Massachusetts' Revised Guidance on Groupons & Sales Tax; An 'About Face' or Simply a More Reasonable Approach?
Revised Administrative Guidance: The tax implications of Groupon, LivingSocial and other
deal-of-the-day transactions are undoubtedly a topic I’m
passionate about. If you’re a frequent visitor to The State and Local Tax “Buzz”, you’ve likely read at least a few of my prior
contributions on this topic.
So what happens next? As is the normal procedure prior to issuance of a final DOR Directive, the Department is accepting public comments on Working Draft Directive 12-XX. As the comment period closes on June 28, 2012, if this is an area of concern for your business or your clients, the time to comment is now. (Comments can be sent directly to the Massachusetts Rules and Regulations Bureau at rulesandregs@dor.state.ma.us) Given the length of time that the Department has been considering this issue, I would imagine that a final directive will be issued soon after the comment period closes.
Today I’m back to reporting on a new, or should I say updated, "Groupon state tax" development - and with good reason!
Yesterday, the Massachusetts Department of Revenue (“the
Department”) issued a revised Draft Directive on
its position on the impact of deal-of-the-day (e.g., Groupon, LivingSocial)
promotional discounts on sale price subject to sales tax.
The Department’s Working Draft Directive 12-XX: Application of Sales Tax to Sales and Redemption of Qualifying Promotional Vouchers replaces previously
issued Working Draft Directive 11-XX: Application of
Sales Tax to Sales and Redemption of Third Party Coupons.
This is significant!! It's significant because the Department’s guidance regarding the value subject to sales tax
where a deal-of-the-day voucher is redeemed, is contrary to the
guidance provided in its original Draft Directive 11-XX. But more on
that in bit!
Overview of NEW Massachusetts Working Draft Directive
12-XX
Working Draft Directive 12-XX: Application of Sales Tax to
Sales and Redemption of Qualifying Promotional Vouchers (“the
new Directive” or “DD 12-XX”) opens with a description of the third-party internet based vouchers to which the directive applies and describes the
transaction that occurs in a typical deal-of-the-day promotion, e.g., a
merchant contracts with a third party marketer to publish and sell below face
value vouchers on the Internet to potential customers which can be subsequently
redeemed to purchase taxable property or meals at the merchant’s establishment,
etc. As in the original Draft Directive, the new Directive states that
the promotional arrangements described are known under various names in
the marketplace including Groupon and LivingSocial.
Although Draft Directive 11-XX contained a
similar overview, DD 12-XX adds new language that was not part of the
original Directive. This new language defines a "qualifying promotional
voucher", for purposes of DD 12-XX, as one that clearly states
"both the time limited promotional (face) value and the amount paid by
the customer for the voucher, and must remain valid for redemption for at least
the amount paid by the customer indefinitely.” As I'll explain momentarily, this language is important because it has an impact on the value subject to sales tax.
Like the original Directive, DD 12-XX addresses two key
issues:
- Whether
the actual sale by the third party deal-of-the-day marketer (i.e.,
Groupon, LivingSocial) of the “qualifying promotional voucher” is subject
to sales or use tax at the time of sale; and,
- What
sales price value (amount) is subject to tax when taxable tangible
personal property or meals are purchased using a qualifying promotional
voucher. Specifically, this second issue deals with the impact
of “Groupon” discounts on the sales price subject to sales tax.
Regarding the first issue, DD 12-XX confirms the
Department's original position that tax is not due upon the
sale of the e-coupon voucher or 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 third party marketer
charges a subscriber’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.
But it’s the second issue that the Department has “changed
its tune” on as the Department’s revised guidance states that the sales price
subject to tax in transactions where the retail customer uses a “qualifying
promotional voucher" is "the amount paid by the customer for the
voucher plus any additional cash or other consideration paid to the vendor
(merchant) by the customer at the time of sale.”
In its Discussion of the Law as it applies to the second
issue, Directive 12-XX first highlights Massachusetts’ definition of "sale
price", stating that “sale price” subject to sales tax... “excludes (i)
cash discounts allowed and taken on sales….” (Note that saying that cash discounts are “excluded”
from the sale price means that cash discounts reduce the sale price.)
DD 12-XX then points to the language in the
Massachusetts Regulation on Discounts, Coupons and Rebates which
states that both a “manufacturer’s coupon” and a “retailer’s coupon” that "entitle the retail customer to a reduction in the sale price at the time of the
sale will be treated like a cash discount.”
