Sales Tax Slice: Jet.com’s Pricing Algorithm and Affiliate Sales Program Offer Sales Tax Case Study


Online shopping website Jet.com opened for business this Tuesday. With a unique pricing model and affiliate sales program, Jet could potentially rival competitor Amazon.com in time. Therefore, tax professionals should be salivating over the novel sales tax considerations the new site raises. A brief overview follows.

Jet is a members-only shopping club website. Think of it as an online BJ’s Wholesale Club, Costco, or Sam’s Club. For a $49.99 annual fee, a member can reportedly “save 10 percent to 15 percent versus the lowest prices online”, Jet’s CEO Marc Lore explains to CNBC’s Squawk Box.

You might remember Mr. Lore as the Diapers.com wunderkind. He’s the brains behind Quidsi, Diapers.com’s former parent company, which he cofounded in 2005, and which Amazon purchased in 2010 for $550 million. Now, after having worked at Amazon for two years, Mr. Lore is again a competitor with that online giant, as reported in January by Bloomberg Business.

Jet has a unique dynamic pricing algorithm. The algorithm reprices a shopper’s potential purchases based on other items that she has already placed in her shopping cart. Further, certain “smart items” receive price discounts when purchased together, Lore tells CNBC. The idea is that they would be cost-efficient to deliver in tandem.

Jet is reportedly not collecting sales tax in any state right now. But let’s suppose it were, in which case one might wonder how states would view “bundled” or “mixed” transactions on the site. These transactions often pose thorny sales tax problems. They occur when a transaction involves some taxable products or services and some nontaxable products or services. We could imagine that Jet’s proprietary price-pairing system might make the bundled transaction concern even murkier. Did you buy one taxable item and one tax-exempt item, or did you buy a single two-part item? In states that examine the purchaser’s “true object” for the purchase, it seems reasonable that a creative Department of Revenue might attempt to tax the entire transaction.

Another sales tax question arises from Jet Anywhere, Jet’s affiliate sales program. Jet Anywhere allows a shopper to buy items from Jet’s selected affiliate retailers, and, in doing so, earn JetCash—basically a 20% reward that’s similar to the most credit card companies’ reward programs. Jet Anywhere operates on a theory of delivery efficiency, as comedian Kumail Nanjiani explains in Jet’s official About Us video:

The dynamic Jet pricing engine is powered by a proprietary algorithm that applies Lambda calculus to a user’s shopping basket to match the user’s order in real time to the best retail partner that Jet trusts in . . . a network that can most efficiently deliver the wanted set of goods. By triangulating the optimal merchant, location, packing, and shipping zones for any given order, we can derive maximum fulfillment efficiencies, thus reducing system costs, and consequently, prices, culminating in what is the ultimate price-savings mechanic ever offered to the public.

The punchline follows when he grimaces comically and says, “I didn’t choose the code life. She chose me.”

Jokes aside, Jet’s affiliate sales program challenges us to consider state sales tax treatment on transactions involving coupons, discounts, or rebates. Generally, in states that impose sales tax, a retailer offering its own coupons, discounts, or rebates need only collect sales tax on the post-discount price, not on the regular price. (The theory is that the seller is not reimbursed for the difference.) We should consider, then, how states would tax purchases in which Jet members use previously earned JetCash to buy items on Jet.com. For example, suppose I have earned $20 of JetCash by buying items from Jet’s affiliates. Then, I buy a scarf on Jet.com for $20, using only my hard-earned JetCash. It seems reasonable to conclude that when I buy the scarf with the JetCash, no sales tax should apply. Arguably, Jet has offered me a retailer’s rebate on the purchase.

These two sales tax inquiries are not alone. Rather, several other extra cost savings act as case studies. For example, there are “extra savings based on your delivery location.” You can also waive returns for an added discount. And products’ prices vary by payment method, with decreased prices for, say, debit card payments versus credit card payments. Further, one can only imagine the many challenging nexus questions that the affiliate sales program could raise.

In light of Jet’s unique pricing model and affiliate sales program, tax professionals would be wise to keep Jet on their radars for the foreseeable future.

Continue the discussion on LinkedIn: What is the most interesting sales tax challenge that Jet poses?

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