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