Monday, January 23, 2012

As We Wait for Massachusetts, More States Issue "Groupon Sales Tax" Guidance


Administrative Guidance:  Groupons and Sales Tax! Now here's an issue that states are paying close attention to - specifically how discounts offered through internet based "deal-of- the-day" marketing companies, such as Groupon and LivingSocial, impact the sales price subject to sales tax. In this post, I provide an update on Draft Guidance issued by Massachusetts last fall and on additional states that have come forward with administrative guidance in recent months.  You probably won't be surprised to find out that the states approaches vary - but more on that in a bit!  

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This past September, I wrote post a post entitled Wondering How Sales Tax Applies to a Groupon? Massachusetts Issues Draft Guidance” in which I gave an overview on a Massachusetts Department of Revenue ("the Department") Draft Directive that had just been issued to address the sales tax implications of third party e-coupons discounts. (See Massachusetts' Working Draft Directive 11-XX, Application of Sales Tax to Sales and Redemption of Third Party Coupons.) As of today, January 23rd, this Draft Directive is still, well, a Draft, and you're probably wondering when Massachusetts will issue its Draft Directive in final form.

But before delving into the status of Draft Directive 11-XX, I'll note that prior to issuing final administrative guidance (e.g., Technical Information Releases "TIRs" or Directives) the Department typically issues its guidance as a Working Draft and solicits practitioner and taxpayer comments through a specified date. My experience in following the issuance of Massachusetts’ administrative guidance is that a final TIR or Directive is often issued shortly after the comment period closes and generally with little to no change from the Working Draft version. 

As many of you know, I’m following developments in the third party “deal-of-the-day” (i.e., Groupon, LivingSocial, BuyWithMe) arena very closely – watching and reporting on how various states are treating the “deal-of-the-day” discounts associated with these transactions and in particular, on what amount states are determining sales tax should be charged on. And as a State Tax consultant based in Massachusetts, I'm particularly interested in the impact of Massachusetts’ guidance on Massachusetts' businesses who choose to offer a “Groupon”.  

Thus, as it had been more than four months since the Department issued Draft Directive 11-XX (and well over three months since the September 30th closing of the comment period), I decided to follow-up with the Massachusetts Rules and Regulations Bureau (see Note A below) on the timing of a final Directive. I was informed (via e-mail) that a major sponsor of these “deals” had requested additional time to comment (the Bureau's e-mail indicated that the Bureau has been reviewing the comments and the sponsor’s responses to follow-up questions).  The Bureau's response also stated that the Department is considering further outreach to affected vendors (and restaurant owners) about the administrative burdens in the varying approaches other states are using.  Finally, the Bureau’s response also noted that there is no specific timetable regarding the issuance of a final Directive on the treatment of “e-coupon” discounts. (See Note B below)

As We Wait for Massachusetts, More States Issue Groupon-Sales Tax Guidance

In the last four months at least five other states have issued final guidance on the impact of third party "deal-of-the-day" discounts on sales price.  For instance, this past September, both California and New York issued final guidance on what amount merchants should be collecting sales tax on. (See California Publication 388 and New York Technical Services Bulletin, TSB-M-11(16)S . Also see my 11/17/11 AllBusiness.com article “Groupons & Sales Tax – New Guidance for SmallBusiness", in which I detail California’s, New York’s and Massachusetts’ treatment.)  

Since then three more states have jumped on the “Groupon – Sales Tax” bandwagon, including Kentucky (See December 2011 Kentucky Sales Tax Bulletin), Iowa (see Iowa's Webpage on Groupons– Iowa Sales Tax), and Maine (See Maine Revenue Services Instructional Bulletin No. 39, 1/17/2012)

Given that several states have issued guidance recently, how does Massachusetts’ Draft guidance compare?

Currently, Massachusetts’ position in Draft Directive 11-XX is that sales tax is due on the full, non-discounted value of the product or taxable service obtained through the deal as the Department does not consider these e-coupon discounts to be either a manufacturer’s or a retailer's discount. (Under the Massachusetts sales tax regulation on Discounts, Coupons and Rebates - 830 CMR 64H.1.4 - manufacturer's and retailer's discounts are allowed to reduce sales price subject to sales tax.)  

This represents one of the most aggressive positions being taken by any of the states that have issued guidance thus far as it allows no variation in the amount subject to sales tax based on how a transaction may be structured. (But keep in mind that Massachusetts guidance is still in Draft form, thus subject to change.) 

Although three other states have stated that in certain situations sales tax is due on the full sales price of the transaction, these same states have also stated that in other situations sales tax is due on the discounted sales price.  

