"Buy One, Get One Free" and Similar Promotions

NOTE: This Article Has Been Replaced by a Tax Release Dated December 8, 2011.

Statutes: Section 77.51(1f)(intro.), (3pf)(b), (15b)(b)1. and (c), and 77.52(21), Wis. Stats., as created by 2009 Wis. Act 2, sec. 77.52(2m)(b), Wis. Stats. (2007-08), as amended by 2009 Wis. Act 2, and sec. 77.51(11d), Wis. Stats., as created by 2009 Wis. Act 2 and amended by 2009 Wis. Act 28.

Wisconsin Administrative Code: Section Tax 11.28, Wis. Adm. Code (May 2010 Register).

Effective October 1, 2009, Wisconsin sales and use tax law was changed to impose tax on a retailer's purchases of items that it provides free of charge to its customers with the required purchase of another item. This article provides examples to illustrate how Wisconsin sales and use taxes apply to various promotions.

Applicable Wisconsin Statutes:

Section 77.51(1f)(intro.), Wis. Stats., defines "bundled transaction" to mean " …the retail sale of 2 or more products, not including real property and services to real property, if the products are distinct and identifiable products and sold for one nonitemized price…"

Section 77.51(3pf)(b), Wis. Stats., provides that "distinct and identifiable product" does not include "A product that is provided free of charge to the consumer in conjunction with the required purchase of another product, if the sales price of the other product does not vary depending on whether the product provided free of charge is included in the transaction."

Section 77.51(11d), Wis. Stats., provides that "For purposes of subs. (1ag), (1f), (3pf), and (9p) and ss. 77.52(20) and (21), 77.522, and 77.54(51) and (52), 'product' includes tangible personal property, and items, property, and goods under s. 77.52(1)(b), (c), and (d), and services."

Section 77.51(15b)(b)1., Wis. Stats., provides that "sales price" does not include "Discounts, including cash, terms, or coupons, that are not reimbursed by a 3rd party, except as provided in par. (c); that are allowed by a seller; and that are taken by a purchaser on a sale."

Section 77.51(15b)(c), Wis. Stats., provides that "sales price" includes consideration received by a seller from a 3rd party, if:

"1. The seller actually receives consideration from a 3rd party, other than the purchaser, and the consideration is directly related to a price reduction or discount on a sale.

2. The seller is obliged to pass the price reduction or discount to the purchaser.

3. The amount of the consideration that is attributable to the sale is a fixed amount and the seller is able to determine that amount at the time of the sale to the purchaser.

4. One of the following also applies:

a. The purchaser presents a coupon, certificate, or other documentation to the seller to claim the price reduction or discount, if the coupon, certificate, or other documentation is authorized, distributed, or granted by the 3rd party with the understanding that the 3rd party will reimburse the seller for the amount of the price reduction or discount.

b. The purchaser identifies himself or herself to the seller as a member of a group or organization that may claim the price reduction or discount.

c. The seller provides an invoice to the purchaser, or the purchaser presents a coupon, certificate, or other documentation to the seller, that identifies the price reduction or discount as a 3rd-party price reduction or discount."

Section 77.52(21), Wis. Stats., provides that "A person who provides a product that is not a distinct and identifiable product because it is provided free of charge, as provided in s. 77.51(3pf)(b), is the consumer of that product and shall pay the tax imposed under this subchapter on the purchase price of that product."

Section 77.52(2m)(b), Wis. Stats., provides that "With respect to the services subject to tax under sub. (2)(a)7., 10., 11. and 20., all property or items, property, or goods under s. 77.52(1) (b), (c), or (d) physically transferred, or transferred electronically, to the customer in conjunction with the selling, performing or furnishing of the service is a sale of tangible personal property or items, property, or goods under s. 77.52(1)(b), (c), or (d) separate from the selling, performing or furnishing of the service."

