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Groupons, Sales Tax and More - The Issues Continue

Last Friday, March 23rd, I had an article published by the fine folks at Bloomberg BNA.  The article, “State Tax Issues to Consider with ‘Groupons’ And Other Third-Party ‘Deal-of-the-Day’ Programs” appeared in electronic media in the publisher’s State Tax Weekly Report.  The print version of the article is also scheduled to be published in the April 27th edition of the publisher's Tax Management - Multistate Tax Report.  If you’re a subscriber to the State Tax Weekly, you can access the article here.  

If you’re a frequent visitor to The State and Local Tax “Buzz”, you've probably noticed that I’ve been closely following developments in the “Groupon-sales tax” arena and have authored several posts covering these developments.  This is an area in which I’m genuinely interested – which is why I jumped at the opportunity to write an expanded article when I was approached by one of Bloomberg BNA’s State Tax Law editors. 

In the article I cover several aspects of deal-of-the-day programs, including how “deal-of-the-day” promotions, such as those marketed by Groupon, LivingSocial and other third party marketers which follow the same business model, work. I also provide a detailed explanation of guidance issued by New York, California, Massachusetts, Kentucky, Maine, Iowa and Illinois and contrast the various approaches that these states are taking.  (Note that I briefly cover the guidance issued is all of these states, with the exception of Illinois, in my most recent post, “As We Wait for Massachusetts, More States Issue ‘Groupon Sales Tax’ Guidance, as well as in my prior Groupon articles/posts listed at the end of this contribution.)

Illinois Developments

For the benefit of my readers who haven’t read the Bloomberg BNA article and because developments in Illinois are so recent that I have not had an opportunity to cover them in a "Buzz" post, here’s a quick overview of "Groupon-sales tax " developments in Illinois.

On February 3rd, the Illinois Department of Revenue (“IDOR”) held its Annual Tax Practitioner meeting.  In conjunction with this meeting, practitioners were allowed to send advance questions to the IDOR. One question, to which the IDOR provided a response, was how Groupons should be treated for sales tax purposes.  In short, the IDOR's response was  ‘‘If the retailer knows the amount that the customer paid for the voucher, then the amount that the customer paid for the voucher is taxable when the voucher is redeemed.” (That is, sales tax would normally be calculated on the discounted value.) The response added that “if a retailer does not have this information, the retailer may calculate tax on the full value of the voucher.”  Just a few weeks later, on 2/28/12, the IDOR issued a Private Letter Ruling (“PLR”) which was in response to a taxpayer’s query regarding a third party internet marketer’s obligation to pay or collect sales tax on the sale of discounted promotions to customers for use at unrelated eating and drinking establishments. (See Illinois ST 12-0009-GIL.)  

Because the question in the ruling request was focused on whether the third party marketer is required to collect sales tax on the sale of the promotions (i.e., the vouchers), the IDOR first responded that “persons who are engaged in the business of selling cards or coupons, or vouchers, which entitle purchasers to the right to redeem those cards for tangible personal property, are not engaged in selling tangible personal property. Rather, they are making sales of intangibles.”   Thus, as is the case in other states, it does not appear that Illinois would expect sales tax to be collected on the actual sale of a voucher or certificate.  In the PLR, the IDOR took the opportunity to once again reiterate what it had stated in its Tax Practitioner Q&A response – that sales tax would normally be due on the amount the customer paid for the voucher provided the retailer knows what the customer paid for the voucher, but that sales tax would be due on the full value of the products, services or meals received if the retailer did not have that knowledge.  Although the IDOR's Q&A response and taxpayer specific guidance in the PLR do not represent final directives to which the IDOR would be bound, they are indicative of the IDOR's position on what the tax base subject to sales tax should be when a deal-of-the-day voucher is redeemed.


SST State and Local Advisory Council ("SLAC") Sales Price Workgroup

In the Bloomberg BNA article, I also discussed recent actions of a workgroup of the State and Local Advisory Council (“SLAC”) of the Streamlined Sales Tax (“SST”) Project.  This SLAC workgroup was formed in response to the numerous questions states have been receiving from customers and the business community concerning the measure subject to tax when customers tender a deal voucher, such as those provided by Groupon or Living Social, to make purchases of products from a retailer. This workgroup has been holding periodic teleconferences to discuss this issue, including a teleconference on February 1st and  March 22nd.  A subsequent teleconference is set to occur on March 29th.  (See March 29th Update Below)

