SSTGB Group Fails to Reach Consensus On Taxing Online Daily Deal Transactions

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

 MILWAUKEE, Wis. –An advisory body of the Streamlined Sales Tax Governing Board failed to reach consensus May 22 on a potential interpretive rule governing uniform sales tax treatment of online “deal-of-the-day’’ vouchers.

The governing board's State and Local Advisory Council (SLAC) took up two different proposals. Each clarify the tax treatment of vouchers sold and marketed by firms such as Groupon and LivingSocial for the 24 states participating in the Streamlined Sales and Use Tax Agreement (SSUTA). But neither proposal won sufficient support to suggest a direction to the SSUTA governing board.

Depending on the approach taken, the amount of sales tax imposed will differ. Without a uniform policy, however, industry representatives, such as those from Groupon, are concerned that class actions might arise from customers upset over disparities in taxes charged from state to state. SLAC Vice Chair Ellen Thompson of Nebraska told Bloomberg BNA that the issue is whether the voucher represents the consideration that is exchanged by the purchaser with the retailer, or whether the voucher represents an in-store coupon.

Anxious for Resolution

Retailers worry that if tax is imposed on the face value, the added tax might diminish the voucher's popularity with customers. According to Thompson, if the voucher contains a store discount, additional concerns have been raised by states as to whether the retailer is able to know the amount the purchaser actually paid for the voucher to use that amount as the tax base.

If tax is imposed on a lesser value, Thompson said, states are concerned the policy would ignore long-standing policies related to similar marketing tools, such as gift certificates.

Mike McMahon, state tax director for Chicago-based Groupon, said his company is anxious for a resolution. At the same time, he thanked the SLAC for its thoughtful posture.

“Groupon sincerely appreciates the significant time and effort that has been spent reviewing this issue and developing the draft rules,’’ McMahon said after the final votes were tallied.

“Having uniform guidance in this area is of paramount importance to our business and customers. The rule should be consistent with previous guidance issued by SSTP [the Streamlined Sales Tax Project] regarding the definition of sales price and consistent with retail customers' expectations when they buy and redeem a voucher. We do encourage a quick and practical resolution to this since it is something that affects our business daily.’’

Tennessee, Nebraska Proposals Debated

One proposal, touted by Tennessee and supported by internet deal-of-the-day organizations, would treat the difference between the face value of the voucher and the amount the consumer paid for the voucher as an “in-store discount,’’ and not subject to taxation.

A second strategy, introduced by Nebraska, would have established a “toggle approach’’ that would permit states to choose one of three tax treatment options. One of the options mirrored the Tennessee approach, but another would permit states to apply sales taxes to the full face value of each voucher.

A series of straw polls showed major divisions within the advisory body. Twelve states said they could support the Tennessee proposal for the interpretive rule, but 13 voiced opposition. At the same time, Nebraska's scheme garnered only eight votes of support and 18 negative votes.

Sherry Hathaway, who chairs the SLAC workgroup on the voucher issue, put forward the Tennessee proposal (RP12005A01). This proposal included an interpretation of “sales price’’ that does not include the amount a retailer essentially absorbs by participating in the deal-of-the-day business model.

The Tennessee proposal recognizes the difference between the face value of the voucher and the amount the consumer pays for the voucher as an in-store discount. Hathaway said this assumes there is no third-party reimbursement as in cases of a manufacturer's coupon. In this structure, the consumer would be taxed on the amount he or she paid for the voucher.

If the voucher identifies the amount paid by the purchaser to the third-party and a reduction in the amount that will be fully reimbursed by another third-party (such as a manufacturer), the seller must use the voucher's face value or stated value and not the price paid by the purchaser as the sales price.

However, if a seller does not know the amount paid by the purchaser to the third-party for the voucher, the seller must use the voucher's face value or stated value as the sales price.

Nebraska Offers Three Options

Thompson presented the Nebraska proposal (RP12004A01), saying it would provide states with greater flexibility. She added that the Nebraska approach would also embrace deal-of-the-day structures that vary from the Groupon and LivingSocial model.

Under the Nebraska proposal, states have three options to determine the sales price, but they must report their option on their taxability matrix:

  • Option A: The state would treat a voucher with a stated face value as the consideration received by the seller for purposes of determining the selling price. The seller would remit sales tax on the selling price before the voucher's stated value is applied.
  • Option B: The state may treat a voucher as incorporating a seller's in-store coupon. The amount paid by a customer to a third-party company for the voucher plus any additional amount required to be paid to the seller upon redemption of the voucher is the sales price.
    • Where a voucher identifies the amount a customer paid to the third-party company and the value that will be allowed by the seller toward the selling price, the difference between the value of the voucher allowed by the seller and the amount paid for the voucher is a discount that is not included in the sales price (provided the seller is not reimbursed by a third-party).
    • Where the voucher identifies the amount paid by the customer to the third-party and a reduction in the amount that will be fully reimbursed by another third-party (such as a manufacturer), the seller must use the voucher's face value or stated value as the sales price.
    • If the voucher does not identify the amount paid by a customer to a third-party for the voucher and the seller does not know that amount, the sales price is the voucher's stated face value.
  • Option C: The state may provide distinct treatment for stated face value vouchers or specific product or service vouchers. When a stated face value voucher does not identify a specific product, the stated face value is the consideration received, and the seller must remit sales tax on the selling price before the voucher's stated value is applied. Where a specific product or service voucher does not contain a stated face value, even if the regular selling price is stated on the voucher, the seller must follow the rules under “Option B” to determine the sales price.

