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Wondering How Sales Tax Applies to a Groupon? So Are Many of The States!

Groupon, LivingSocial; those increasingly popular internet based social coupon programs.  If you're a business launching a new product or service or just looking to increase your customer base, you've probably contemplated promoting your business through one of these programs.  With Groupon being named one of the "fastest growing companies in Web history" by Forbes.com, it's certainly tempting to jump on this fast moving train. Why shouldn't your business benefit from this successful business model?

Your analysis has probably included looking through the Groupon, LivingSocial or other e-coupon program websites.  You’ve probably read the success stories, as well as the reports criticizing these e-coupon programs as nothing more than expensive advertising.

But here's another issue to consider in your analysis.  If the product or service on which you'll offer a discount is subject to sales tax, on what value should sales tax be calculated? Should sales tax be charged on the full value of the product or service?  Or should sales tax be charged on the discounted value?  

Before launching into how sales taxes might apply to a Groupon, here's a quick overview of how these programs work.  If you're a Groupon or LivingSocial subscriber, you're familiar with the concept. Subscribers receive a "Daily Deal" e-mail in which discounted products and/or services are offered. Subscribers have a specified amount of time to “buy” into a deal.  If a minimum number of people choose to "buy" before the offer expires, the deal becomes effective, or as Groupon says, "the deal is on."  (I understand that LivingSocial differs slightly from Groupon in that a minimum number of buyers aren't necessary for a LivingSocial deal to go through.)  For the retailer offering the Groupon, the "discount" is lost revenue; money spent that will hopefully bring in new business. The retailer also incurs a service fee which Groupon retains from the amount it receives from customers who pay Groupon directly via a credit card. Neither Groupon nor LivingSocial collect sales taxes on the transaction. (Groupon's Merchant Self-Service Agreement states that the merchant "shall be responsible for paying all sales and use taxes" due.) 

But how does sales tax apply to a Groupon? What exactly is a Groupon?  Is it a retailer's discount, a manufacturer's discount, a gift card equivalent or some type of hybrid?  How a particular state views a Groupon could impact the amount of sales tax the state expects to be collected.  In general, states treat a retailer's discount, such as one where a retailer creates its own coupon, as a "cash discount allowed and taken". Because the retailer incurs an economic loss, sales tax is calculated on the discounted sales price.  In comparison, when a retailer applies a manufacturer's discount to a sale, most states require that sales tax be charged on the full sales price since ultimately the retailer will be reimbursed the discount amount by the manufacturer or another third party.

In some Groupon transactions, the consumer is pre-paying for a specific item or service, e.g., a specific piece of jewelry or a carpet cleaning service, while in others the consumer is buying a voucher that be used to purchase from the retailer’s offerings.  In the former, an actual sale of the product or service has occurred (even if possession doesn’t take place until a later date), while the latter operates like a gift card as what has been purchased is a cash equivalent that will be used to purchase "something" but whether that "something" is taxable or not isn't known just yet.  Some of my fellow SALT colleagues have suggested that a Groupon is neither a retailer's or manufacturer's discount or a gift card equivalent, but some type of hybrid, and have noted that it's difficult to apply existing law to a hybrid.  

So where do the states stand on this issue?  According to a recent article in Forbes.com, California, Florida and Illinois expect retailers to collect sales tax on the full (non-discounted) value of the product or service even though the retailer ultimately ends up with much less than the full sales price after taking into account the discount and Groupon's service fee.  The article says that Texas, on the other hand, allows sales tax to be calculated on the discounted value, the amount actually paid, which implies that Texas is more apt to treat a Groupon like a retailer's discount. (See "Social Confusion: How Do Sales Taxes Apply to a Groupon?", by Janet Novak, Forbes.com, 2/18/11)

While authoring this piece, I also reached out to my own state, Massachusetts, after my research found limited guidance. (See Note B below)  In my query to the Massachusetts Rules and Regulations Bureau (the department within the Legal Division which interprets the statute and authors regulations and administrative guidance explaining the law), I noted that the existing law and guidance do not appear to address how sales tax applies specifically to Groupon type arrangements.  The Bureau's e-mail response to my inquiry (See Note A below), confirmed that indeed, the Bureau had not issued guidance on Groupon type arrangements, stating that they have yet to receive a fully documented ruling request as required by the Massachusetts administrative provisions. Their response added that without a formal ruling request detailing the specifics of these arrangements, the Rules and Regulations Bureau lacked sufficient information as to exactly how these promotions work and if they all work in the same way.  Interestingly, despite this statement, the response also stated that the Bureau does not believe that Groupon certificates qualify as retailer's or manufacturer's coupons, which do reduce the taxable sales price in accordance with the Massachusetts sales tax rules.

But what about the remaining states that impose a sales tax?  Well, you can bet that Groupons are on the radar of many revenue hungry states.  But despite an elevated interest in how participating retailers are handling sales tax, some state officials, such as Jeannine Koranda, a spokesperson for the Kansas Department of Revenue, agree that "it's an area where a lot of states are finding that technology is outpacing their laws."  (See "Kansas Department of Revenue monitoring sales tax collections by retailers using Groupon", by Christine Metz, LJWorld.com, 2/27/11)   Brad Malone of New York's Department of Taxation and Finance, voices a similar concern in the Forbes article, stating that the current New York regulations on the taxation of discounted merchandise do not seem to cover the Groupon model.  And, as just noted, Massachusetts has yet to state an official position on how the Massachusetts sales tax rules on discounts apply to Groupon type arrangements.

