Wondering how to handle sales tax on Groupon deals? Three key states now have detailed rules -- here's what they mean for your small business.
While many people followed Groupon's recent IPO, I've been following Groupon for a different reason. You see, I'm like the kid in "The Sixth Sense" -- the movie where Bruce Willis plays a psychiatrist helping a young boy who says, "I see dead people".
Like that young boy, when I think of Groupon, I see sales tax. And I'm not the only one.
When states look at Groupon, LivingSocial and other third party "deal-of-the-day" marketers, they see sales tax too -- and they want a piece of the revenue pie!
Last May, I wrote post -- "Wondering How Sales Tax Applies to a Groupon? So Are Many of the States" -- where I noted that states really hadn't given absolute guidance on how merchants should figure sales tax on third-party e-coupon discounts. I also pointed out that state officials were taking great interest in these e-coupon programs but were quick to admit that their evolution was outpacing their existing rules.
As a result, states have scrambled to address the impact of "deal-of-the-day" discounts. Without specific guidance, merchants were left to their own interpretations of how "deal-of-the-day" discounts impact sales prices. (Both Groupon's and LivingSocial's merchant agreement turn the sales tax collection issue over to merchants, and neither company advises merchants on taxes.)
Recently, three key states, New York, California, and Massachusetts, issued formal guidance. Here's what they have to say.
New York's guidance, detailed in a Technical Memorandum, separates "deal-of-the-day" vouchers into two categories. The amount of sales tax ultimately due depends into which category a deal falls.
The first type of discount voucher is what's referred to as a "Specific Product or Service" voucher. If what's been issued is a voucher for a specific product or service, let's say one oil change or an hour's massage, sales tax is due on the discounted amount the customer paid for the voucher.
This is the case even if the "specific product or service" voucher lists the full price of what's been purchased. So let's say that a bookstore offers a Groupon for Walter Isaacson's Steve Jobs biography for $15; a book the store sells at full retail for $35. New York's guidance says sales tax is due only on the $15 paid by the customer, even if the voucher clearly states that the book normally retails for $35.
However if the discount voucher is a "Stated Face Value Voucher", New York says sales tax is due on the full, non-discounted value of the customer's total purchase. In New York's analysis, this type of voucher is no different from a gift certificate in that its value can be applied towards the purchase of any product or service from the retailer's offerings.
Now, let's say the same bookstore offers a Groupon for a $15 voucher that can be applied towards the purchase of $35 worth of books or other items. Assume further, that a customer uses the $15 voucher to purchase the same $35 Steve Job's biography. Because the voucher was essentially like a gift certificate and could've been used to purchase anything, the store must charge sales tax on the full $35 before applying the voucher's value.
Because sales tax isn't collected when Groupon charges a customer's credit card, a merchant must collect all of the sales tax due when customers redeem their vouchers. In the first scenario above, the customer would redeem the voucher and give the store cash to cover sales tax on $15. Not too big of a deal, right?
In the second scenario, sales tax on $35 is owed, which, if requested from the customer, won't make them too happy. But what if, instead of purchasing the Steve Jobs book, the customer purchases a different book which retails for $30, and requests the remaining $5 be used to cover the sales tax. (The Memorandum says this allowed.) Because the book store must remit $2.66 in sales tax ($30 times the NYC sales tax rate of 8.875%) to New York, but has not collected any additional cash from the customer, the merchant must essentially fund the sales tax.
Now, assume the book store only received half the amount Groupon charged the customer for the "deal" ($7.50 or half of $15) and on top of that funded the $2.66 of sales tax. The store would net a mere $4.84 on the sale of a $30 book!!
In a recently issued a Tax Information Bulletin addressing the sales tax treatment of "deal-of-the-day" instruments, California advises that sales tax applies to "the amount paid by the customer for the deal-of-the-day instrument plus any additional cash, credit, or other consideration required to be paid when the product is purchased."
Although California doesn't explicitly define discount vouchers as being "specific product or service" or "stated face value" vouchers, California's Bulletin offers two examples which illustrate that California's treatment is similar to New York's treatment of "specific product or service" vouchers. For instance, in California's first example, a "deal-of-the-day" is offered for the purchase of a $100 tennis racket for $50. California's guidance says that sales tax is due on $50 -- the amount the customer paid for the "deal".
In California's second example, a "deal-of-the-day" is offered for $105 worth of custom picture framing for $50. The customer redeems the coupon for a custom frame priced at $120 (i.e., the customer owes an additional $15 since the voucher only covers up to $105 worth of framing). California's Bulletin states that sales tax is due on $65 - the $50 the customer paid for the voucher plus the extra $15.
Although this second example fits New York's description of a "stated face value" voucher, California only expects sales tax on the amount the customer actually paid for the voucher plus any additional cash, credit or other consideration required to be paid.
In September, Massachusetts issued a Working Draft Directive which, although subject to change until a final Directive is issued, gives an indication of how Massachusetts believes "deal-of-the-day" discounts impact sales price.
Like California, Massachusetts does not make a distinction between "specific product or service" or "stated face value" vouchers. According to the Working Draft Directive, third party e-coupon discounts do not reduce the sales price on which sales tax should be calculated in any situation primarily because they do not qualify under Massachusetts' sales tax rules as either a manufacturer's or retailer's coupon (which do reduce sales price).
Merchants in Massachusetts who offer Groupons are expected to collect sales tax on the full price of any taxable product or service redeemed with a "deal-of-the-day" voucher. Like New York's "stated face value voucher" rule, Massachusetts customers may be unpleasantly surprised to hear they must hand over sales tax on the full sales price, while merchants who agree to "fund" the customer's sales tax may be similarly disappointed with the financial outcome of their "deal-of-the-day" offer.
There you have it: three states with a less than uniform approach to how sales tax applies to a Groupon. One point that all three states do agree on is that sales tax is not due at the time Groupon charges a customer's credit card, thus leaving the sales tax collection responsibility to the merchant.
As I mentioned in my last Groupon post, how sales tax applies to a Groupon should be part of the analysis of whether a Groupon makes business sense, especially given the complex, non-uniform, and aggressive state rules that could apply to these transactions. One thing I'm certain of is that more and more states will come forward with their own interpretation and guidance.
If your business is considering a Groupon, LivingSocial, or other third party "deal-of-the-day" promotion, make sure to consult your CPA, tax advisor, or State Department of Revenue for the rules and developments in your particular state.