The Department’s new guidance then adds (and this is significant) that a “qualifying promotional voucher or coupon published
on the Internet by a third party under a contractual arrangement with the
vendor as described in this Directive will be treated similar
to a retailer’s coupon that reduces the vendor’s gross receipts subject to
tax."
DD 12-XX adds that “during the period of time that the
promotional value is in effect, the difference between the promotional (face)
value of the voucher and the amount actually paid by the retail customer for
the voucher is excluded from the sales price subject to tax as a cash discount”
and that “nonqualifying vouchers, including any that do not state the amount
paid by the retail customer for the voucher, will not be treated as retailer’s
coupons and no reduction should be made to the sales price subject to tax.”
In other words, during the period in which a subscriber can
redeem his deal-of-the-day “qualifying promotional voucher" for the full value of the
promotion, the merchant may treat the deal-of-the-day promotional discount in the same way as a
retailer’s coupon.
Working Draft Directive 12-XX Examples
To illustrate the application of these rules, DD 12-XX
includes four examples.
The first example details a scenario in which a customer
purchases a third party deal-of-the-day qualifying promotional voucher for $20.00 which
can be applied towards a $40.00 restaurant meal. The customer redeems the
voucher within the promotional period for exactly a $40.00 meal. Because this qualifying promotional voucher was used
within the promotional period, sales tax is due only on the amount paid for the
voucher, or $20.00.
In the second example, the same facts apply except that when
the customer redeems the qualifying promotional voucher his total restaurant bill is
$75.00. Because the voucher is redeemed within the promotional
period, the $20.00 "Groupon" discount is allowed to reduce his total
bill from $75.00 down to $55.00, the amount subject to sales tax. This is consistent with DD 12-XX's language that sales tax is due on the amount
paid by the customer for the voucher, or $20.00, plus any
additional cash or other consideration paid to the vendor (merchant) by the
customer at the time of sale, or $35.00 ($75.00 less the $40.00).
In a third example the same facts apply (a restaurant
voucher for a $40.00 meal is purchased for $20.00), except that the customer
redeems the qualifying promotional voucher after the expiration of the promotion's period for a $40.00 meal. Here, sales tax is due on the full $40.00 -
what the customer paid for the voucher, plus the additional $20.00 the customer
was required to pay since the voucher could no longer be applied to cover the
entire $40.00 bill. Note that the fact
that the voucher’s promotional value expired did not cause the voucher to
become “non-qualifying” as a voucher is deemed to be “qualifying” if it
includes the documentation required on its face.
Note also that although the voucher’s promotional period (as stated on the
voucher) has expired, the merchant could still honor the voucher’s terms (a $40.00 meal in exchange for the $20.00 voucher), in
which case sales tax would only be due on the $20.00 paid for the “deal”, not
the $40.00 full value of the meal.
Finally, a fourth example includes a scenario where a
customer purchases a qualifying promotional voucher for a $300.00 golf package for $150.00. The package includes
non-taxable green fees normally valued at $250.00 and a taxable golf cart
rental fee normally valued at $50.00. Because the customer redeems his voucher within the promotional period, sales tax is due on the
amount paid for the voucher. However, as the $150.00 voucher price
included both a taxable and a non-taxable component, the discounted voucher
price must be prorated based on the relative value of the components to
determine the amount of sales tax due. In this scenario sales tax is
calculated as follows: the $50 full value of golf cart rental divided by the
$300 total full value of the golf package times the $150 paid for the voucher
times the sales tax rate (50/300 = 16.6% times $150.00 = $25.00 times
Massachusetts' 6.25% tax rate = $1.56 sales tax due).
Comparing the Department’s Original Draft to its New
Draft Directive
Interestingly, the Department’s original Draft
Directive, 11-XX, pointed to the same regulation on Discounts,
Coupons and Rebates, but added that while the 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”.
The original Draft
Directive, 11-XX, then concluded 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 added that a "third
party certificate is therefore not treated as a cash discount that reduces the
taxable sales price.” (See my 9/28/11 post, Wondering How Sales Tax Applies to a Groupon? Massachusetts
Issues Draft Guidance for more on the Department's original
Directive.)