Applicable Wisconsin Administrative Code:

Section Tax 11.28(2)(a), Wis. Adm. Code (May 2010 Register), provides, in part:

"…Persons who make gifts of taxable tangible personal property or items, property, or goods under s. 77.52(1)(b), (c), or (d), Stats., or distribute tangible personal property or items, property, or goods under s. 77.52(1)(b), (c), or (d), Stats., at no charge to others are the consumers of the property, items, or goods and the tax shall apply to the sales price from the sale of the property, items, or goods to persons making gifts. …"

Sales and Use Tax Treatment Effective October 1, 2009 and Thereafter:

Note: The information contained in this article assumes the item provided free of charge is a taxable item. You should also note that exceptions may apply to transactions that occur prior to October 1, 2009. Additional information, including the tax treatment of purchases and sales made prior to October 1, 2009, is provided in an article titled Items Given Away For Free - Change In Wisconsin Sales and Use Tax Treatment Effective October 1, 2009.

As provided in sec. 77.52(21), Wis. Stats., a retailer is the consumer of the items it provides free of charge in conjunction with the required purchase of another product and is required to pay Wisconsin sales or use tax on its purchases of these free items. This is true regardless of whether the required purchase is a taxable or nontaxable item.

An item is provided free of charge with the required purchase of another product if the customer does not have to pay an additional amount to receive the second item (i.e., the sales price of the transaction does not vary depending upon whether or not the second item is included in the transaction).

The sales and use tax treatment of buy one, get one free and similar promotions is determined by the invoice or receipt provided by the seller to the customer. If the invoice or receipt provided by the seller to the customer indicates that a second item is provided free to the customer when the customer buys the first item, then the seller is the consumer of the second item and is required to pay Wisconsin sales or use tax on its purchase of this item. This includes invoices or receipts that show a sales price for the second item, along with a discount applicable to the second item that reduces the sales price of the second item to zero. This is provided in sec. 77.51(15b)(b)1., which states that "sales price" does not include discounts allowed by a seller and taken by a purchaser on a sale.

If the invoice or receipt provided by the seller to the customer indicates that the seller makes a charge to the customer for the second item, and the charge is not discounted or otherwise adjusted to zero, the seller may purchase the second item without tax for resale.

The tax treatment is not affected by whether or not the item given away for free is the same as, similar to, or different than the item required to be purchased.

Exception: Section 77.52(21), Wis. Stats., does not apply to tangible personal property transferred to the customer in conjunction with services that are identified in sec. 77.52(2)(a)7., 10., 11., or 20., Wis. Stats. (photographic services; repair and certain other services to tangible personal property and certain other items; producing, fabricating, processing, printing, or imprinting of tangible personal property and certain other items; and landscaping and lawn maintenance services).

Examples:

The following examples illustrate this change. (Note: In all of the following examples, the retailer's purchases and sales are made on or after October 1, 2009.)

Index to Examples

Example 1: Taxable Item Given Away with Required Purchase of Nontaxable Item

Example 2: Taxable Item Given Away with Required Purchase of a Different Taxable Item

Example 3: Retailer Advertises that a Taxable Item is Included with the Purchase of a Different Taxable Item

Example 4: Taxable Item Given Away with Required Purchase of Both Taxable and Nontaxable Items

Example 5: Retailer Advertises "Two for the Price of One;" Second Item Provided Free

Example 6: Retailer Advertises "Two for the Price of One;" Retailer Charges for Second Item

Example 7: Retailer Advertises "Buy One, Get One Free;" Discount Applied to Total Sales Price

Example 8: Retailer Advertises "Buy One, Get One Free;" Discount Applied Equally to Both Items

Example 9: Retailer Advertises "Buy One, Get One Free;" Discount Applied to One Item

Example 10: Retailer Advertises "Buy Two, Get Half Off;" Discount Applied to Total Sales Price

Example 11: Retailer Advertises "Buy Two, Get Half Off;" Discount Applied Equally to Both Items

Example 12: Retailer Advertises "Buy Two, Get Half Off;" Discount Applied to One Item

Example 13: Retailer Advertises "Buy One, Get One for a Penny"

Example 14: "Buy One, Get One Free;" Retailer Receives Reimbursement from Manufacturer

Example 15: Restaurant Advertises "Buy One Meal, Get Second Meal Free"

Example 16: Restaurant Advertises "Buy One Meal, Get Second Meal Free;" Buys Meals from Caterer

