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Wondering How Sales Tax Applies to a Groupon? Massachusetts Issues Draft Guidance


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Massachusetts Deals
This past June, I wrote a post entitled Wondering How Sales Tax Applies to a Groupon? So Are Many of The States”.  If you’re a frequent visitor to The State and Local Tax “Buzz”, my guess is you’ve read this post as it’s become the most popular blog post I’ve published to date.


As you probably guessed from the title of that post, the key point I highlighted is that much uncertainty has existed regarding the sales tax implications of third-party e-coupon discounts, such as those marketing and arranged by companies like Groupon and LivingSocial. Specifically, I addressed whether states allow Groupon type discounts to impact sales price in the same manner as manufacturer’s or retailer’s discounts, as well as whether the nature of the Groupon type arrangement impacts the amount subject to sales tax as these promotions are not all identical. (In some promotions a consumer purchases a specific product or service, while in others, a consumer has purchased a “cash equivalent” which may be tendered as payment when choosing from the participating retailer’s offerings.) In my prior post, I also highlighted that state officials have been taking great interest in these third party e-coupon programs, but many states had not yet issued definitive guidance on how they impact sales price as their current regulations on the taxation of discounted merchandise did not appear to cover the Groupon model.

Massachusetts Issues Working Draft Directive 11-XX:
As states begin to address this issue, we may soon see this uncertainly evaporate. On September 16, 2011, Massachusetts became one of the first states to publicly address the sales tax implications of third party e-coupon discounts.  The Department of Revenue's ("the Department") temporary guidance is articulated in Working Draft Directive 11-XX, Application of Sales Tax to Sales and Redemption of Third Party Coupons.
This Working Draft Directive clearly identifies the promotional arrangements to which it applies as those “known under various names in the marketplace including Groupon, LivingSocial and BuyWithMe.” The two issues addressed in Draft Directive11-XX include:

  1. Whether the sale of a third party e-coupon certificate is subject to sales or use tax. That is, whether the sale of the actual e-voucher which may be redeemed (at a future point) at face value for taxable property or meals is subject to sales tax.
  2. What value should be used to determine the amount subject to sales tax when taxable personal property or meals are purchased using a third party e-coupon certificate. Specifically, this second issue deals with the impact of these third party e-coupon discounts on the sales price subject to sales tax.  
Regarding the first point, Draft Directive 11-XX confirms that tax is not due upon the sale of the e-coupon certificate, stating that the sale of e-coupon certificates should be treated, for sales tax purposes, in the same manner as gift certificates issued by a vendor. Effectively, this means that at the point in time when Groupon or other e-coupon vendor charges a customer’s credit card, the transaction is the equivalent of a gift certificate sale even if the customer is purchasing a specific taxable product or service.
  
On the second issue, Draft Directive 11-XX first explains Massachusetts' current rule on the impact of manufacturer’s and retailer’s discounts on sales price as detailed in the Massachusetts sales tax regulations. The Draft Directive states that while the Massachusetts regulation on discounts and coupons allows both manufacturer’s and retailer’s discounts to reduce the sales price subject to tax, the Massachusetts regulation also states that “other types of coupons will not be treated as cash discounts”. (See 830 CMR 64H.1.4 Discounts, Coupons and Rebates)

Draft Directive 11-XX then concludes that a “certificate or coupon issued by a third party as described in this Directive does not qualify as a manufacturer’s or retailer’s coupon because it is neither issued by the manufacturer nor the retailer…”, and further adds that “A third party certificate is therefore not treated as a cash discount that reduces the taxable sales price.”

To illustrate the application of these rules, Draft Directive 11-XX includes two examples. The first example details a scenario in which a consumer purchases an e-certificate for $20.00 which can be applied towards a $40.00 restaurant meal (i.e., the consumer will be able to choose from the restaurant's offering and tender the e-certificate as payment). The Draft Directive states that state and local sales tax will be due on the full $40.00 value of the meal. In the second scenario, a consumer purchases a $280.00 golf package for $140.00. The package includes non-taxable green fees normally valued at $200.00 and a taxable golf cart rental fee normally valued at $80.00.  The Draft Directives states that the golf course must collect and remit sales tax on the full $80.00 value of the taxable golf cart rental fee.  Note that while Draft Directive 11-XX is indicative of the Department’s position on the treatment of third party e-coupon discounts, it is at this time still a Working Draft Directive and subject to change.