Thompson explained that, with the growing number of businesses offering to sell vouchers for retailers, crafting a single policy that recognizes the differences in voucher offerings, as well as the individual states' authority to determine tax policy, has proved challenging.

The SLAC also spent considerable time debating options for a potential amendment to the SSUTA covering credits that states and local jurisdictions would be required to allow for sales or use taxes paid in a different jurisdiction.

Dividing the States

Craig Johnson, chair of SLAC's Credit Workgroup, told Bloomberg BNA the goal during the meeting was to find consensus on some of the issues around the provision of credit currently dividing the states.

He said the workgroup hopes to draft amendment language that can be presented to the broader governing board during its fall meeting in Salt Lake City.

Johnson, a sales tax specialist with the Wisconsin Department of Revenue, said it is unclear whether any proposed amendment presented during the fall meeting could achieve final approval. At a minimum, however, he said the draft amendment would serve as a base for a more focused discussion of the credit issues.

In drafting the amendment, Johnson said the workgroup has three primary goals:

  • Taxpayers should not be subjected to multiple taxation without credit for taxes paid to other jurisdictions, including scenarios of concurrent use in multiple jurisdictions;
  • The administration of the credit should be as simple as possible; and
  • Credit language should be framed as an amendment to the SSUTA and, if needed, an interpretive rule should be drafted containing functional examples.

Johnson said there have been several key problems with the credit issue over the years because the SSUTA does not contain a universal rule that applies to every transaction in every state with respect to a state's imposition of its sales and use taxes on a retail sale.

Additionally, the states do not have consistent priority rules. He added that any potential amendment to the SSUTA must reflect case law requiring the apportionment of state taxes that touch interstate commerce.

Provision of Credits


In examining the questions surrounding credits, the SLAC evaluated a discussion document, which identified 20 separate policy questions governing the provision of credits.

The workgroup polled the member states on several of these questions to determine areas of conformity and division. The polling and the subsequent debate by the SLAC suggested:

  • Most states prefer a policy that ensures the provision of credits to just the sales and use taxes subject to the SSUTA;
  • Business groups would prefer a broader definition of the types of taxes for which credits should be allowed to include, “sales, use and similar taxes that are imposed on the sale or use of a product based on a percentage of the ‘sales price’ or ‘value of use’ and not taxes imposed at a fixed amount per unit sold.”
  • States had mixed views on whether credits should be limited to the initial “retail sale’’ or all potential sales and uses. Most states favored language that would permit a credit only when tax is paid by a purchaser: to the seller; directly to the state because the purchaser issued their direct pay permit; and, to the first state where the purchaser used the product. In this way, a state would not be required to allow credit for tax paid to any other states in which the purchaser was required to pay tax on the sale or use of the product, except the first state. However, several states expressed support for language permitting credit beyond the initial retail sale. The business community suggested an approach allowing credit for all sales, use and similar taxes paid by the purchaser.
  • States and the business community agree that the credit should address tax credits for taxes paid to both member and nonmember SSUTA states.
  • Both the states and business representatives agreed that credits should be allowed for the tax paid on the same transaction regardless of whether one state treats the transaction as a sale of tangible personal property and another treats it as the sale of a service.

The SLAC also considered possible action addressing the tax issues emerging around the sourcing of digital products under the SSUTA. The discussion responded in part to the emerging business models for digital products.

Members of the Digital Products Sourcing Workgroup said the discussion could eventually lead to an interpretive rule or an amendment to the agreement.

The workgroup has already identified four issues for consideration:

  • Location of receipt;
  • Collecting and maintaining buyer address information;
  • Sourcing allocation; and
  • Origin sourcing.

Finally, the digital sourcing group placed on hold a proposal suggesting the workgroup develop an interpretive rule that would generally describe the sourcing of specified digital products together with the development of an issue paper.

The Nebraska and Tennessee proposals are available on the internet at http://www.streamlinedsalestax.org/index.php?page=meeting-material-10_5_11.

Draft text of the credit for sales and use taxes paid to other state and local jurisdictions is available at http://www.streamlinedsalestax.org, and the text of the digital products sourcing paper is available at http://www.streamlinedsalestax.org.

By Michael Bologna and William H. Carlile