Example 17: Retailer Offers Fourth Tire Free with Purchase of Three Other Tires

Example 18: Retailer Offers 11th Oil Change Free

Example 19: Dealer Provides Free Loaner Car with Repair Service

Example 20: Retailer Offers Free Taxable Products When Customer Redeems Points; Points Received for Buying Nontaxable Services

Example 1: Taxable Item Given Away with Required Purchase of Nontaxable Item - Retailer A provides a hat free of charge to any customer that purchases a certain number of gallons of gasoline (i.e., a nontaxable item). The price of the gasoline does not vary depending on whether the hat is included in the transaction. The receipt given by Retailer A to the customer indicates the sales price of the gasoline but does not mention the hat at all. Since Retailer A is giving a hat at no charge to any customer that purchases the required number of gallons of gasoline, Retailer A is the consumer of these hats, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the hats.

Example 2: Taxable Item Given Away with Required Purchase of a Different Taxable Item - Retailer B provides a bicycle free of charge to every customer that purchases a new couch. The price of the couch does not vary depending on whether the bicycle is included in the transaction. The receipt given by Retailer B to the customer indicates that the bicycle is given to the customer for no charge. Since Retailer B is providing a bicycle free of charge to every customer that purchases a couch, Retailer B is the consumer of these bicycles, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the bicycles.

Example 3: Retailer Advertises that a Taxable Item is Included with the Purchase of a Different Taxable Item - Same as Example 2, except that Retailer B advertises that the bicycle is included with the purchase of the couch. The receipt given by Retailer B to the customer indicates that the bicycle is given to the customer for no charge. Since Retailer B is providing a bicycle free of charge to every customer that purchases a couch, Retailer B is the consumer of these bicycles, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the bicycles.

Example 4: Taxable Item Given Away with Required Purchase of Both Taxable and Nontaxable Items - Retailer C provides a soft drink free of charge to every customer that purchases $20 worth of products. The sales prices of the products in the required purchase do not vary depending on whether the soft drink is included in the transaction and the products that are purchased by the customer may or may not be subject to Wisconsin sales or use tax. The receipt given by Retailer C to the customer indicates that the soft drink is given to the customer for no charge. Since Retailer C is providing a soft drink free of charge to every customer that purchases $20 worth of products, Retailer C is the consumer of the soft drinks it provides free of charge, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of these soft drinks.

Example 5: Retailer Advertises "Two for the Price of One;" Second Item Provided Free - Retailer D has a promotion in which it advertises that a customer may buy two candy bars for the price of one. A customer may buy one candy bar for $1.00 and receive a second candy bar at no additional charge. If the customer wants only one candy bar, the customer will still have to pay $1.00. The receipt given by Retailer D to the customer indicates that the second candy bar is given to the customer for no charge. Since Retailer D is providing a candy bar free of charge to every customer that buys a candy bar, Retailer D is the consumer of the candy bars that it provides free of charge, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of these candy bars.

Example 6: Retailer Advertises "Two for the Price of One;" Retailer Charges for Second Item - Retailer E has a promotion in which it advertises that a customer may buy two candy bars for the price of one. If a customer buys a candy bar at the regular price of $1.00, the customer may receive a second candy bar free of charge. However, if a customer buys only one candy bar, the price of the candy bar is $0.79. The receipt given by Retailer E to the customer indicates a sales price of $0.79 for the first candy bar and a sales price of $0.21 for the second candy bar. Since a customer must pay an additional amount to receive the second candy bar, the second candy bar is not given away for free. Section 77.52(21), Wis. Stats., does not apply and Retailer D may purchase the candy bars that it provides to its customers in this promotion without tax for resale.

Example 7: Retailer Advertises "Buy One, Get One Free;" Discount Applied to Total Sales Price - Retailer F has a promotion in which it advertises that a customer may buy one shirt at the regular price of $30, and receive the second shirt free. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, and a $30 discount (i.e., 50% discount) applied against the $60 total sales price for the two shirts. Since the receipt given by Retailer F to the customer indicates a $30 selling price for each shirt, and the discount does not reduce the sales price of either shirt to zero, but instead is applied against the total $60 amount, sec. 77.52(21), Wis. Stats., does not apply and Retailer F may purchase both shirts without tax for resale.

