Vendor Allowances — Retailer Perspective
Retailers whose business activity includes the resale of products they get from product manufacturers (vendors) sometimes receive allowances or incentives from them. These vendor allowances can be various types of credits, rebates, or cash that the vendor pays the retailer who sells their product or service. The retailers may have arrangements with more than one vendor and more than one arrangement with the same vendor. The retailer and the vendor negotiate the terms and conditions of the vendor allowances.
- When you should report a vendor allowance as a gross receipt
- How to source any vendor allowances that are gross receipts to be included in the sales factor
- Documents that we request during an examination
When you should report a vendor allowance as a gross receipt
Retailers that receive vendor allowances only include them as gross receipts in their sales factor when all of the following apply:
- The retailer sells a product or service back to the vendor.
- The vendor pays them for the product or service they receive.
- The allowance is separate from the underlying product or service that the vendor sells to the retailer (the vendor could buy it from an unrelated third party).
- The vendor’s benefit is measureable (the retailer must be able to reasonably estimate its value).
Allowance amounts that exceed the value that the vendor receives reduce the retailer’s cost of goods sold and are not a gross receipt for California sales factor purposes.
- The retailer purchases item X from a vendor for $50.
- They then sell it to a customer for $100.
- The retailer receives a vendor allowance of $10 per item sold if minimum purchased.
Normally the retailer has a $100 gross receipt and $50 income. If they receive a $10 vendor allowance per item sold, provided they purchase a minimum number of items, the $10 they receive or credit reduces cost of goods sold (COGS).This is because the allowance is not separable from the underlying product that the retailer purchases from vendor.
In other words, the vendor would not purchase this benefit from a party that was not selling its products. The sales factor question is whether the gross receipt is the $100 they receive from the customer or $110 including the vendor allowance. The retailer receives the $100 gross receipt when they sell the item to a customer. The $10 credit does not give rise to a further gross receipt above the $100 they receive when they sell the product. The retailer did not sell a product or service to the vendor for which the vendor paid the $10.
- A retailer purchases item X from a vendor for $50.
- They then sell it to a customer for $100.
- The retailer receives a vendor allowance of $10 per item sold for performing a market analysis.
Normally the retailer has a $100 gross receipt and $50 income. If they receive a $10 allowance per item sold for performing a market analysis that is separable and measurable, then, that $10 is a separate revenue stream. The total gross receipts amount increases from $100 to $110. The $10 (service) sourcing would likely be different than the $100 sourcing (sale of tangible personal property).
If the value that the vendor receives for the $10 paid is actually $6 per item, then that excess $4 reduces COGS and is not a gross receipt for the retailer. There was no separate product or service sale by the retailer for that $4. The retailer’s original COGS was $50 per product. The $4 excess identifiable benefit to the vendor reduces the $50 COGS to $46. This is because the retailer received $4 more in value than the estimated fair value of the market analysis provided by the retailer to the vendor. The retailer's gross receipts would then be $106 for California sales factor purposes.
How to source any vendor allowances that are gross receipts to be included in the sales factor
If the vendor allowance buys:
- Tangible personal property assign the gross receipts under R&TC Section 25135.
- Services from the retailer assign the gross receipts under R&TC Section 25136.
Documents that we request during an examination
Documents that we request to support the treatment of vendor allowances may include:
Vendor allowance written agreements
These agreements allow us to figure out the transaction's specific nature and terms. We determine whether the allowance was your gross receipt. We consider written agreements or contracts that show the terms and conditions the vendor requires.
A list of who provided you the allowances
It allows us to develop a sampling approach. Our auditors sample and request information and documents to verify specific vendor relationships when you report numerous vendors.
A list of the types of allowances you received and total amount for each type
The treatment for each type of allowance may be different, so we need to know what allowance categories and the amounts that you reported as gross receipts.