Groupon Craze, Other Online Daily Deals A Hot Topic for State Tax Authorities

BOSTON—Just how to handle sales taxes for the flurry of online daily coupons offering everything from discounted tai chi classes to deals on cheap eats is a hot topic among tax administrators striving to iron out which existing tax category, if any, such coupons may fall into, a Federation of Tax Administrators spokeswoman said Sept. 22.

Several states have recently issued guidance, or draft proposals, indicating how the vouchers issued by companies such as Groupon and LivingSocial should be treated when sold and cashed in. Other states have engaged in listserv conversations, or blogged online about the issue, explained FTA spokesperson Verenda Smith.

“We have been seeing a lot of discussion on this topic,” Smith told BNA. States have been sharing their insights, or asking “do you have this scenario,” because of course, she said, the situation varies depending upon a state’s specific sales tax rules.

How the Deals Work.

At the center of the discussion is the online sale of vouchers by a third-party company, or deal site, which markets those coupons to consumers on behalf of merchants. These companies typically offer deal-of-the-day instruments for sale on their websites that may be redeemed at local or national merchants.

Customers generally purchase daily deal coupons at discounted prices that they can then use to buy specific products and services. For example, a consumer may purchase a voucher for $20 from an online service that is worth $40 at a specific sushi restaurant.

The online seller collects the purchase price of the voucher from the customer, and typically retains a portion of the price paid by the customer and remits the rest of the payment to the local business.

Still in their infancy, group-buying sites like Groupon, LivingSocial, and Gilt City have already made their mark on many online shoppers with eight in 10, or 82 percent, of online consumers aware of these sites, according to a May 2011 study by Shop.org, the digital division of the National Retail Federation.

However, only 19 percent of survey respondents in the study have actually made a purchase through one of the sites. But those who do leverage group-buying sites appear to be enthusiasts, with the majority of consumers, 57 percent, having already spent more than $100 through these sites.

States: Voucher Like Gift Card.

Several states have taken the general position that the sale of the voucher is similar to that of a gift card. Tax is not due on the sale of the gift card, or in this case, on the voucher purchased online, at the time of the purchase. Sales tax is due on the full value of the goods or services at the time the voucher is redeemed if it is redeemed for taxable goods or services.

Such is the position taken by the New York State Department of Taxation and Finance in a technical memorandum issued Sept. 19 (183 DTR H-1, 9/21/11). The tax department notes however, that the amount of tax due at the time the voucher is redeemed depends on whether the voucher is for a specific product or service, or whether it is for a stated face value.

The guidance issued by the tax department details how the tax must be paid in those two situations.

In its draft directive issued Sept. 16, the Massachusetts Department of Revenue also stated that the third-party certificates or vouchers issued by vendors such as Groupon should be treated the same as a gift certificate issued by a vendor for sales tax purposes (181 DTR H-2, 9/19/11).

A retail customer who redeems a certificate purchased online from a third-party-seller must pay tax on the entire taxable value of the tangible personal property or meal when redeeming the certificate, according to the draft directive.

The agency further explained in its draft that these third party-certificates are not the same as a manufacturer or retail coupon that generally entitles the purchaser to a reduction in the sales price at the time of purchase.

Discussion About Discounts.

FTA’s Smith said there has been some discussion about whether online discount coupons are similar to manufacturers’ incentives or discounts, an issue that was debated in the 1980s. At that time, manufacturers’ deals were offered in the auto industry, and the topic of discussion was the difference in treatment between instant price reductions and incentives paid after purchases.

Joseph X. Donovan, an attorney with the Boston office of Sullivan & Worcester and a former state tax official, told BNA Sept. 19 that states could be all over the map in the treatment of the online discount vouchers depending on whether they define them as gift cards or discounts offered by the retailer.

In the general definition of sales tax, he said, when cash discounts are offered by retailers, the purchasers pay tax on the discounted prices. However, in the case of a gift card, the purchaser pays tax on the full value of the taxable item, and the gift card is simply considered a form of payment.

“It is a bit of a mess, but that is true of a lot of breaking issues,” Donovan said, citing the initial confusion over the tax treatment of software transmitted electronically rather than on a physical medium. “There will be a period of time when retailers are in a difficult position.”

For example, he said, if a retailer guesses wrong and fails to charge enough tax, they can be stuck with a huge bill which, when combined with penalties and interest, can be a significant burden.

However, if the retailer goes the opposite way and charges the customer on the full value of the item, it becomes a burden on the customer. And doing so, Donovan noted, perhaps opens a retailer to a class-action lawsuit in which the retailer could be sued and forced to reimburse customers a nickel each, while the plaintiff law firm collects $300,000.

California Guidance.

In addition to Massachusetts and New York, California also issued comment on the taxation of deal-of-the day instruments in its September Taxpayer Information Bulletin.

In that publication, the California State Board of Equalization said that “retailers often engage in marketing and sales programs in which they issue coupons that entitle their customers to a discounted price for products sold by the retailer. Deal-of-the-day instruments (coupons) fall within this category. In general, tax applies to the amount paid by the customer for the deal-of the day instrument plus any additional cash, credit, or other consideration required to be paid when the product is purchased.”

The board also added that, in general, if the type of sale is normally not subject to tax, then tax would not apply to the sale when the coupon is used by the customer.

Not Taxable in Florida.

While the state of Florida has not issued specific guidance, a spokeswoman for the Department of Revenue said the position taken by the department is that Groupon is selling a cash equivalent or gift card or gift certificate. Rule 12A-1.089, F.A.C., provides that the sale of a gift certificate or gift card is not taxable. Therefore, the sale by Groupon is not taxable, Renee Watters explained Sept. 21.

Tax is due when the cash equivalent of the gift card or gift certificate is redeemed on a taxable item or service on the full amount of the sale. Tax should be collected and remitted by the selling dealer of the taxable item or service, she said.

Illinois, Ohio Examining Issue.

Illinois is examining the tax implications of vouchers sold through web-based services, discount clubs, and social networking sites, Susan Hofer, a spokeswoman for the Illinois Department of Revenue, told BNA Sept. 19. But she said the department has come to no firm conclusions on the need for guidance in this arena.

Hofer said IDOR generally views the transaction between the consumer and the web-based provider as a nontaxable event. However, sales or use tax obligations would be triggered when the consumer redeems the voucher with a vendor for a particular product. She said the department has not yet decided whether it needs to make this view more explicit through formal rulemaking.

“We are looking at the tax implications, but actually I’m not sure there will be any real issues,” Hofer said. “Sales and use taxes are paid when the coupon is used.”

Like many states, Ohio currently does not have specific tax policy regarding online vouchers, Gary Gudmundson, spokesman for the Ohio Department of Taxation, told BNA Sept. 21.

However, he said the department is collecting data on this form of retailing and analyzing the policy implications, taking special note of how vendors are treating taxable products and services when vouchers are redeemed.

A call to the Internal Revenue Service seeking comment on how the federal government views the sale of online discount vouchers was not returned.

A Groupon spokeswoman said in an e-mail that she was unable to comment on the topic. A call to LivingSocial seeking comment was not returned.