Businesses frequently find it advantageous to provide their customers with extra goods or services. In addition to generating loyalty and goodwill, providing certain items for free can often induce customers to purchase additional items.1 From an income tax perspective, providing additional goods usually does not raise any meaningful issues, as the cost of providing the additional goods is generally deductible as a business expense. The impact of the sales tax is more complex, particularly when a company may be selling or giving away some items subject to sales tax and other items that are exempt.
Two recent sales tax cases highlight the complexities of offering “free” items to customers as an add-on to those services for which the seller is charging a fee: Washington Square Hotel LLC2 and Institutional Investor, Inc.3
Hotel Case
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