Jump to content
The Wifcon Forums and Blogs
Corduroy Frog

Bonus Credit Card Points

Recommended Posts

A company receives several hundred $ in promotional credit card rebates every month.  The rebate approaches 1% of the entire bill.  Which of the following describes the best treatment?

  1. The company must allocate the rebate proportionately over all charge numbers during the monthly billing period. 
  2. The company may simply put the cash in the bank and not allocate to anything.
  3. The company may let the cash accumulate, and apply it to a free airline ticket at some point.  They have to allocate the credit to the charge number of the airline ticket.
  4. Does the answer to any of the above change if some of the charges are for a cost-type contract?

Share this post


Link to post
Share on other sites
34 minutes ago, Corduroy Frog said:

A company receives several hundred $ in promotional credit card rebates every month.  The rebate approaches 1% of the entire bill.  Which of the following describes the best treatment?

  1. The company must allocate the rebate proportionately over all charge numbers during the monthly billing period. 
  2. The company may simply put the cash in the bank and not allocate to anything.
  3. The company may let the cash accumulate, and apply it to a free airline ticket at some point.  They have to allocate the credit to the charge number of the airline ticket.
  4. Does the answer to any of the above change if some of the charges are for a cost-type contract?

As to how to account for it I don’t know. But See 31.201-5 credits for treatment as a cost (credit) to the government. 

Clause 52.216-7 Allowable Cost and Payment applies to cost reimbursement contracts. 

For cost based negotiated acquisitions or contract actions, when Part 31 applies, then 31.201-5 would explain how to treat rebates.  

Share this post


Link to post
Share on other sites
3 hours ago, Corduroy Frog said:

A company receives several hundred $ in promotional credit card rebates every month.  The rebate approaches 1% of the entire bill.  Which of the following describes the best treatment?

  1. The company must allocate the rebate proportionately over all charge numbers during the monthly billing period. 
  2. The company may simply put the cash in the bank and not allocate to anything.
  3. The company may let the cash accumulate, and apply it to a free airline ticket at some point.  They have to allocate the credit to the charge number of the airline ticket.
  4. Does the answer to any of the above change if some of the charges are for a cost-type contract?

Joel answered the question correctly. The government must share in the rebate to the extent it reimbursed the original expense. The contractor has discretion regarding methodology. I will note that the government doesn't share in the rebate to the extent costs were incurred on an FFP contract; however, if the original solicitation was subject to TINA and the contractor failed to disclose it was getting a 1% rebate on costs it was estimating and pricing, then the government may have a remedy available.

Share this post


Link to post
Share on other sites

Yes,  thanks H2H for clarifying. When negotiating the cost of a FFP contract, when negotiating a FFP modification that is based upon estimated forward pricing or when negotiating based upon on incurred costs , if the contractor has received or knows that it will receive rebates or discounts, the settled price should reflect the lower cost. This is regardless of whether ‘TINA’ is applicable to the negotiated action.  Failure to disclose a known fact during negotiations concerning rebates or discounts is dishonest. 

But the mere fact that the contractor is able to obtain credit card rebates on an FFP contract doesn’t entitle the government to all or a share of it.  

 

Share this post


Link to post
Share on other sites
11 hours ago, joel hoffman said:

Failure to disclose a known fact during negotiations concerning rebates or discounts is dishonest.

May we please avoid pejorative terms such as "honest" or "dishonest." If the contractor was required to, and failed to, disclose a fact that would reasonably be expected to significantly/materially affect the negotiated price, then it has failed to comply with the solicitation terms and the government has a remedy. The term "dishonest" implies intent, which may or may not be the case. Speaking as one who has worked at several contractors over the course of a career, many times the right hand has no idea what the left hand is doing.

Share this post


Link to post
Share on other sites
19 hours ago, Corduroy Frog said:

A company receives several hundred $ in promotional credit card rebates every month.  The rebate approaches 1% of the entire bill.  Which of the following describes the best treatment?

  1. The company must allocate the rebate proportionately over all charge numbers during the monthly billing period. 
  2. The company may simply put the cash in the bank and not allocate to anything.
  3. The company may let the cash accumulate, and apply it to a free airline ticket at some point.  They have to allocate the credit to the charge number of the airline ticket.
  4. Does the answer to any of the above change if some of the charges are for a cost-type contract?

