount was not provided.  Because of this, bona fide discounts are not subject to B&O tax.

Examples of discounts that are bona fide, where the distributor providing the allowance does not receive a service or benefit from the grocer in return include:

  • An off-invoice allowance,
  • A scan-down allowance, and
  • A volume discount allowance

However, it is important to remember that the name of the allowance alone will not determine if a discount is bona fide.  For example, a scan-down allowance may also be provided to a grocery store by a distributor for a specific period for doing product advertising during that period.  This type of scan-down allowance is in exchange for advertising services; therefor it would not be a bona fide discount.

The notice provides specific examples of bona fide and non bona fide discounts and also discusses the records that are required to prove that a discount is bona fide.

For Further Information:

Washington Department of Revenue – Excise Tax Advisory No. 3173.2013