Should Customer Loyalty Cards Have a Use Tax?

Monday, April 28, 2008 by Mistlee

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Should Customer Loyalty Cards Have a "Use Tax"?

By Dave Taylor

There's a very interesting sales tax issue brewing here in Boulder, as reported in the local paper. Seems that someone in city hall has gotten the inspiration to tax a local coffee house, Vics, for the hundreds of free cups of coffee they hand out to frequent customers.

Lots of companies in Boulder have the customer loyalty device in question: a frequent buyer punch card or similar. I have about a dozen of them in my wallet or car glove compartment and they're all generally the same: get ten punches and the eleventh is on the house. Whether it's an expensive coffee drink, a burrito, a smoothie or even a sandwich, companies from Safeway to Wahoo's Fish Tacos have these ubiquitous cards.

According to the paper, Vic's owes the city approximately $3,000 in unpaid sales tax, which is being labeled "use tax". Rather than just pay it or register a complaint through the chamber of commerce, Vic's has brought its fight public by putting up a Web site and hosting a fund raiser for its legal fund. You can check out the site at Vic's

I'm torn on this issue because on the one hand, I really like the loyalty card idea and it does help me decide to return to my favorite haunts on a regular basis, but tax revenue from commercial transactions are also an important source of funds for the city and the myriad of services I enjoy as a resident too.

Learn More about what is Inside and Outside the Box

Vic's basic argument is that the sales tax for the paid portion of the loyalty transactions (e.g., the ten cups you have to buy to get the eleventh free) are sufficient and that the cost of the eleventh cup is already factored into the price of the ten paid cups, so the city's already received the sales tax in advance for that freebie cup.

If you think about the economics of running a business, that must be true because however inexpensive the cost of a free burrito, sandwich or latte, it's still non-zero and that money has to come from somewhere, but I have to admit that it makes me feel a tiny bit squeamish that the price of goods is artificially inflated to pay for freebies that I might not every enjoy if I'm not a regular patron of the establishment.

At some level I think it's a pragmatic issue: both residents and visitors to Boulder clearly demonstrate the effectiveness of loyalty programs through their shopping and eating habits, and anything that keeps customers coming back to a local business must be good — in the long term — for Boulder's tax coffers.

My conclusion: the city should be happy with the tax collected by the paid portion of the loyalty program and happy that local businesses have such an effective tool to help generate more business and revenue.

The alternative really can cripple smaller businesses in particular. No "10% discount for frequent customers", no "buy three get one free", none of that, not even down by CU, where these programs are omnipresent. The end result is to take away an effective retail business tool, and that could prove a greater cost to the city than any potential tax revenue from these loyalty programs.


About the Author:
Dave Taylor has been involved with the Internet since 1980 and is internationally known as an expert on both business and technology issues. Holder of an MSEd and MBA, author of twenty books and founder of four startups, he also runs a strategic marketing company and consults with firms seeking the best approach to working with weblogs and social networks. Dave is an award-winning speaker and frequent guest on radio and podcast programs.
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