NOTICE TO DISTRICT RETAILERS August 2, 2001 DC Sales Tax Holiday - Definitions Specific situations and examples: Articles normally sold as a unit Sets containing both exempt and taxable items Discounts, coupons and rebates Layaway sales and rainchecks Exchanges and returned merchandise Mail, telephone, email, and Internet orders Shipping and handling charges Refunds Documenting exempt sales Articles normally sold as a unit Articles normally sold as a unit must be sold that way during the Sales Tax Holiday. They cannot be priced separately and sold as individual items to qualify for the exemption. However, components normally priced as "separates" may still be sold as separate articles, and any piece that is less than $101 will qualify for the exemption. Example: If a pair of shoes sells for $150, the pair cannot be split and each shoe sold for $75 to qualify for the exemption. If a suit is normally priced at $225 on a single price tag, the suit cannot be split into separate articles so that any of the components may be sold for less than $101 to qualify for the exemption. Sets containing both exempt and taxable items When exempt clothing, school supplies or footwear is sold together with taxable merchandise as a set or single units, the full price is subject to sales tax unless the price of the exempt clothing, school supplies or footwear is separately stated. Example: If a boxed gift consisting of a stationery (otherwise exempt) and framed artwork (taxable) is sold for a single price of $80, the full price of the boxed gift set is taxable because the framed artwork is taxable and the sale price of the stationery is not separately stated. When exempt clothing is sold in a set that also contains taxable merchandise as a free gift and no additional charge is made for the gift, the exempt clothing qualifies for the exemption. Discounts, coupons and rebates Discounts. If a retailer offers discounts to reduce the price of an eligible item to $101 or less, the item will qualify for the exemption. Example: A customer buys a $150 dress and a $110 blouse from a retailer offering a 10 percent discount. After applying the 10 percent discount, the final sale price of the dress is $135 and the blouse is $99. The dress is taxable because the price is more than $101, and the blouse is exempt because the price is less than $101. Coupons. When retailers accept coupons as a part of the selling price of a taxable item, the value of the coupon is excludable from the tax as a cash discount, unless a third party reimburses the retailer for the amount of the coupon (a manufacturer's coupon). Example: A customer buys a pair shoes priced at $110 with a retailer's coupon worth $10 off. The final sales price of the shoes is $100. Since the retailer issued the coupon and is not reimbursed by a third party, the shoes qualify for the exemption. Example: If a customer purchases a pair of shoes priced at $110 with a manufacturer's coupon worth $10 off, the consideration paid for the pair of shoes for tax purposes is $110, and the shoes do not qualify for the exemption. "Tax" discounts. Retailers cannot state or imply that they will pay the DC sales tax on non-exempt items during the Sales Tax Holiday or at any other time. DC law prohibits vendors from directly or indirectly stating that they will absorb the tax, that it will not be added to the price of taxable property or services, or that the tax will be refunded. Buy one, get one free or for a reduced price. The total price of items advertised as "buy one get one free" or "buy one for a reduced price" cannot be averaged to qualify both items for the exemption. The application of the exemption depends on the actual price paid for the items. Example: A retailer advertises pants as "buy one get one free." The first pair of pants is priced at $120 and the second pair is free. The tax is due on the $120. However, if the retailer advertises and sells the pants for 50 percent off, selling each pair of $120 pants for $60, each pair of pants qualifies for the exemption. Example: A retailer advertises shoes as "buy one at the regular price, get a second pair for half price." The first pair of shoes is sold for $120 and the second pair is sold for $60. Tax is due on the $120 pair of shoes but not on the $60 pair of shoes. Having advertised that the second pair is half price, the store cannot ring up each pair of shoes for $90 each so the items will not qualify for the exemption. However, if the retailer advertises the shoes for 50 percent off, thereby selling each pair of $120 shoes for $60, each pair qualifies for the exemption. Rebates. Rebates occur after the sale and do not affect the sales price of an item for purposes of the Sales Tax Holiday exemption. Example: A customer buys a sweater for $110 and sends for and later receives a $12 rebate from the manufacturer. The retailer should collect tax on the $110 price of the sweater. Layaway sales A layaway sale is a transaction in which merchandise is set aside for future delivery to a customer who makes a deposit, agrees to pay the balance of the purchase price over a period of time, and receives the merchandise at the end of the payments. Qualifying items placed on layaway during the Sales Tax Holiday are exempt from sales tax. Example: A customer places items of clothing, each costing less than $101, on layaway during the Sales Tax Holiday. The customer completes the layaway payment and receives the merchandise after the holiday period. The total purchase is exempt from the tax. Rain checks Eligible items purchased during the Sales Tax Holiday using a rain check qualify for the sales tax exemption only if the rain check is redeemed during the Sales Tax Holiday. If it is redeemed after the holiday period, the purchase is not tax exempt. Exchanges If a customer buys an eligible item during the exemption period and later exchanges it for the same item (different size or color), tax is not to be charged even if the exchange is made after the Sales Tax Holiday. Example: A customer buys a $30 pair of shoes during the Sales Tax Holiday and later exchanges it for the same item in a different size. Tax is not due on the $30 price of the shoes received in the exchange. If a customer buys an eligible item during the Sales Tax Holiday and returns the item after that week for credit on the purchase of a different item, the sales tax applies to the sale of the newly purchased item even if it would have been eligible for the exemption during the Sales Tax Holiday. Example: A customer purchases a $2 notebook during the exemption period and then exchanges the notebook for a $2 ream of paper. Because the paper was not purchased during the exemption period, tax is due on the $2 price of the paper. Example: A customer purchases a $40 dress during the Sales Tax Holiday. The customer exchanges the dress during the holiday period for a $90 dress. Tax is not due on the $90 dress because it was purchased during the Sales Tax Holiday period. Returned merchandise For a 30-day period after the Sales Tax Holiday, retailers may not refund or credit sales tax on qualified items purchased during the Sales Tax Holiday, unless the customer provides a receipt or invoice showing tax was paid during the holiday period, or unless the retailer can document that tax was paid on the specific item during the holiday period. Mail, telephone, email, and Internet orders Qualified items sold to purchasers in the District of Columbia by mail, telephone, email and Internet shall qualify for the sales tax exemption if: The item is both delivered to and paid for by the customer during the Sales Tax Holiday period; The customer orders and pays for the item and the retailer accepts the order during the exemption period for immediate shipment, even if delivery is made after the exemption period. Shipping and handling charges Separately stated shipping or delivery charges are not included in the sale price of otherwise eligible items, and therefore such charges are not eligible for the exemption. However, a combined shipping and handling charge is considered part of the sales price of an item, even if stated separately from the price of the item. These charges must be added to the price of the eligible item to determine if it is less than $101. If more than one item is shipped on a single invoice, the separately stated combined shipping and handling charge must be proportionately allocated to each item ordered and separately identified on the invoice, based on the price of each item. Refunds Retailers should refund tax to any customer who was charged sales tax on an exempt item during the Sales Tax Holiday. Customers who were charged the tax by a retailer should take their tax paid receipt to the retailer for a refund. Documenting exempt sales Retailers filing monthly or annual Sales and Use tax returns should enter the total amount of tax exempted due to the Sales Tax Holiday along with any other exempt taxes on line 11 of the Sales Tax portion of the tax return. Retailers also are encouraged to clearly state in their records the type of item sold, the date sold and the sales price of tax-exempt merchandise sold during Sales Tax Holiday.