A recent memo issued by the Comptroller’s Tax Policy Division provides guidance on the Texas franchise tax treatment of various types of vendor funded incentives. The issue is whether the incentives reduce COGS, are included in revenue, or are ignored altogether. Vendors provide incentives as allowances, credits, and rebates to retailers through a variety of programs to support merchandise purchased for retail. Vendor Funded Incentives (VFI) refers to this collection of programs and includes incentives like volume-based purchase adjustments, sales-based incentives, produce placement incentives, new store allowances, and depletion allowances.
Some retailers argue that VFI should not be treated as a reduction in the COGS deduction for franchise tax purposes, because VFI relate to the sale of goods rather than the purchase of goods for resale.
The Comptroller’s position is that certain VFIs relating to advertising or selling activities are excluded from the COGS calculation. Specifically, advertising, coupon program-handling fees, product demos, product placement, and shows and seminars are excluded. This means that the taxpayers’ COGS deduction is not reduced by the VFI. However, certain sales-based incentives are included in the COGS calculation, if not reported as revenue. These include coupon program-face value, depletion allowance or volume incentives, mark down funding, new item allowances, sales based incentives, and temporary price reductions.