It seems to me that the most complete answer to those questions is that if a credit card charge is allocable to a fixed-price incentive, cost-reimbursement, or T&M contract pursuant to FAR 31.201-5, 31.205-26, FAR 52.212-4, 52.216-7, 52.216-16, 52.216-17, or 52.232-7, as applicable, then the contractor must credit the Government for any rebate from that charge.

Joel, H2H, correct me if I'm wrong or if my answer is incomplete.

Edited by Vern Edwards
Corrected 31.232-7 to 52.232-7.

Share this post


Link to post
Share on other sites
36 minutes ago, here_2_help said:

May we please avoid pejorative terms such as "honest" or "dishonest." If the contractor was required to, and failed to, disclose a fact that would reasonably be expected to significantly/materially affect the negotiated price, then it has failed to comply with the solicitation terms and the government has a remedy. The term "dishonest" implies intent, which may or may not be the case. Speaking as one who has worked at several contractors over the course of a career, many times the right hand has no idea what the left hand is doing.

Agreed in principle. If the negotiator and estimator don’t have knowledge of a fact, then they aren’t acting with intent or (maybe) negligence.  

Share this post


Link to post
Share on other sites
3 minutes ago, Vern Edwards said:

It seems to me that the most complete answer to those questions is that if a credit card charge is allocable to a fixed-price incentive, cost-reimbursement, or T&M contract pursuant to FAR 31.201-5, 31.205-26, FAR 52.212-4, 52.216-7, 52.216-16, 52.216-17, or 31.232-7, as applicable, then the contractor must credit the Government for any rebate from that charge.

Joel, H2H, correct me if I'm wrong or if my answer is incomplete.

You’ve got it, I believe. Good references. 

Share this post


Link to post
Share on other sites
21 minutes ago, joel hoffman said:

You’ve got it, I believe. Good references. 

Actually, one of my references was wrong. Where I typed 31.232-7 it should have been 52.232-7. I will correct that entry.

Share this post


Link to post
Share on other sites
24 minutes ago, Vern Edwards said:

It seems to me that the most complete answer to those questions is that if a credit card charge is allocable to a fixed-price incentive, cost-reimbursement, or T&M contract pursuant to FAR 31.201-5, 31.205-26, FAR 52.212-4, 52.216-7, 52.216-16, 52.216-17, or 31.232-7, as applicable, then the contractor must credit the Government for any rebate from that charge.

Joel, H2H, correct me if I'm wrong or if my answer is incomplete.

You've quoted the correct contract clauses but missed the point that the contractor has discretion in how to comply with them. See DCAA Contract Audit Manual 6-203.

Share this post


Link to post
Share on other sites

Thanks, H2H, but I didn't miss it. I simply did not see a question in the opening post about how to handle rebates as an accounting matter, so I didn't mention DCAA or the Audit Manual.

I found the first bullet point to be obscure. I do not know what "allocate the rebate proportionately over all charge numbers" means. All I can think of by way of reaction would be that the amount of any rebates to be credited to the government under a particular contract would be the amount of the credit card charges that were allocated to that contract multiplied by the rebate percentage. Is that wrong? Is there any other way to determine the amount of the credit?

Share this post


Link to post
Share on other sites

Vern, I have some comments on the application of FAR 52.212-4 to this topic.  That clause is to be used with its alternate I when a T&M contract is used to acquire commercial items.  Under Alternate I, if material is charged as a direct cost of the contract, the contractor is entitled to be paid its actual costs less any applicable refunds or rebates.  Thus, if the credit card rebates relate to material, as defined in the clause, charged as a direct cost of the contract, the refunds would apply.  However, if the credit card refunds relate to indirect costs, FAR 31.201-5 does not apply to Alternate I because the cost principles do not apply to that clause.  Thus, the government would not be entitled to receive any portion of the refund on that basis.  Further, indirect costs under Alternate I are a negotiated lump sum amount and are not subject to adjustment based on actual costs incurred.  Finally, while Alt I contains a release of claims requirement, it does not contain a payment of refunds provision as FAR 52.232-7 does.  Therefore, I do not see any government entitlement under FAR 52.212-4 to a portion of the refunds that are properly accounted for as an indirect cost

Share this post


Link to post
Share on other sites

Retread:

Okay.

