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

Groupon, LivingSocial; those increasingly popular internet based social coupon programs.  If you’re a business launching a new product or service or just looking to increase your customer base, you’ve probably contemplated promoting your business through one of these programs.  With Groupon being named one of the “fastest growing companies in Web history” by Forbes.com, it’s certainly tempting to jump on this fast moving train. Why shouldn’t your business benefit from this successful business model?

Your analysis has probably included looking through the Groupon, LivingSocial or other e-coupon program websites.  You’ve probably read the success stories, as well as the reports criticizing these e-coupon programs as nothing more than expensive advertising.

But here’s another issue to consider in your analysis.  If the product or service on which you’ll offer a discount is subject to sales tax, on what value should sales tax be calculated? Should sales tax be charged on the full value of the product or service?  Or should sales tax be charged on the discounted value?  

Before launching into how sales taxes might apply to a Groupon, here’s a quick overview of how these programs work.  If you’re a Groupon or LivingSocial subscriber, you’re familiar with the concept. Subscribers receive a “Daily Deal” e-mail in which discounted products and/or services are offered. Subscribers have a specified amount of time to “buy” into a deal.  If a minimum number of people choose to “buy” before the offer expires, the deal becomes effective, or as Groupon says, “the deal is on.”  (I understand that LivingSocial differs slightly from Groupon in that a minimum number of buyers aren’t necessary for a LivingSocial deal to go through.)  For the retailer offering the Groupon, the “discount” is lost revenue; money spent that will hopefully bring in new business. The retailer also incurs a service fee which Groupon retains from the amount it receives from customers who pay Groupon directly via a credit card. Neither Groupon nor LivingSocial collect sales taxes on the transaction. (Groupon’s Merchant Self-Service Agreement states that the merchant “shall be responsible for paying all sales and use taxes” due.) 

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 the 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 the discount amount by the manufacturer or another third party.

In some Groupon transactions, the consumer is pre-paying for a specific item or service, e.g., a specific piece of jewelry or a carpet cleaning service, while in others the consumer is buying a voucher that be used to purchase from the retailer’s offerings.  In the former, an actual sale of the product or service has occurred (even if possession doesn’t take place until a later date), while the latter operates like a gift card as what has been purchased is a cash equivalent that will be used to purchase “something” but whether that “something” is taxable or not isn’t known just yet.  Some of my fellow SALT colleagues have suggested that a Groupon is neither a retailer’s or manufacturer’s discount or a gift card equivalent, but some type of hybrid, and have noted that it’s difficult to apply existing law to a hybrid.  

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 says 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. (See “Social Confusion: How Do Sales Taxes Apply to a Groupon?“, by Janet Novak, Forbes.com, 2/18/11)

While authoring this piece, I also reached out to my own state, Massachusetts, after my research found limited guidance. (See Note B below)  In my query to the Massachusetts Rules and Regulations Bureau (the department within the Legal Division which interprets the statute and authors regulations and administrative guidance explaining the law), I noted that the existing law and guidance do not appear to address how sales tax applies specifically to Groupon type arrangements.  The Bureau’s e-mail response to my inquiry (See Note A below), confirmed that indeed, the Bureau had not issued guidance on Groupon type arrangements, stating that they have yet to receive a fully documented ruling request as required by the Massachusetts administrative provisions. Their response added that without a formal ruling request detailing the specifics of these arrangements, the Rules and Regulations Bureau lacked sufficient information as to exactly how these promotions work and if they all work in the same way.  Interestingly, despite this statement, the response also stated that the Bureau does not believe that Groupon certificates qualify as retailer’s or manufacturer’s coupons, which do reduce the taxable sales price in accordance with the Massachusetts sales tax rules.

But what about the remaining 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.”  (See “Kansas Department of Revenue monitoring sales tax collections by retailers using Groupon“, by Christine Metz, LJWorld.com, 2/27/11)   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.  And, as just noted, Massachusetts has yet to state an official position on how the Massachusetts sales tax rules on discounts apply to Groupon type arrangements.

Sylvia’s Summation:  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, SALT consultant, CPA, or their particular State Tax Department. But the states’ positions on this issue are largely undefined at this point, 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 might end up under collecting tax and  be required to cough up the additional sales tax (on audit) if his state takes the position that the full value should’ve been taxed. But collecting sales tax on the full value could leave the retailer with disgruntled customers who might not appreciate 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 you tax on the discounted or full price?  Did the retailer allow you to apply your Groupon voucher towards the sales tax?

Note A:  The e-mail response received from the Massachusetts Department of Revenue’s (DOR) Rules and Regulations Bureau is what is referred to as an “Information Letter” (as defined in Letter Ruling Regulation, 830 CMR 62C.3.2.)  It is intended to provide general information such as the potential applicability of DOR public written statements or well-established principles of tax law, but it is not intended to provide authoritative guidance on the application of the tax laws to a specific set of facts, therefore, it is not a “ruling” or “letter ruling” that is legally binding on the DOR.

Note B:  Limited guidance on this issue was found in an Information Letter issued by the Department. (see http://www.benedelman.org/restaurants/ma-opinion-033010.pdf).  Although this Information Letter clearly addresses a Groupon type arrangement, as stated above, it is not considered authoritative guidance, and is not binding on the Department.