Therefore, although the deal-of-the-day vouchers or
certificates described in original Draft Directive 11-XX are in essence the same
vouchers/certificates described in new DD 12-XX, and are still by
definition, neither a "manufacturer's" or a "retailer's"
coupon (because they are not issued by either a manufacturer or the retailer), the Department is taking a softer, or at least a more reasonable
approach in its new guidance by now stating that “Groupon” discounts are like a retailer’s discount and may reduce the taxable sales price. (Assuming the voucher is a "qualifying promotional voucher")
Sylvia’s Summation
Let me start off with throwing out the question that some of
you may be asking. Why an “about face” by the Department?
Well, in all fairness to the Department, this really isn’t
an “about face” as Draft Directive 11-XX was never issued in final form.
As I emphasized in my prior Groupon articles and blog posts, Massachusetts’
Working Draft Directive 11-XX was just that – a draft document.
And although Draft Directive 11-XX was “indicative
of the department’s position”, the original Draft Directive was subject to change.
Keep in mind also, that when the Department issued Draft
Directive 11-XX last September, it was one of the first formal “directives”
issued by any state. Massachusetts Working Draft Directive 11-XX was
issued on September 16, 2011; New York’s guidance, TSB-M-11(16)S, was issued
three days later on September 19th; California included a snippet of
guidance in a September 2011 Tax Bulletin then followed-up in November 2011
with a Special Notice exclusively devoted to the treatment of deal-of-the-day
promotions; while Iowa’s, Kentucky’s, Maine’s and Illinois’ guidance were all
issued between December 2011 and February 2012. (See my 1/23/12 post, As We Wait for Massachusetts, More States Issue "Groupon Sales Tax" Guidance, for more.)
Additionally, since last September, a workgroup within the State
and Local Advisory Council (SLAC) of the SST has made significant strides in
identifying the sales tax issues associated with the ‘deal-of-the-day’
transactions, drafting an Issue Paper, creating a State Survey asking states to address several aspects of these transactions, compiling the State
Survey results and conducting periodic teleconferences in order to discuss the
issues and ultimately draft a SST interpretive rule. I would
imagine that the SLAC workgroup’s efforts have weighed in on various states
approaches, including Massachusetts', as to what value should be subject to sales
tax. (See my 3/27/12 post, Groupons, Sales Tax and More - The Issues Continue, for
more on the work of the SLAC workgroup.)
As a matter of fact, Massachusetts’ revised Draft
position is similar to that of several other states whose guidance requires
documentation on the voucher stating the amount the subscriber paid for the
deal-of-the-day voucher in order for sales tax to be due on the discounted
value (i.e., the amount paid for the voucher). For instance, Iowa’s rule states that while tax should be
charged on the full price of the item purchased, “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.” Kentucky also requires 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" in
order for the merchant to be able to charge sales tax on the amount the
subscriber paid for the voucher. And Illinois' guidance states that ‘‘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.”
But, as this recent turn of events emphasizes, Draft
Directive 12-XX is just that – a working draft - and therefore, subject to
change until issued in final form.
So what happens next? As is the normal procedure prior to issuance of a final DOR Directive, the Department is accepting public comments on Working Draft Directive 12-XX. As the comment period closes on June 28, 2012, if this is an area of concern for your business or your clients, the time to comment is now. (Comments can be sent directly to the Massachusetts Rules and Regulations Bureau at rulesandregs@dor.state.ma.us) Given the length of time that the Department has been considering this issue, I would imagine that a final directive will be issued soon after the comment period closes.
**********
For
more on Groupon and Sales Tax, see my prior journal and blog articles:
- State Tax Issues to Consider With Third-Party “Deal-of-the-Day” Programs, Bloomberg BNA Multistate Tax Report, 4/27/12; Bloomberg BNA State Tax Weekly, 3/23/12 (subscription required)
- Groupons, Sales Tax and More - The Issues Continue, The State and Local Tax ‘Buzz’, 3/27/12
- As We Wait for Massachusetts, More States Issue "Groupon - Sales Tax" Guidance, The State and Local Tax 'Buzz', 1/23/12
- Groupons & Sales Tax - New Guidance for Small Business, AllBusiness.com, 1/17/11
- Wondering How Sales Tax Applies to a Groupon? Massachusetts Issues Draft Guidance, The State and Local Tax 'Buzz', 9/28/11
- Wondering How Sales Tax Applies to a Groupon? So Are Many of the States! (expanded version), The State and Local Tax 'Buzz', 6/10/11
- Wondering How Sales Tax Applies to a Groupon? So Are Many Of The States!, (condensed version), AllBusiness.com, 5/31/11
Follow me on twitter at @SylviaDionCPA. Visit my company website atwww.sylviadioncpa.com
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