BTW, your brief, clear post is a lesson in the complexities of FAR/contract interpretation and analysis. It knocked my socks off. I might use it as a case study. It really shows how complex the system of government contracting rules has become over the decades. A question in my mind is whether we as a country and as taxpayers are really better off as a result of all that complexity.

Vern

Share this post


Link to post
Share on other sites

Fun thread. I hope CFrog got what they were looking for.

Share this post


Link to post
Share on other sites

I noticed that the caption for this discussion was credit card bonus points.  However, the question asked about credit card rebates.  What a contractor can do with credit card points earned as a result of credit card purchases for a government contract raises an entirely different set of issues than rebates.

Share this post


Link to post
Share on other sites

Everything is contractual, and we have clauses that read parts of the FAR into the contract. So, read the regulation. Do you see any mention of "bonus points"? I didn't---not anywhere in the FAR System. So a contractor can do what it likes with bonus points, unless...

Do we have any basis for interpreting "bonus point" to mean "rebate" or "refund"? I checked Manos, Government Contract Costs & Pricing (2017) and found no mention of bonus points. I also checked ASBCA and Court of Federal Claims decisions for "bonus point" in this context and found nothing.

Share this post


Link to post
Share on other sites

The title said "points" but the question asked about "$" not points. We answered the question, not the title.

As for points, the analogy would be to frequent flier miles. Thus, they have no intrinsic value and need not be shared with the government, even if awarded based on usage that was charged to a government contract.

Share this post


Link to post
Share on other sites

Yes, irrespective of the title,  the original post clearly referred to “several hundred $” in promotional rebates per month, approaching one percent of the charges.   And one of the possible scenarios includes cashing in the cash value to put in the bank. 

Another scenario involves letting the cash value accumulate and cash in for airline miles.  

Share this post


Link to post
Share on other sites
23 hours ago, here_2_help said:

As for points, the analogy would be to frequent flier miles. Thus, they have no intrinsic value and need not be shared with the government, even if awarded based on usage that was charged to a government contract.

Emphasis added.

@here_2_help

That's quite a statement. So the key is "intrinsic value"? I have five questions:

  1. What do you mean by "intrinsic value"? Please see my notes, below.
  2. Why do you suggest that frequent flier miles have no intrinsic value (if the answer is not clear from your answer to Q.1)?
  3. How do I know that something has or does not have intrinsic value (if the answer is not clear from your answer to Q.1)?
  4. How do I measure it (if the answer is not clear from your answer to Q.1)?
  5. If bonus points (or frequent flyer miles) had intrinsic value, then would they have to be shared with the government?

    Note 1: The FAR mentions the term only in 15.404-1(f), pertaining to unit prices, and provides no explanation or clarification of the term. I could not find the term in the CAS. I found only one mention of intrinsic value in Manos, in a footnote to § 76:3, which pertains to stock options. I checked APB Opinion No. 25, to which Manos refers, and which has been superseded by SFAS No. 123 (Revised). Those, too, pertain to stock options.

    Note 2: I found this in an online accounting dictionary --- "Intrinsic value: Valuation determined by applying data inputs to a valuation theory or model." Is that what you mean? If so, what is your theory or model?

    Note 3: Black's Law Dictionary, 10th, defines it as follows:

    Quote

    intrinsic value (17c) 1. The inherent value of a thing, without any special features that might alter its market value. • The intrinsic value of a silver coin, for example, is simply the value of the silver within it. 2. Value in the open market without regard for any personal or sentimental value. 3. The value inherent in an object, such as a $100 bill considered as a piece of printed paper and not as currency with a market value of $100.

    Did you mean one of those three definitions?

I'm not challenging the truth of what you wrote. I just want to understand what you wrote.

Share this post


Link to post
Share on other sites

Obviously, frequent flyer miles -- an intangible asset -- have value. But only when used to purchase a ticket. Not before. For example, if an airline will give you a coach ticket in return for cashing in 30,000 frequent flyer miles and you only have 10,000 miles, then your 10,000 miles are worth nothing. If you have 30,000 miles then you have something, but what? If you want to fly to Hawaii, probably not. You will need more miles. If you want to travel to a nearby city, then yes. You can, if you wish, value the FF miles at the coach fare for travel to that city. But what's the coach fare? It changes frequently.

Because of the problems in valuing FF miles and the like (e.g., hotel membership points), accountants don't value them. The IRS doesn't tax them.