Sylvia's Summation:  I said earlier that how sales tax applies to a Groupon should be part of the analysis of whether a Groupon makes sense for your business.  This is where I'd normally caution readers to consult their tax advisor, SALT consultant, CPA, or their particular State Tax Department. But the states' positions on this issue are largely undefined at this point, making this a question that most states can't offer an absolute answer to.  In some ways this dilemma is a "doomed if you don't" or "doomed if you do".  A retailer who collects sales tax on the discounted value might end up under collecting tax and  be required to cough up the additional sales tax (on audit) if his state takes the position that the full value should've been taxed. But collecting sales tax on the full value could leave the retailer with disgruntled customers who might not appreciate that their sales tax bill is higher than they expected, especially if they're in a high sales tax state. Not a positive thing when you're trying to bring in new customers. As your friendly state tax blogger, I'll keep you posted as developments unfold in this newest e-commerce state tax dilemma.  In the meantime, let me know your thoughts.  Have you used a Groupon lately?  Did the retailer charge you tax on the discounted or full price?  Did the retailer allow you to apply your Groupon voucher towards the sales tax?

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Note A:  The e-mail response received from the Massachusetts Department of Revenue's (DOR) Rules and Regulations Bureau is what is referred to as an "Information Letter" (as defined in Letter Ruling Regulation, 830 CMR 62C.3.2.)  It is intended to provide general information such as the potential applicability of DOR public written statements or well-established principles of tax law, but it is not intended to provide authoritative guidance on the application of the tax laws to a specific set of facts, therefore, it is not a "ruling" or "letter ruling" that is legally binding on the DOR.

Note B:  Limited guidance on this issue was found in an Information Letter issued by the Department. (see http://www.benedelman.org/restaurants/ma-opinion-033010.pdf).  Although this Information Letter clearly addresses a Groupon type arrangement, as stated above, it is not considered authoritative guidance, and is not binding on the Department.

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The above is based on my  5/31/11 AllBusiness.com post, "Wondering How Sales Tax Applies to a Groupon? So Are Many of the States", which I wrote as a contribution to the Business Tax Advisor blog of AllBusiness.com  (see side bar for more on my AllBusiness.com posts).  It has been expanded upon (specifically, the entire commentary on Massachusetts) and re-produced  a State and Local Tax "Buzz" post for the benefit of the "Buzz's" readers.


Comments

HepperSchepp said…
Re: Massachussets. See here:
http://www.benedelman.org/restaurants/ma-opinion-033010.pdf

This is another information letter. However, It is very well spelled out so I am unclear on what you advised them for them to give you a contrary answer.
Reader, Thank you for your comment. Incidentally, I had also seen the 2010 Ben Edelman opinion letter while I doing my research. You are correct, in that it appears that the DOR has offered a contradictory position. In my query to the DOR, I described a couple of ways that a Groupon might operate. Quoting from my e-mail to the DOR, I stated: "As you know, a Groupon can work in a couple of different ways. On one hand, a consumer who buys into a Groupon deal that “is on” (because enough people opted to buy that deal) purchases a specific product or a taxable service at a significant discount. In this case it’s almost like the consumer has pre-paid for the specific product or service. In other instances, it looks like the Groupon is more like a gift card or pre-paid voucher that the consumer can use to buy whatever they want at the retailer’s location (that is, the consumer hasn’t purchased an actual, specific product or service). I’ve seen this quite often where the Groupon is for meals or other edibles from a restaurant, bakery or other eatery. An example would be a Groupon offer of $30.00 worth of restaurant food/beverages or other edibles for the discounted price of $20.00. It appears that some Massachusetts merchants are charging sales tax on the discounted price and other merchants are charging sales tax on the full (non-discounted) price." My latter example is essentially what is described in the Edelman opinion letter. Interesting! (Note that the official who addressed my query was not the same official who signed the Edelman letter.) From comments that I've shared with other SALT practitioners, the states everywhere are struggling with how Groupons impact the sales tax base. Thanks again for the reminder - I'll be updating my post with an additional footnote, linking in the Edelman opinion.
Readers, My last comment got me to thinking about some of the other interesting stories/tidbits I came across while writing this story. If you're a fellow blogger, you know the challenge of keeping a blogpost to manageable length (this one's pretty long), and how you have to pick and choose what will make it into your post. One story that caught my eye dealt with Groupon's first nationwide deal with the Gap back in 2010. The deal, which was for $50 worth of Gap clothing, etc. for $25, earned the Gap $11 million in one day. See: http://www.zdnet.com/blog/btl/groupons-11-million-gap-day-a-business-winner-or-loser/38259
And of course, upon reading about the nationwide GAP deal, I couldn't help but think about the significant sales tax implications across the country on that deal.