The Sales by Item report provides information on the items that have been purchased by customers for a specific period. However, discount items are not displayed in the standard report.
The standard report uses the Transaction Total (Revenue) for the sales total. This total is based on the amount that goes into the revenue account (Sales) of the item. For discount items, there is no revenue account and this is why you will not see the item on the standard report.
To expose the discount items on the report, replace the Transaction Total (Revenue) column with Amount (Gross). This will display all gross amounts related to all items involved in the sale, including discount items.