Weekly Round-Up: The Myriad of State Tax Issues Facing Groupons

Groupon and LivingSocial are arguably the biggest and most widely subscribed to web-based “deal-of-the-day” discount coupon programs. [For those closely following this developing trend, keep an eye out for Bloomberg BNA’s 2012 Survey of State Tax Departments, set to be issued in late April, which will offer an in-depth look at each state’s tax treatment of these social media coupons.]

As the popularity of these programs continues to grow, and as new competitors following the same business model enter the marketplace, state officials are taking an increased interest in the potential state tax implications associated with deal-of-the-day transactions, Sylvia F. Dion, CPA, explains in a new article published in this week’s issue of Bloomberg BNA’s Weekly State Tax Report.

Where sales taxation is concerned, states are recognizing the potential for lost revenue because the existing rules on the impact of discounts on sales price could greatly diminish the sales tax base. States are also recognizing the potential for increasing state revenues by asserting that expired deal-of-the-day instruments meet the definition of unclaimed property for state escheat laws.

Although the financial arrangements of most Groupon and comparable deal-of-the-day arrangements work similarly, i.e., subscribers purchase discounted products or services for which the merchant ultimately receives substantially less than full value, there is a nuance to consider.

In some Groupon transactions, the subscriber is prepaying for a specific item or service, e.g., a specific piece of jewelry or an hour's massage, while in others subscribers are buying vouchers that can be used to purchase what they wish from the retailer's offerings. In the former, an actual sale of the product or service has occurred (even if possession does not take place until a later date), while the latter operates like a gift card or gift certificate in that what has been purchased is a cash equivalent that can be applied toward the purchase of any combination of products or services offered by the merchant.

However, as the specifics of what will be acquired are not yet known, whether the redemption will result in sales tax being due may not be determinable upon the sale of the voucher. Therefore, the nature of the Groupon arrangement may impact the amount subject to sales tax in that these transactions are not all the same.

For complete coverage of this emerging issue, including a look at specific guidance issued by various states, check out Dion’s article found in this week’s issue of the Bloomberg BNA Weekly State Tax Report.

In other developments…

Arizona’s Court of Appeals finds that an Arizona business selling cooperative direct mail advertising is not subject to Arizona use tax, according to a story by Christine Boeckel, Bloomberg BNA State Tax Law Editor, which can be read in its entirety here.

The California Franchise Tax Board’s decision to re-issue legal division guidance on the research and development credit is the subject of a new client alert by Eric J. Coffill and Jenny Choi, of Morrison & Foerster.

State tax revenues softened in the fourth quarter of 2011, Lucy Dadayan reports in a new data alert by The Nelson A. Rockefeller Institute of Government.

Without a state income tax, other taxes are higher, Nicholas Johnson and Erica Williams, of the Center on Budget and Policy Priorities, report.

No refund for baseball team owner following federal audit, Sutherland SALT explains.

Compiled by Priya D. Nair
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