"...the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel."

https://www.irs.gov/pub/irs-drop/a-02-18.pdf

A FF mile has no intrinsic value because it cannot be used in trade. Two miles have no intrinsic value. One thousand FF miles have no intrinsic value. By any of the three definitions you posted.

In my hypothetical, above, it takes 30,000 FF miles to have any value, and that value varies by airline and by destination and by time of booking. Until the magical number is reached. the FF miles are worthless. And for most of us, by the time we reach the magical number the FF miles have expired.

 

 

 

Share this post


Link to post
Share on other sites

Thanks, H2H, but you answered only one of my questions.

My main concern is the idea of intrinsic value. You say frequent flyer miles have value, but you suggest (you don't explicitly say) that they don't have intrinsic value, and only have value when used to purchase a ticket. It appears that your "worthless" argument is that since an airline might want 30,000 miles and you have only 10,000, your 10,000 have no value, and thus the value of the miles is not intrinsic. But how's that different than wanting to buy a $30.00 book when you only have $10? Most airlines will let you supplement your miles with dollars, or vice versa, in which case 10,000 miles are not worth nothing. And some credit cards will let you use points to buy many kinds of things. And as for money, well, $10 sometimes goes further than at other times. Prices change.

You say "A FF mile has no intrinsic value because it cannot be used in trade." So is that what intrinsic means? Can be used in trade? In other words, the only thing that has intrinsic value is something that can be used in trade? Like money---currency or coin. Anyway, if use in trade is the criterion for intrinsic value, then some credit cards let you use points in trade to buy all kinds of things, so why don't they have intrinsic value?

I'm not sure what the IRS has to do with the issue, since we're talking about FAR cost principles, not taxes. While FAR some cost principles are sometimes based on or reflect IRS rules, that's not true of all.

The term "intrinsic value" strikes me as fuzzy. I've spend a lot of time lately reading up on it for other research that I'm doing, and I'm still not sure what it means. That's why your comment caught my eye. It's the kind of term that one might use without thinking through all the issues of definition and implication. There is no reason to be embarrassed if you used "intrinsic value" without a clear idea of what you meant. In any case, I cannot find a basis in law or regulation for what you wrote.

It could be that the people who wrote the cost principles and clauses simply did not think about frequent flyer miles or credit card points when they wrote 31.205-5, 31.205-26, etc., or couldn't figure out to take credit for them for the government, or didn't want to spend time trying to figure it out, or thought it would be too much too demand.

Share this post


Link to post
Share on other sites

Vern, I will confess I used "intrinsic value" without considering all of the ramifications. I should have known better ...

Share this post


Link to post
Share on other sites

No big deal. I'm sure I have written several articles in which I used the phrase "intrinsic value" meaning something, but God knows what. But in a current writing project I found myself typing "intrinsic value" and then thinking, "Wait a minute. What do I mean by that?" And after deciding that I was not even close to being sure what I meant I deleted the phrase and used something else. Since then I've been reading up on intrinsic and extrinsic value. I've read about 500 pages on the subject. I even stumbled on a 1969 article entitled, "The Fallacy of Intrinsic Value," by libertarian economist and historian Gary North at the website for Foundation for Economic Education. https://fee.org/articles/the-fallacy-of-intrinsic-value/ Writing about the intrinsic value of gold he said:

Quote

I do not want to involve myself in a rarefied philosophical debate con­cerning metaphysics, but I think it is safe to say that gold does have certain intrinsic qualities. It is highly durable, easily divisible, transportable, and most of all, it is scarce. Money must be all of these, to one degree or another, if it is to function as a means of ex­change. It is vital that we get our categories straight in our minds: it is not value that is intrinsic to gold, but only the physical prop­erties that are valued by acting men. Gold’s physical properties are the product of nature; its value is the product of acting men.

What do I know?

 

Share this post


Link to post
Share on other sites

Thanks for the discussion.  I can answer for the tax ramifications:  so long as the rebates are treated as income (most likely "Other Income" on a profit & loss statement), the IRS will be happy.  In the case of "points" (or frequent flyer miles), as long as the applied expense is reduced, the IRS will be happy too.

Appreciate all the fine points of discussion.  Suffice it to say that unless a cost-reimbursable contract or CLIN is involved, the pursuit of application to reducing cost is really a dead-end street.

 

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

×