Rebates or Kickbacks

Q. Our company makes bulk purchases on behalf of small stores who benefit from our concentrated purchases. Occasionally in addition to standard quantity discounts, we also get rebates. Who is entitled to these rebates -- us or our customers?

A. There are two potential problems with your company keeping these rebates:

The first problem is your ability to do your job properly. Your customer is paying you to scout out and obtain the best merchandise for the lowest price. That's why you get a commission. When you obtain a rebate from the supplier, your judgment is liable to be colored; you will tend to favor suppliers who give rebates over others who may have better merchandise or prices.

The Torah tells us, "Don't take bribes, for a bribe blinds the eyes of the wise and distorts the words of the righteous" (Deuteronomy 16:19). The Torah is telling us that partiality towards one who gives a gift is practically speaking inevitable; even a wise and righteous person will find his judgment affected.

The second problem is that accepting the rebate could be considered "double dipping." You are getting paid by the customer to buy objects on his behalf; from that time on you are merely the agent of the final customer. Any rebates offered really belong to the customer, not you.

Your company undoubtedly already accepts this understanding regarding your own employees. After all, you asked if the rebate belongs to your company or the customer; it didn't occur to you that it should accrue to the individual purchasing agent who happened to carry out the purchase.

The Talmud discusses a similar case, in the following passage:

If they [the sellers] added one extra [item], it all belongs to the agent; so says Rabbi Yehuda. Rabbi Yosi says, they divide it. But did we not also teach: Rabbi Yosi says, it all belongs to the payer? Rami bar Chama said, there is no difficulty: This case is where there is a fixed [price], this one where there is no fixed [price]. (1)

If there is no fixed price for the purchase, then the "extra" item is not extra at all; it just means that the seller is selling for a lower-than-expected price and giving the customer more for the money. But if there is a fixed price for the item, then the extra could be seen as being something quite apart from the purchase; perhaps the seller decided to personally favor the agent. Even so, Rabbi Yosi concludes that the payer (customer) is still entitled to half, because the generosity of the seller was a result of his work on behalf of the customer.

How does this play out in your case? If the rebate is part of a publicized, equitable rebate program, it would be considered "no fixed price". This is not a special extra given to you, but rather a discount, perhaps temporary, in the price. If most customers don't get a rebate but you do, the possibility exists that this supplier esteems a special relationship he has with your firm, above and beyond relationships with other customers who make similar orders. In this case, your firm might be entitled to part of the rebate.

This is a complex case. A similar situation arose a few years ago regarding a gigantic hotel management firm; when the case reached court, Price Waterhouse Cooper Accountant Sean Hennessey told reporters that the status of the payment was not really clear: "One side calls it a kickback and the other calls it a rebate." (The judge looked askance at the buyer's actions and particularly their opaque accounting practices and ordered them to return tens of millions of dollars.)

The best response to these questionable, border-line cases is not to leave them to chance. When you negotiate your fee agreement with the customer, you should include an explicit clause stating how special, negotiated rebates (as opposed to equitably applied discounts) will be accounted for and split up. Whatever you decide to do in this particular case, it should be accounted for in a transparent way so you don't share the fate of the ill-fated hotel management firm.

SOURCES: (1) Babylonian Talmud Ketubot 98b