Promotional allowances are reductions in the price of products that suppliers offer trade partners to carry out additional promotional activity in support of suppliers' products. The Internal Revenue Service includes promotional allowances in the general category of vendor allowances along with other trade allowances. Vendor allowances are a normal part of a company's marketing activities, but they are of keen interest to the IRS for tax purposes and the Federal Trade Commission for fair trade purposes.
Marketers generally agree that strong trade partner support at the retail store level is vital in establishing the critical link between shoppers and products at the time buying decisions are made. To encourage such support, suppliers routinely offer promotional allowances to their trade partners to conduct a variety of promotional activities on their behalf. The Federal Trade Commission provides a list of such activities that it recognizes, which it cautions is not exhaustive. These activities include cooperative advertising, in-store demonstrations and displays, catalogs, contests and special packaging or package sizes.
Promotional allowances encourage in-store promotions. They often are combined with other kinds of trade allowances to accomplish more than one objective. You may find it helpful to develop a framework for how different types of trade allowances could be used to support complementary channel partner goals. Trade deals encourage the purchase of larger-than-normal quantities of products during specified time periods. Deal loaders are similar to trade deals except that the purchase quantity is usually specified. A common type of deal loader is the pre-loaded in-store display unit. Push money, commonly known as spiffs, is extra money suppliers pay to wholesaler salespeople for meeting specified sales goals. Slotting allowances are fees trade partners routinely charge suppliers for creating warehouse and retail shelf-space for new products.
The FTC is charged with enforcing the provisions of the Robinson-Patman Act. The law prohibits suppliers from giving lower prices to large retailers than to small independents. Trade allowances can receive close scrutiny by the FTC when there's a suspicion that they're used as vehicles to perpetrate illegal pricing schemes. Most retailers go to great lengths to avoid running afoul of Robinson-Patman. Nonetheless, some retailers do try to extract pricing concessions, particularly from smaller suppliers. Be aware that the pricing concessions you offer to one retailer must be offered to all retailers on a proportionately equal basis in any given geographic territory.
Most trade allowances are treated as a reduction in gross revenue. The net effect is that most trade allowances reduce the gross profit on a company's income statement. From the retailer's perspective, the opposite applies. Trade allowances increase the retailer's gross revenue. The Internal Revenue Service is interested in the accounting treatment of trade allowances because of the significant tax implications. The IRS makes an exception for some promotional allowances to retailers that involve the "after-the-fact" reimbursement of incurred expenses for promotional activity, such as cooperative advertising and similar activities. In these instances, the IRS allows treating the expenses as advertising expenses.