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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.

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-XXApplication 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:
  1. 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,
  2. 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 Continuefor 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 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:

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James Dumler said…
This is a very straight forward explanation for a complex sales tax issue. Very helpful!
James, Thanks for your kind words! You're correct - this is a complex sales tax issue especially since states are taking various positions. And if they are taking similar positions, their guidance is not consistently explained. This is especially an issue for merchants who offer "Groupon" promotions in multiple states. It's also a significant issue for small merchants who may not have the in-house expertise to decipher how their state's guidance applies to them.