There's No Such Thing as a Free Coffee

By: Mike Hilliker

The Sunday Camera’s front-page report, “Tax on Freebies Surprises Boulder Business Owners,” contains an error that was repeated in the editorial of October 31, “Charitable Tax Evaders.” Vic’s Coffee does not owe tax on the 11th cup of coffee that it serves to customers redeeming their spent customer loyalty cards. While use tax is due on a donor’s cost of an item “given away,” that is not the case in Vic’s Coffee’s situation because the customers had to first buy ten cups of coffee such that the cost of that 11th cup was rolled into the preceding transactions.

In light of the fact that Boulder is attempting to collect sales tax on phantom transactions, Vic’s Coffee has protested the City’s assessment and will bring the matter before the City Manager and, if we are not successful at that stage, I will pursue other remedies available to me. While Vic’s Coffee will agree to pay tax when it gives something away – during its customer appreciation days, for example – it will not pay tax on coffee that is part of its customer loyalty program, one that the Camera correctly characterized as a “buy 10, get one free” punch card program.

Boulder Municipal Code § 3-1-1 defines “price” and “purchase price” to exclude, among others, “(c) Discounts from the original price if such discount and the corresponding decrease in sales tax due is actually passed on to the purchaser.” Moreover, Code § 3-2-10 deducts from the taxable gross sales of a vendor the amount of discount from the original sales price if the discount and corresponding decrease in sales tax due is actually passed on to the purchaser. Because Vic’s Coffee discounts its customers’ 11th cup of coffee without reimbursement from a third party, it is entitled to treat the transactions the way it has, just as a grocery store or restaurant treats a “buy 1, get one free” promotional transaction.

Boulder has a legal foundation for taxing food and beverage giveaways, such as those offered at “happy hour” buffets, continental breakfasts, or peanuts and pretzels at a bar. However, Vic’s Coffee’s punch card promotion is not a giveaway because the customer must purchase ten cups to receive the 11th as part of the full package. In fact, when customers come in to purchase 11 cups of coffee for a meeting or as a group, the customers are only charged for ten cups, parallel to a baker’s dozen.

It is important to understand Vic’s Coffee’s objection to the City’s erroneous assessment. Just as Vic’s Coffee is correcting Boulder’s mischaracterization of its transactions for the sake of its business, customers, and similarly-situated Boulder businesses with customer appreciation programs, it felt compelled to make sure the Camera and its readers understand the nature of its argument.

Vic's Coffe