Example 8: Retailer Advertises "Buy One, Get One Free;" Discount Applied Equally to Both Items - Retailer F has a promotion in which it advertises that a customer may buy one shirt at the regular price of $30, and receive the second shirt free. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, a $15 discount (i.e., 50% discount) applied to the sales price of the first shirt and a $15 discount (i.e., 50% discount) applied to the sales price of the second shirt. Since the receipt given by Retailer F to the customer indicates a $30 selling price for each shirt, and the discount does not reduce the sales price of either shirt to zero, but instead is applied equally against the sales prices of both shirts, sec. 77.52(21), Wis. Stats., does not apply and Retailer F may purchase both shirts without tax for resale.

Example 9: Retailer Advertises "Buy One, Get One Free;" Discount Applied to One Item - Retailer F has a promotion in which it advertises that a customer may buy one shirt at the regular price of $30, and receive the second shirt free. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, and a $30 discount applied against the sales price of the second shirt. Since the receipt given by Retailer F to the customer reduces the sales price of the second shirt to zero, Retailer F is the consumer of the second shirt, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the second shirt.

Example 10: Retailer Advertises "Buy Two, Get Half Off;" Discount Applied to Total Sales Price - Retailer F has a promotion in which it advertises that a customer may buy two shirts that have a regular price of $30 each, and receive half off the total sales price of the two shirts. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, and a $30 discount (i.e., 50% discount) applied against the $60 total sales price for the two shirts. Since the receipt given by Retailer F to the customer indicates a $30 selling price for each shirt, and the discount does not reduce the sales price of either shirt to zero, but instead is applied against the total $60 amount, sec. 77.52(21), Wis. Stats., does not apply and Retailer F may purchase both shirts without tax for resale.

Example 11: Retailer Advertises "Buy Two, Get Half Off;" Discount Applied Equally to Both Items - Retailer F has a promotion in which it advertises that a customer may buy two shirts that have a regular price of $30 each, and receive half off the total sales price of the two shirts. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, a $15 discount (i.e., 50% discount) applied to the sales price of the first shirt and a $15 discount (i.e., 50% discount) applied to the sales price of the second shirt. Since the receipt given by Retailer F to the customer indicates a $30 selling price for each shirt, and the discount does not reduce the sales price of either shirt to zero, but instead is applied equally against the sales prices of both shirts, sec. 77.52(21), Wis. Stats., does not apply and Retailer F may purchase both shirts without tax for resale.

Example 12: Retailer Advertises "Buy Two, Get Half Off;" Discount Applied to One Item - Retailer F has a promotion in which it advertises that a customer may buy two shirts that have a regular price of $30 each, and receive half off the total sales price of the two shirts. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, and a $30 discount applied against the sales price of the second shirt. Since the receipt given by Retailer F to the customer reduces the sales price of the second shirt to zero, Retailer F is the consumer of the second shirt, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the second shirt.

Example 13: Retailer Advertises "Buy One, Get One for a Penny" - Retailer F has a promotion in which it advertises that a customer may buy one shirt that has a regular price of $30 and receive a second shirt for a penny. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt and a sales price of $0.01 for the second shirt. Since a customer must pay an additional amount to receive the second shirt, the second shirt is not given away for free. Section 77.52(21), Wis. Stats., does not apply and Retailer F may purchase the shirts that it sells to its customers in this promotion without tax for resale.

Example 14: "Buy One, Get One Free;" Retailer Receives Reimbursement from Manufacturer - Battery Manufacturer G offers a promotion to Retailer H in which Retailer H will receive $1.00 for every package of batteries it gives away free in a buy one, get one free promotion. The receipt given by Retailer H to its customer indicates that one of the packages of batteries is given to the customer for no charge. None of the conditions in sec. 77.51(15b)(c)4.a. to c., Wis. Stats., apply to the sale of the batteries by Retailer H to its customer:

Retailer H must pay sales or use tax on its purchase of the package of batteries that it gives to its customer, based on its initial purchase price of the package of batteries less the $1.00 reimbursement from Battery Manufacturer G.

