Normally, if a transaction is subject to sales tax, the tax is imposed upon the price charged the retail customer with respect to the sale of taxable tangible personal property or the provision of taxable services. Consequently, a taxable retail transaction generally gives rise to the imposition of only one tax. However, in the case of a barter exchange, seemingly one retail transaction may be burdened with multiple sales taxes. Many taxpayers are not aware of this possibility. In fact, they often mistakenly consider barter exchanges as not being subject to sales tax at all, despite the fact that state laws uniformly provide otherwise.
For example, under New York State law, a “sale” is considered to be any transaction in which there is a transfer of title or possession, or both, of tangible personal property (and certain enumerated services) for consideration. The term “sale” also includes barter exchanges of tangible personal property or taxable services. Consideration under the law includes items or services exchanged during the course of a barter transaction. As a result, barter transactions are very likely to generate multiple sales taxable events since there are exchanges of goods or services flowing in both directions. Each of the parties is deemed to be both a buyer and a seller.
As an illustration, if the Widget Retail Company (“Widget Co.”) exchanges 50 of the widgets it markets and sells with the Gizmo Retail Company (“Gizmo Co.”) in trade for 50 gizmos, each company intending to give the products away as gifts to their respective customers, the New York State Department of Taxation and Finance (the “Department”) would view the transaction as two separate taxable transactions, each with a seller and a buyer. The first transaction would be the “sale” of the widgets by Widget Co. to Gizmo Co., for a consideration equal to the fair market value of 50 gizmos. The second transaction would be the “sale” of the gizmos by Gizmo Co. to Widget Co., for a consideration equal to the fair market value of 50 widgets. Thus, what appears to be one trade to the average consumer results in the imposition of two sales taxes.
A good example of this concept was provided by the Department in TSB-A-91(51)S (July 22,1991) (the “Ruling”). Under the facts of the Ruling, the Petitioner was a direct sales company that operated home parties. As an incentive to hold a party, the Petitioner offered credits to its hostesses that could only be used to obtain items from the Petitioner’s line of merchandise. The issue raised by the Petitioner in the Ruling was whether merchandise obtained by the hostesses through the use of the credits was subject to sales tax.
The Department found that the merchandise purchased by the hostesses through the credit use was clearly subject to sales tax. The price of the merchandise was found to be the value of the credits used to purchase it (presumably, the retail price of the merchandise). Beyond that, the Department turned to what it deemed to be another taxable transaction, the transfer of the credits from the Petitioner to the hostesses for conducting the home parties at which the Petitioner’s merchandise was sold. The price of the credits was found to be the total monetary value that they could be used to offset.
When considering whether or not to enter a barter exchange, taxpayers should always contemplate the sales tax implications of the exchange. Simply ignoring them, and treating the exchange as not being potentially subject to tax since no money will be paid by either party, is very “risky” business. The states are aware of the increased frequency of such transactions as a result of the recent economic downturn, and are focusing on them with renewed vigor.
If you have any questions about the content of this article, please contact Friedman LLP Director Tom Corrie at (212) 842-7019 or firstname.lastname@example.org, or contact your engagement partner.