Wondering How Sales Tax Applies to a Groupon? So Are Many of the States!

But how does sales tax apply to a Groupon? What exactly is a Groupon?  Is it a retailer's discount, a manufacturer's discount, a gift card equivalent or some type of hybrid.  How a particular state views a Groupon could impact the amount of sales tax a state expects to be collected.  In general, states treat a retailer's discount, such as one where a retailer creates its own coupon, as a "cash discount allowed and taken". Because the retailer incurs an economic loss, sales tax is calculated on the discounted sales price.  In comparison, when a retailer applies a manufacturer's discount to a sale, most states require that sales tax be charged on the full sales price since ultimately the retailer will be reimbursed for the discount by the manufacturer or another third party.  In some Groupon transactions, the consumer is prepaying for a specific item or service, while in others the consumer is buying a voucher that can be used to purchase from the retailer's offerings.  In the former, an actual sale of a product or service has occurred (even if possession doesn't take place until a later date), while the latter operates like a gift card (which aren't generally subject to sales tax).

So where do the states stand on this issue?  According to a recent article in Forbes.com, California, Florida and Illinois expect retailers to collect sales tax on the full (non-discounted) value of the product or service even though the retailer ultimately ends up with much less than the full sales price after taking into account the discount and Groupon's service fee.  The article states that Texas, on the other hand, allows sales tax to be calculated on the discounted value, the amount actually paid, which implies that Texas is more apt to treat a Groupon like a retailer's discount.

But what about the other forty-one states that impose a sales tax?  Well, you can bet that Groupons are on the radar of many revenue hungry states.  But despite an elevated interest in how participating retailers are handling sales tax, some state officials, such as Jeannine Koranda, a spokesperson for the Kansas Department of Revenue, agree that "it's an area where a lot of states are finding that technology is outpacing their laws."  Brad Malone of New York's Department of Taxation and Finance voices a similar concern in the Forbes article, stating that the current New York regulations on the taxation of discounted merchandise do not seem to cover the Groupon model.

Final Thoughts:  I said earlier that how sales tax applies to a Groupon should be part of the analysis of whether a Groupon makes sense for your business. This is where I'd normally caution readers to consult their tax advisor, CPA or their particular state's Department of Taxation or Revenue for further guidance.  But the states' positions on this issue are largely undefined at this time, making this a question that most states can't offer an absolute answer to.  In some ways this dilemma is a "doomed if you don't" or "doomed if you do".  A retailer who collects sales tax on the discounted value could end up undercollecting tax and be required to cough up the additional tax if his state takes the position that tax was due on the full sales price. But collecting sales tax on the full value could leave the retailer with disgruntled customers who might not like that their sales tax bill is higher than they expected, especially if they're in a high sales tax state. Not a positive thing when you're trying to bring in new customers.  As your friendly state tax blogger, I'll keep you posted as developments unfold in this newest e-commerce state tax dilemma.  In the meantime, let me know your thoughts. Have you used a Groupon lately? Did the retailer charge tax on full or discounted price?  Did the retailer allow you to use your Groupon voucher towards the sales tax?