New York, for instance, requires that sales tax be charged on the full (non-discounted) value of the transaction if what's been issued is a “Stated Face Value” voucher - one which allows a customer to choose from the retailer’s offerings and apply the voucher's value like cash. However, New York allows sales tax to be charged on the discounted value of the transaction (what the customer pays for the deal) if what's been issued is a “Specific Product or Service” voucher - one where the customer purchases a specific product or service (e.g., one oil change or a specific item) and isn't allowed to redeem the voucher for any other product or service .  (See my AllBusiness.com Groupon article for a detailed discussion of New York’s rule, including an example of how a customer who obtains the exact same item can owe a different amount of tax based on what type of voucher is redeemed and how merchants who allow customers to use a portion of a voucher's value to cover the sales tax due could end up with a financial loss on their offer. )

Though not stated in exactly the same way, Iowa’s rule works similarly such that “in most situations, sales tax should be charged on the full price of the item purchased.” However, Iowa’s guidance adds that “if the certificate states on its face the price paid by the purchaser to the online buying service, tax is collected on that amount (i.e., the discounted amount), rather than the full price of the item purchased.”  And although Kentucky's guidance works in an opposite manner - where the general rule is that sales tax is due on the discounted sales price, Kentucky's rule adds that "an e-voucher must indicate the discounted price or the local retailer must know and retain documentation of the discounted price otherwise sales tax is due on the full-value".

Finally, note that both California's and Maine's guidance allow the discounted value to be the sales tax base. California's rule states that sales tax is due on "the amount paid by the customer for the deal-of-the-day instrument plus any additional cash, credit or other consideration given at the time of redemption".  (See examples on page 2 of California Publication 388 and my AllBusiness.com Groupon article for more details.) 


Maine's guidance states that "Groupon type" discounts are to be treated in the same manner as a retailer's discount. (See page 4, example 4.C.1 in Maine Revenue Services Instructional Bulletin No. 39.  Also see my original Groupon post, "Wondering How Sales Tax Applies to a Groupon? So Are Many of the States", for a discussion on the general rules relating to retailer's and manufacturer's discounts.) 

Sylvia’s Summation

As we wait for Massachusetts to issue its final Directive, more and more states have come forward with guidance on how third party "deal-of-the-day"discounts impact sales price subject to sales tax. Although in certain states, the end result is similar, the rules are not identical or uniform across the board, requiring merchants who engage in nationwide or multi-state offers to decipher how each state's rule could impact the same "deal-of-the-day" transaction in different states.   

As Massachusetts' Draft position does not allow for any variation on how sales tax should be applied based on the various ways a transaction could be structured and the Draft guidance requires that sales tax be charged on the full, non-discounted, sales price in all instances, Massachusetts' Draft position represents one of the most aggressive positions taken by the states that have issued formal guidance thus far. (However, once again, please keep in mind that Massachusetts' guidance is still in Draft form, and thus subject to change.)

However, my experience in following Massachusetts' developments and the Department's issuance of regulations and other administrative guidance, is that the Department's final guidance is often comprehensive and well-thought through. An example that comes to mind is the issuance of the Department's 75 page Combined Reporting regulation. Although the final regulation was issued long after the comment period closed, the Department spent an inordinate amount of time reviewing the multitude of comments that were submitted and issued a thorough regulation which contains numerous examples addressing the application of Massachusetts' combined reporting rules. (Yes, I'm giving the Department a compliment.)  

Thus, my hope is that the Rules and Regulations Bureau is carefully evaluating other states' guidance and thoughtfully considering the practitioner and taxpayer comments it received in response to Draft Directive 11-XX. Given the length of time that has passed since Draft Directive 11-XX was issued, I'm also hopeful that Massachusetts' Final Directive will address that these "deal-of-the-day" transactions may be structured in a variety of different ways and provide more comprehensive guidance than was is provided in the Draft Directive.  


Oh course I can't predict what the final Directive will look like, but one thing I can assure you of is that I'll be reporting on it!  Stayed tuned!

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For more on Groupon and Sales Tax, see my prior articles/posts:

"Wondering How Sales Tax Applies to a Groupon? So Are Many of the States", The State and Local Tax 'Buzz', June 10, 2011

"Wondering How Sales Tax Applies to a Groupon? Massachusetts Issues Draft Guidance", The State and Local Tax 'Buzz', September 28, 2011

"Groupons & Sales Tax - New Guidance for Small Business", AllBusiness.com, November 17, 2011




Note A:  The Rules and Regulations Bureau is the the Legal Division within the Department which interprets the statute and authors regulations and administrative guidance explaining the law. In the above post, I use the term "the Department" and "the Bureau" interchangeably.  However, actual administrative guidance is drafted and issued by the Rules and Regulations Bureau.


Note B:  Note that the e-mail response I received from the Rules and Regulations Bureau should in no way be construed to be binding upon the Department.  Until the Department issues its FINAL Directive on the Application of Sales Tax to Sales and Redemptions of Third Party Coupons, Massachusetts merchants who offer a "Groupon" should follow the Department's Draft guidance and charge sales tax on the full (non-discounted) value of the product or taxable service offered through any third party e-coupon "deal-of-the-day" transaction OR should consult the Massachusetts Rules and Regulations Bureau for guidance specific to their transaction.




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