Items Given Away For Free - Change In Wisconsin Sales and Use Tax Treatment Effective October 1, 2009

NOTE: This Article Has Been Replaced by a Tax Release Dated December 8, 2011.

This article explains the proper Wisconsin sales and use tax treatment of transactions in which an item is provided free of charge on the condition that the purchaser makes some other required purchase.

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 or 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. (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 77.52 (20), Wis. Stats., imposes Wisconsin sales tax on the entire sales price of a bundled transaction.

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."

Sales and Use Tax Treatment Effective October 1, 2009 and Thereafter
Based on 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. (See Exception, below.) This is true regardless of whether the customer is required to purchase a separate taxable or nontaxable item before getting the free item. This is a change from prior law.

Prior to October 1, 2009, retailers were considered to have made a retail sale of the items they transferred to customers who were required to purchase some other property in order to receive the "free" item. In addition, retailers were allowed to purchase such "free" items without tax for resale.

Exception: Items that were purchased without tax for resale prior to October 1, 2009 that were intended to be transferred to customers who are required to purchase some other property in order to receive the "free" item do not become subject to use tax solely due to the sec. 77.52 (21), Wis. Stats., law change. This includes such items that are transferred to customers October 1, 2009 or thereafter. However, if a customer receives a taxable "free" item when purchasing a nontaxable item, the seller may use the cost of the "free" item to determine the amount that is subject to sales tax.

The following examples illustrate this change.

Example 1: Taxable Item Given Away with Required Purchase of Nontaxable Item – On or after October 1, 2009, 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. 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.*

For sales made prior to October 1 2009, Retailer A was required to allocate its selling price between the taxable item (i.e., the hat) that was "given away" and the nontaxable item (i.e., the gasoline) that was sold. Retailer A was liable for the sales tax on the portion of its selling price allocated to the taxable item (i.e., the hat) that was "given away." Retailer A could have purchased the hats without tax, because they were for resale.

*Hats that were purchased without tax for resale prior to October 1, 2009 that are "given away" on October 1, 2009 or thereafter will not become subject to use tax solely due to the change in law. Retailer A may use the cost of the hats to determine the amount that is subject to sales tax.

Example 2: Taxable Item Given Away with Required Purchase of a Different Taxable Item – On or after October 1, 2009, 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. 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.**

For sales made prior to October 1 2009, since both the item that was being purchased (i.e., the couch) and the item that was being "given away" (i.e., the bicycle) are taxable items, no specific allocation between the selling prices of the items would have been made (i.e., Retailer B would have charged sales tax on the entire selling price, regardless of any allocation of the selling price between the two items). Retailer B could have purchased the bicycles without tax, because they were for resale.

**Bicycles that were purchased without tax for resale prior to October 1, 2009 that are "given away" on October 1, 2009 or thereafter will not become subject to use tax solely due to the change in law. Retailer B is liable for Wisconsin sales tax on its sale of the couch, but it not liable for Wisconsin use tax on its purchase of the bicycle.

Example 3: Taxable Item Given Away with Required Purchase of Both Taxable and Nontaxable Items – On or after October 1, 2009, 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. 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.***

For sales made prior to October 1, 2009, Retailer C would have made an allocation of the selling price between the taxable item that was "given away" (i.e., the soft drink) and the taxable and nontaxable items that were sold. Retailer C would have been required to charge sales tax on the total amount allocated to the taxable items (which would include the taxable item that was "given away"). This allocation could have been computed by determining the ratio of the overall cost of all of the taxable items (including the taxable item that was "given away") to the overall cost of all of the items in the transaction (including the cost of the taxable item that was "given away") and then multiplying that ratio times the total selling price charged to the customer to arrive at the amount subject to Wisconsin sales tax.

***Soft drinks that were purchased without tax for resale prior to October 1, 2009 that are "given away" on October 1, 2009 or thereafter will not become subject to use tax solely due to the change in law. Retailer C may use the cost of the soft drinks to determine the amount that is subject to sales tax.

Page last updated December 4, 2009