A Blog by Sylvia F. Dion

Massachusetts Issues Final “Groupon – Sales Tax” Guidance: DOR Directive 12-4

Final Administrative Guidance:  Last Monday, July 16, 2012, the Massachusetts Department of Revenue (“the Department”) issued its final directive, 12-4, on the sales tax implications of Groupon type vouchers. (Applause please!)

Ordinarily, a Department of Revenue’s issuance of administrative guidance wouldn’t necessarily warrant such fanfare, but in this case it’s only taken the Department ten monthstwo working drafts, and an “about face” in the Department’s position to get to this final Directive.

That’s right, ten months ago, on September 16, 2011, the Department issued an initial Working Draft Directive (DD 11-XX, Application of Sales Tax to Sales and Redemption of Third Party Coupon) providing draft guidance on the sales tax implications upon the issuance of third party deal-of-the-day discount vouchers and the value on which sales tax should be charged.  I reported on this development in my 9/28/11 post, “Wondering How Sales Tax Applies to a Groupon? Massachusetts Issues Draft Guidance” and waited patiently for a final directive to follow.

But four months later, there was still no final Directive in sight.  By the end of January of this year, several other states had issued their “Groupon – Sales Tax” guidance, but Massachusetts remained silent. (See my 1/23/12 post, “As We Wait for Massachusetts, More States Issue”Groupon – Sales Tax” Guidance)

Then just last month, on June 14, 2012, the Department surprised many by issuing a REVISED Working Draft Directive, DD 12-XX: Application of Sales Tax to Sales and Redemption of Qualifying Promotional Vouchers.  This was a significant development because the Department’s position on the value subject to sales tax where a deal-of-the-day voucher is redeemed, was contrary to the guidance the Department had provided in its original Draft Directive, 11-XX.  I reported on this development in my 6/15/12 post, and described the significant “about face” that had occurred between the Department’s initial Draft Directive, 11-XX, and its revised Draft Directive, 12-XX.  (See my 6/15/12 post, “Massachusetts’ Revised Guidance on Groupons & Sales Tax; An ‘About Face’ or Simply a More Reasonable Approach?“)  I also advised that given the length of time the Department had contemplated this issue, a final Directive was likely to be issued shortly after the comment period closed.

Therefore, it was not surprising to see that the final Directive issued just 18 days after the comment period closed and to note that the final Directive was not significantly different from the Department’s second, revised Draft Directive, 12-XX.  As a matter of fact, except for new parenthetical language that clarified that any voluntary extension of the stated promotional period by the vendor is to be included in the period of time during which the promotional value is in effect (discussed more in a bit) and a one additional example – new example three (also discussed more in a bit), final DOR Directive 12-4 is identical to the June 2012 Working Draft.

Overview of DOR Directive 12-4

DD 12-4 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.  The Directive then states that the promotional arrangements described in the Directive are known under various names in the marketplace including Deal of the Day, Groupon and LivingSocial.

DD-4 then adds that a “qualifying promotional voucher”, for purposes of DD 12-4, is 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 its two predecessor Draft Directives, DD 12-4 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 12-4 states 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.
Regarding the second issue, DD 12-4 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 12-4 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 12-4 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 Directive then emphasizes 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.”
DOR Directive 12-4 then adds that “during the period of time that the promotional value is in effect (including any voluntary extension of stated promotional period by the vendor), 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 and reduce the sales price subject to tax. 

DOR Directive 12-4 Examples
To illustrate the application of these rules, the DD 12-4 includes five examples.  As noted above, the third example was newly added to the final Directive.
Example 1 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 example 2, 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 the language in DD 12-4 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).

Example 3 was added to final Directive 12-4 and is based in the same facts presented in the first two examples except that the customer’s total restaurant bill is $30.00; $10.00 less than the full $40.00 full value of the voucher.  The qualifying promotional voucher is once again, redeemed within the promotional period.   However, because the customer has purchased a meal totaling less than the full value of the voucher, example 3 advises that the restaurant should charge the customer sales tax on the proportion of the amount paid for the voucher which bears the same proportion as the value of the meal received to the full value of the voucher.  In this case, the customer would owe sales tax on $15.00, or 30/40 of the $20.00 amount paid for the voucher.  This third example also considers that a customer may request the restaurant to apply the unused value of the voucher ($10.00) to cover his sales tax due.  The Directive emphasizes that a vendor who allows a customer to apply their voucher’s remaining value to cover the sales tax due must still remit the full amount of tax due on the transaction even if the vendor did not collect any cash from the customer.
In example 4 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.  And indeed the new parenthetical language that was added to the final Directive regarding “any voluntary extension of stated promotional period by the vendor” being included in the period of time that the promotional value is in effect, supports that where a vendor honors the full value of the voucher even after the expiration date, the sales price may still be reduced by the promotional discount.
Finally, example 5 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).  

Sylvia’s Summation
So there you have it.  Or should say now we have IT – a final Massachusetts DOR Directive on the application of sales tax to sales and redemption of qualifying promotional vouchers, such as those issued marketed by companies like Groupon and LivingSocial.
If you have been following my posts on this topic (see full listing below), you know this Directive in particular has had quite a journey. (And yes, you may call me a “Grouponhead”)  
As I pointed out in my last post on the topic, it was particularly interesting that the Department’s original Draft Directive, 11-XX, pointed to the same regulation on Discounts, Coupons and Rebates, but in that Working Draft concluded that certificate and coupons issued by a third party did not qualify as manufacturer’s or retailer’s coupons and therefore would not be treated as a cash discount that reduces the taxable sales price.  Yet although the deal-of-the-day vouchers described in both Draft Directive 12 –XX and final DD 12-4 are in essence, the same instruments described in original Working Draft Directive 11-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’s final Directive has taken a more reasonable approach by now allowing “Groupon” discounts to be treated like a retailer’s discount that reduces taxable sales price. (Assuming the voucher is a “qualifying promotional voucher” redeemed within the promotional period.)  
Finally, although DOR Directive 12-4 does not explicitly state an effective date, the Massachusetts regulation on Public Written Statements provides that a DOR Directive is prospective in effect, except to the extent that it expressly provides otherwise, which means the effective date of DD 12-4 is the date of issuance or July 16, 2012.


For more on Groupon and Sales Tax, see my prior journal and blog articles:

Coming soon, more reporting on the “Groupon-Sales Tax” Issue:
  • I’ll have new article published by Bloomberg BNA, “Massachusetts Issues Final Directive on Applying Sales Tax To Third-Party “Deal-of-the-Day” Qualifying Promotional Vouchers”, scheduled publication date August 17, 2012  
  • I’ll be writing a second “plain English” whitepaper for STS Publishing LLC (see my recent STS “Plain English” Whitepaper on the Federal Internet Sales Tax Proposals). This will be a easy to comprehend primer on Groupons & Sales Tax geared towards the CPA practitioner and SMB owner which will include an update on the various states’ guidance issued to date and an overview of Streamlined Sales Tax developments in this area. 

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