Example 15: Restaurant Advertises "Buy One Meal, Get Second Meal Free" - Restaurant I runs a promotion in which a customer may buy one meal and receive a second meal free. No additional charge is made for the second meal, and the price of the first meal does not vary if the second meal is received. The receipt given by Restaurant I to the customer indicates that the second meal is given to the customer for no charge. Restaurant I buys the ingredients for the meals and prepares the meals itself. Since Restaurant I is providing a meal free of charge to customers that buy a meal, Restaurant I is the consumer of the ingredients it uses to prepare the meals it provides free of charge, as provided in sec. 77.52 (21), Wis. Stats. Most of the ingredients Restaurant I purchases to prepare the meals qualify for the exemption for food and food ingredients, and Restaurant I does not owe sales or use tax on its purchases of these items. However, to the extent that Restaurant I buys taxable items, and gives them to customers as a part of the meals it gives away for free, Restaurant I owes sales or use tax on its purchases of those taxable items. Examples of ingredients Restaurant I may buy without tax include meats, vegetables, bread, milk, and fruit. Examples of taxable purchases by Restaurant I include soft drinks, alcoholic beverages, and candy that are given away to customers as a part of the free meals.

Example 16: Restaurant Advertises "Buy One Meal, Get Second Meal Free;" Buys Meals from Caterer - Same as Example 9, except that Restaurant I does not prepare the meals that it gives away for free. Instead, Restaurant I buys these meals from Caterer J. The meals, as Restaurant I purchases them from Caterer J, are "prepared food" because they are heated. Restaurant I owes sales or use tax on its purchases of the meals that it provides to its customers for free.

Example 17: Retailer Advertises Fourth Tire Free with Purchase of Three Other Tires - Retailer K operates an automotive repair facility. Retailer K offers a promotion in which a customer is provided a free tire if the customer purchases three other tires. If the customer does not want the free tire, the price of the other three tires does not change. The receipt given by Retailer K to the customer indicates that the fourth tire is given to the customer for no charge. Retailer K is the consumer of the tires that it provides to customers for free, as provided in sec. 77.51 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of such tires.

Example 18: Retailer Offers 11th Oil Change Free - Retailer L operates an automotive oil change shop. After purchasing ten oil changes, Retailer L's customers may receive the 11th oil change free. Retailer L is the consumer of the oil and oil filters that it provides to customers for free, as provided in sec. 77.51 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of such oil and oil filters.

Example 19: Dealer Provides Free Loaner Car with Repair Service - Motor Vehicle Dealer M takes a vehicle out of its inventory and provides it free to customers who are having repair services performed on their vehicles. Motor Vehicle Dealer M does not owe use tax on its purchase of the vehicle that it took out of inventory and used as a loaner vehicle, assuming that this is the only use that Motor Vehicle Dealer M makes of the loaner vehicle, other than retention, demonstration, or display while holding it for sale, lease, or rental in the regular course of its business. The repair service that Motor Vehicle Dealer M is performing on its customers' vehicles is a service that is identified in sec. 77.52(2)(a)10., Wis. Stats. Thus, sec. 77.52(2m)(b), Wis. Stats., allows Motor Vehicle Dealer M to purchase the loaner vehicle without tax for resale, since it is considered to be sold separately from the selling, performing, or furnishing of the repair service.

Note: If Motor Vehicle Dealer M uses the vehicle that it removes from inventory for any other purpose (other than retention, demonstration, or display while holding it for sale, lease, or rental in the regular course of its business), such as picking up and dropping off customers, running for parts, etc., its purchase price of the vehicle is subject to tax.

Example 20: Retailer Offers Free Taxable Products When Customer Redeems Points; Points Received for Buying Nontaxable Services - Retailer N operates a hair salon. Retailer N's customers may accumulate points by purchasing various services and hair products. Retailer N offers customers free bottles of shampoo and conditioner after accumulating a specified number of points. The receipt given by Retailer N to the customer indicates that the bottles of shampoo and conditioner are given to the customer for no charge. Retailer N is the consumer of the shampoo and conditioner that it provides to customers for free, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of such shampoo and conditioner.

Page last updated December 14, 2010