Additional Commentary
While authoring my prior Groupon post, I reached out to the Massachusetts Rules and Regulations Bureau (the department within the Legal Division which interprets the statute and authors regulations and administrative guidance) because my research found limited authoritative guidance on Massachusetts’ position on e-certificate discounts. The Bureau’s response to my question came to me in the form of a Private Information Letter (“PIL”) (See Note A), which confirmed that the Department had not issued formal public guidance on Groupon type arrangements, stating that the Bureau had yet to receive a fully documented ruling request as required by the Massachusetts administrative provisions. The PIL added that without a formal ruling request detailing the specifics of these arrangements, the Bureau lacked sufficient information as to exactly how these promotions work and if they all work in the same way. Despite this statement, the response also stated that the Bureau did not believe that Groupon certificates qualified as retailer's or manufacturer's coupons, which do reduce the taxable sales price in accordance with the Massachusetts sales tax rules. The Department's position in the PIL I received is consistent with the Department's position articulated in Draft Directive 11-XX
One point in the PIL, which was not addressed in Draft Directive 11-XX, was a discussion of “sales price”. The PIL noted that the “sales price” issue was discussed at the May 2011 Streamlined Sales Tax Governing Board meeting, and that although a consensus was not reached during the May meeting, Massachusetts would certainly take into account any “sales price” conclusion (once reached) even though Massachusetts is not currently a streamlined conforming state. (See Note B)
As I just noted my preliminary Massachusetts research on this issue uncovered limited guidance. One document I discovered was another PIL issued by the Bureau in March of 2010. That particular PIL describes a scenario which is virtually identical to the scenario described in the first example in Working Draft Directive 11-XX, however, in the March 2010 PIL, the Bureau advises that sales tax would be due on the discounted amount the customer paid for the e-certificate, not the full value of the meal received. (See Massachusetts Private Information Letter issued to Ben Edelman dated March 30, 2010)
Despite the fact that the the March 2010 PIL clearly states that the PIL "provides general guidance only" and "is not binding on a taxpayer or the Department", this "guidance" has been referenced or cited in numerous articles that have focused on Groupon's Consumer Protection Law "violations" which have included claims that Groupon has been advising merchants to overcollect sales tax. (See "Daily Deal Providers May be Violating Consumer Protection Law", TechCrunch, 6/15/2010; "Groupon's legal risks and hidden gift to merchants", Reuters, 6/16/11 - see also link in the Reuter's article to Ben Edelman blogpost "Consumer Protection in Online Discount Voucher Sales", 6/14/11)  
Sylvia's Summation
States are becoming more and more aware of the need to address the impact of e-coupon discounts on taxable sales price. Massachusetts has recently articulated it's position in WorkingDraft Directive 11-XX, stating that e-coupons discounts do not reduce the amount subject to sales tax. Keep in mind that until the Department issues its position in a final Department of Revenue Directive, this guidance is temporary as the Department is currently accepting practitioner and taxpayer comments which may lead the Department to revise this draft guidance. Taxpayers and tax practitioners should also be aware that the media has published stories which relied on information in a March 2010 PIL which was not binding on the Department. Taxpayers considering marketing their products or services through Groupon, LivingSocial, BuyWithMe or other third party e-coupon marketer should carefully consider the sales tax implications and consult with their tax advisor in order to understand their responsibility to collect and remit the proper amount of sales tax. (See Note C.)


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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:  On 8/15/11, the Massachusetts Joint Committee on Revenue reported favorably on H. 3763, An Act to Promote Sales Tax Fairness for Main Street Retailers, which gives the Commissioner authority to petition the SST Governing Board to allow the Commonwealth to become an associate or full member.  This bill was referred to the Joint Committee on Rules, which re-convenes on 11/19/11. 
Note C:  Other states which have recently issued guidance on the sales tax implications of Groupon type discounts include California (Tax Information Bulletin, September 2011) and New York (TSB-M-11(16)S, 9/16/11).  My plan is to author a subsequent post once Massachusetts issues a final directive, which will discuss guidance from every state that has issued final guidance at that point.  

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