Chief Counsel Advice 201128024
In Chief Counsel Advice (CCA), IRS has determined that an indoor tanning salon customer's redemption of various “bonus bucks,” reward points, coupons, and similar devices (collectively, points) issued by the salon as a reward for purchases isn't subject to the Code Sec. 5000B excise tax. IRS also determined that there may be permissible methods to calculate the taxable portion of bundled services other than the ratio method described in Reg. §49.5000B-1T(d)(3), but declined to decide whether the salon's hypothetical method was itself permissible.
Background. Under Code Sec. 5000B, recipients of any indoor tanning service must pay an excise tax equal to 10% of the amount paid for such service, whether paid by insurance or otherwise.
The tax is paid by the individual on whom the service is performed. (Code Sec. 5000B(c)(1)) Under Reg. §49.5000B-1T(b)(1), it is imposed at the time of payment for any indoor tanning services— thus, the event triggering the tax is the payment for such services. The tax is collected by the provider of the services at the time of payment, even if some or all of the payment will later be reimbursed by insurance. (Code Sec. 5000B(c)(1))
If an indoor tanning services provider offers tanning services bundled with other types of goods and services, the tax applies to that portion of the amount paid to the provider that is reasonably attributable to indoor tanning services. (Reg. §49.5000B-1T(d)(3)) A provider may determine the “reasonably attributable” amount by multiplying the total amount paid by a fraction, the numerator of which is the provider's unbundled charge for indoor tanning services, and the denominator of which is the provider's unbundled charge for other goods and services. If the provider only provides the other goods and services as part of a bundled package, then the fraction is determined based on the amounts charged by comparable providers in the same geographic area. (Reg. §49.5000B-1T(d)(3))
Facts. An indoor tanning salon runs a promotion during which a customer is awarded points for each dollar spent at the salon. The points are accumulated by customers and used like cash to obtain indoor tanning services or other goods and services such as tanning lotions or salon services. When the customer redeems points, he is able to receive the goods and services for free, or purchase them with cash at a reduced price, depending on the number of points redeemed.
The tanning salon sought rulings regarding the applicability of Code Sec. 5000B to a customer's redemption of points for indoor tanning services. Specifically, the salon sought guidance on: (i) what difference, if any, is made by whether the points were earned by the customer's purchase of indoor tanning vs. other types of services; and (ii) what effect, if any, results from the customer's use of a combination of points and cash to obtain indoor tanning services. Additionally, the salon requested guidance on whether there were additional methods, other than the one provided in Reg. §49.5000B-1T(d)(3), that could be used to determine the taxable portion of a bundled package of tanning and other salon services.
Favorable ruling. IRS determined that the redemption of points for indoor tanning services isn't a taxable event for purposes of the indoor tanning services excise tax. IRS noted that Reg. §49.5000B-1T(b)(1) defines the taxable event as occurring when an amount is paid for indoor tanning services, and although no guidance directly addresses the definition of “amount paid” in the indoor tanning context, comparable guidance shows that Code Sec. 5000B doesn't apply to any indoor tanning services that are provided for free (i.e., solely for points). For example, in the context of the Code Sec. 4261(c) international travel facilities tax, Rev Rul 72-245, 1972-1 CB 347, provides that the tax doesn't apply to an airline's grant to an employee of the use of its international air travel facilities free of charge.
However, if a customer hasn't accumulated enough points to obtain free services, but instead redeems the available points and pays a reduced rate, comparable guidance similarly shows that the Code Sec. 5000B tax arises to the extent of cash paid. For instance, under Rev Rul 84-12, 1984-1 CB 211, an airline customer who hasn't fully satisfied the airline's requirements to receive a free bonus ticket, but instead pays a portion of the ticket price, is subject to the Code Sec. 4261(a) tax on air transportation to the extent of the amount paid.
Thus, if a customer “pays” for indoor tanning services entirely by redeeming points, the customer is not liable for any tax under Code Sec. 5000B. This result is the same regardless of how the customer acquired the points (i.e., by purchasing tanning or other types of services). However, if the customer uses both points and cash to purchase the services, then the Code Sec. 5000B tax applies to the amount of cash paid.
IRS also determined that the plain language of Reg. §49.5000B-1T(d)(3), which states that the amount of a bundled fee attributable to indoor tanning services “may” be determined using the methodology described above, suggests that the provided method is permissible and not mandatory. Although no alternative methods are contained in the regs, IRS concluded that Reg. §49.5000B-1T(d)(3) left the door open to other permissible methods.
However, IRS declined to decide whether the salon's hypothetical method, under which it would determine the amount of the bundle attributable to indoor tanning services by relying on its detailed historical records, was a permissible method. IRS stated that this was a tax administration issue rather than a legal issue, and it should be evaluated during the examination process based on real facts and not hypotheticals.
References: For the excise tax on indoor tanning services, see FTC 2d/FIN ¶W-6501; United States Tax Reporter Excise ¶50,00B4. For determining the extent that a fee for bundled services is attributable to indoor tanning services, see FTC 2d/FIN ¶W-6507.