Weekly Round-Up: The Evolution of Deal-of-the-Day Vouchers

The state tax treatment of social media coupons such as Groupon or LivingSocial has evolved from treating the vouchers in the same manner as a gift certificate to treating the vouchers as a cash discount, state tax experts participating in a June 12 Bloomberg BNA Webinar said.

However, the states are still all over the map when it comes to taxing transactions involving deal-of-the-day vouchers. The crux of the issues is how a state defines “sales price.” 

Retailers collecting and remitting sales tax on transactions involving the redemption of deal-of-the day vouchers must cope with the general lack of uniformity among states, including the jurisdictions participating in the Streamlined Sales and Use Tax initiative, Arthur R. Rosen, a partner with McDermott Will & Emery LLP. Even within the 21 full member states of the STT, the term "sales price" is defined very differently, Robert W. Nuzum, a partner with Baker Donelson Bearman Caldwell & Berkowitz PC in New Orleans, noted.  Over the years the concepts of cash discounts, vendors coupons and manufacturers coupons have become relatively settled. However, as Groupon and LivingSocial coupons emerge in new marketing strategies, these prior concepts of “sales price” cannot keep pace.

The “stakes are high” for many retailers, Nuzum said, because if a retailer does not collect enough sales tax, the retailer can be liable for sales tax, interest, and penalties. Likewise, if a retailer collects tax when none is due, there are plaintiff's lawyers ready to file lawsuits against the retailers for over-collecting sales and use tax, and possibly even violating consumer protection laws.

Last year, Texas, New York, Kansas, and Massachusetts issued guidance advising that deal-of-the-day discount coupons with a stated face value should be treated for sales tax purposes in the same manner as gift cards. As a result, the tax departments for these states concluded that sales tax is due on the full selling price of the product or service.

 “When the deal is redeemed for a taxable item (either by the original purchaser or someone who may have received the deal as a gift), the deal is treated like cash given for the purchase of the item,” the Texas Comptroller of Public Accounts explained in Tax Policy News (June 2011). “If the item purchased is taxable, sales tax is due on the full sales price, including any amount paid with the use of the deal,” the Comptroller concluded.

New York's tax agency explained in TSB-M-11(16)S(Sept. 19, 2011) that when a deal-of-the day voucher with a stated face value is redeemed for taxable products or services, sales tax is computed on the selling price of the items before the value of the voucher is applied against the purchase price.

Similarly, Massachusetts indicated in Working Draft Directive 11-XX (Sept. 16, 2011) that deal-of-the-day coupons should be treated in the same manner as gift certificates.

Some aspects of the guidance issued by New York and Massachusetts raise questions, however. In New York, when the voucher is for a specific product or service, sales tax is due on the price that the customer paid the deal site for the voucher. But tax is only applied against the purchase price when the voucher has a stated face value. The differing treatment of vouchers with a stated face amount and those issued for a specific product or service makes it very likely that there will be differing sales tax treatment of the same item, said Matthew P. Hedstrom, with McDermott Will &Emery LLP in New York.

Massachusetts excludes cash discounts from its statutory and regulatory definitions of “sales price,” Hedstrom noted, which leads to the question: Is including amounts representing deal-of-the day vouchers within the sales price consistent with these provisions?

More recent guidance issued by state tax agencies shows a trend toward applying tax against the amount that the customer pays the retailer. These states include:

  • Illinois (General Information Letter ST 12-0009-GIL (Feb. 28, 2012)): Retailers that sell “deal-of-the-day” vouchers must collect and remit sales tax on the amount a customer pays for the voucher if the retailer can identify such amount. Otherwise, the retailer collects and remits the full value of the “deal-of-the-day” item sold.
  • Iowa (Sales Tax Publication - Groupons (Feb. 1, 2012)): In most cases, a retailer that accepts the social media coupon should charge sales tax on the regular price of the purchase, not the discounted price.
  • Maine (Instruction Bulletin No. 39 (Jan. 2012) (internal pronouncement)): Retailers calculate sales tax on the reduced deal price.  "Discounts allowed and taken on sales" are not included in the “sales price.”
  • Kentucky (Sales Tax Facts (Dec. 2011)): Sales tax due on discounted price (the price paid by the customer) if: (1) discounted price indicated on the voucher, or (2) retailer knows and retains documentation of discounted price, and
  • California (Tax Information Bulletin, 9-2011 (Sept. 2011); SBOE Special Notice L-297 (Nov. 2011)): Taxable gross receipts include the consideration paid by the customer for the deal-of-the-day coupon, plus any additional cash, or other consideration paid to the retailer when the product is purchased.

An effort by the Streamlined Sales Tax Governing Board Inc. to create a uniform tax rule collapsed May 24 when a measure was narrowly defeated by a small group of states already administering different tax treatment schemes. The board was one vote shy of adopting the “Tennessee Rule,” which would have treated the difference between the voucher's face value and the amount the consumer pays for the voucher (if known by the retailer) as an in-store discount. The competing approach was the “Nebraska Rule,” which would allow the states to choose among three differing methods.

In Other Developments:

Thirteen states have raised sales tax rates, reports the Tax Foundation

Oregon Tax Court rules goodwill excluded from sales factor in Tektronix Inc. v. Oregon Dept. of Rev., Or. Tax Ct., No. TC 4951, 6/5/12.

Arizona, Michigan and Rhode Island could claim budget surpluses, according to the Stateline Daily News Service  

Compiled by Deborah Swann
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