Vendor Funded Incentives May Be Used to Reduce Cost of Goods Sold for Texas Franchise Tax Purposes

To promote sales of their products, wholesalers and manufacturers provide retailers allowances, credits, and rebates in exchange for advertising promotions or vendor-funded incentives (VFI).  Some promotions are based on sales (e.g., volume incentives), and some are for advertising (e.g., product demonstrations). 

In a recently published memorandum, the Texas Comptroller instructed auditors that sales-based VFIs can be used by auditors to reduce a taxpayer’s cost of goods sold (COGS), provided the VFIs are not reported as revenue. Examples of VFIs that auditors were instructed to exclude from COGS calculations include coupon program face value, depletion allowance/volume incentives, markdown funding, new-item allowances, sales-based incentives, and temporary-price reductions.

Because the computation of COGS in Tex. Tax Code Section 171.1012 specifically excludes “selling costs and advertising costs,” an auditor cannot use contra-expense accounts for VFIs that relate to advertising or selling activities to reduce a taxpayer’s COGS calculation. Examples of selling or advertising-based VFIs include advertising, coupon-program-handling fees, product demos, product placement, and shows and seminars.

TECHNICAL INFORMATION CONTACT:

Adina Christian
Director
Ryan
512.476.0022
adina.christian@ryan.com