One of the most interesting aspects of researching developments for my article was reading the SLAC workgroup’s Issue Paper. In an effort to gather information regarding how states are treating "deal-of-the-day" transactions, the workgroup also created a State Survey which asked states to address several aspects of these transactions such as, which party – the deal company or the retailer – the state considers to be the seller of the voucher; whether the sale of the voucher is considered a sale of tangible personal property; what value the state considers to be the tax base; whether the amount retained by the deal company is considered a cost or expense of the retailer which is excludable from sale price;  what the tax base is where a voucher is redeemed after the expiration of the promotional period and whether the state would make a distinction between a voucher issued for a specific product or service or one with a stated value. (You can access the SLAC Gift Cards, Vouchers and Layaway Fees Issue Paper and State Survey here) To assist state representatives in their understanding of  “deal-of-the-day” transactions, the workgroup also created a diagram which shows the flow of funds and services in a typical transaction. (You can see the SLAC Sales Price Voucher diagram here.)  States were asked to respond to the survey by March 19th  - the information will be used to assist in the development of an interpretive rule. (Also See March 29th Update Below for the Results of the SLAC Workgroup State Survey.)

Incidentally, if you’ve made your way to The State and Local Tax “Buzz” by way of Janet Novak’s excellent article, “24 States Moving Towards Decision On Taxing Groupon, LivingSocial Deals”, Forbes.com, 3/26/12, you’ve also read about the SLAC workgroup initiative and how certain states have responded to the SLAC workgroup's survey. (A huge THANK YOU to Janet for the “hat tip” to me and this blog for my coverage on Groupon developments.)  

And if you're wondering which 24 states the article is making reference to, they are the 21 full-member SST states (Arkansa, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Oklahoma, Rhode Island, South Dakota, Vermont, Washington, West Virginia, Wisconsin and Wyoming) and the 3 associate member SST states (Ohio, Tennessee and Utah).


Other State Tax Considerations

But as I point out in the Bloomberg BNA article, there are other state tax issues to consider with third party “deal-of-the-day” programs. For instance, I highlight how state unclaimed property administrators are taking an interest in Groupons. If you’ve purchased a Groupon or other third party “deal-of-the-day” instrument, you already know these instruments often have a short expiration date – they generally must be used within six months of their purchase. (Whether these short expiration dates violate Federal and State Consumer Protection laws is yet another issue.) Both Groupon's and LivingSocial’s customer agreements inform subscribers that state law may require a longer expiration date that what is listed on the voucher and that a voucher that has “expired” may still be redeemed for the amount the subscriber paid (i.e., the voucher may have lost its promotional value, but the value paid can still be applied at redemption). Still, many customers may never read “the fine print”, may lose their motivation to use the voucher once its promotional value is gone or may simply believe that their voucher is no longer usable.

And so it is highly likely that many of these vouchers are never redeemed.  And indeed, it’s been reported that one reason merchants are willing to take a significant discount on their "promotions" is because a certain amount of “breakage” is expected. (Breakage is the term used in the retail industry to describe revenues from unredeemed gift cards, certificates, etc. ) These unredeemed vouchers may ultimately “escheat” to the state and as a significant percentage of property that “escheats” to the state is never claimed by its rightful owner, the state ultimately reaps this revenue.

But the issue doesn’t stop here. There are questions as to which party is required to report and remit this “unclaimed property” – is it the third party “deal-of-the-day” marketer (Groupon, LivingSocial) or the merchant?  Both Groupon's and LivingSocial's merchant agreement state that the Merchant is the issuer of the voucher and is responsible for any unclaimed property liability.  However, in Groupon's 2011 S-1 filing, Groupon disclosed that the Company may indeed be found liable for unclaimed property liabilities.

Yes, there are many state tax issues to consider with “Groupons” and other third party “deal-of-the-day” instruments. If you have access to my article, “State Tax Issues to Consider with ‘Groupons’ And Other Third-Party ‘Deal-of-the-Day’ Programs”, I encourage you to read it for a more in-depth discussion of these developments and issues.  Also note that Bloomberg BNA will be issuing its 2012 Survey of State Tax Departments in late April, which will offer an in-depth look at each state's treatment of social media coupons.    

And if this developing trend is of interest to you, check in which The State and Local Tax “Buzz” every so often.  I’ll be reporting on new developments as they arise!


**March 29, 2012 Update:  Following (or in conjunction with) its March 29th teleconference, the SLAC Sales Price Workgroup posted the results of its State Survey.  The SLAC Survey shows responses received from the following states: Arizona, Arkansas, Indiana, Iowa, Kansas, Kentucky, Maine, Minnesota, Massachusetts, Michigan, Missouri, Nebraska, North Carolina, North Dakota, Ohio, Rhode Island, South Dakota, Tennessee, Texas, Washington State and Wisconsin.    

The State Survey responses can be accessed HERE.  State comments from the Survey can be accessed HERE.

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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

"As We Wait for Massachusetts, More States Issue "Groupon Sales Tax" Guidance", The State and Local Tax 'Buzz', January 23, 2012





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