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Stay Out of the Rough: Collecting state sales tax on Groupon and Living Social deals

Does your business use “Deal of the Day” offers to tee up customers? Did you know that you may not be collecting the right amount of sales tax on these deals?

How does a ‘Deal of the Day’ work?

“Deal of the Day” offers made through websites like Groupon and Living Social continue to grow in popularity for business to consumer marketing. “Deal of the Day” coupons have become popular with consumers because they provide a discounted option to try a new product or service. The attraction for sellers is the prospect of bringing in customers who may spend more than the amount of the coupon and hopefully return to the business.

However, business owners are faced with uncertainty regarding how to apply sales tax to these deals. Many “Deal of the Day” sites provide a payment arrangement in the form of a discounted voucher to redeem at a business. For example, a customer buys a $25 Groupon redeemable at a local golf course for use of a golf cart valued at $50. Groupon then collects the $25 from the customer, retains a portion (normally 50 percent), and pays the balance to the golf course. The quandary? How much sales tax, if any, should the golf course owner collect, and when?

Most states treat the initial sale of the discounted voucher similarly to the sale of a gift card, i.e., as a nontaxable transaction. But what should the golf course owner do when a consumer redeems the voucher for a cart rental? Should the cashier in the pro shop charge sales tax on the entire rental price of the cart (i.e., $50) or merely on the portion of the discounted value of the cart (i.e., $25)? Some states, such as Arizona, Florida, Kansas, Massachusetts, New York and Texas, have treated the voucher as consideration and required that sales tax be collected on the full value of the voucher. Other states, including Kentucky and Indiana, appear to apply the more common sense approach by requiring the collection of sales tax only on the discounted value of the voucher.

Mark your scorecard: The importance of documentation

According to a recent pronouncement of the Kentucky Department of Revenue, when a consumer redeems a voucher at a local business for a taxable product, Kentucky sales tax is due only on the discounted price that the customer paid for the voucher, rather than the total value of the product, provided that the voucher states the discounted price or the local retailer retains documentation of the discounted price. Otherwise, the tax due is on the total face value of the product or service. So, if the total rental price of the golf cart is $50 and there is documentation of the $25 discounted price, then the total Kentucky sales tax due would be $1.50 ($25 x 6%).  But, if there is no record of the discounted value of the voucher, then the entire $50 value is subject to sales tax ($50 x 6% = $3).

To give another example, we’ll look at the sought-after customer who spends more than the voucher amount. This customer purchased the $50 golf cart rental voucher for a discounted value of $25, and then bought tees, balls and a glove for a total value of $100. In this situation, assuming the discounted value is documented, the sales tax due would be $4.50 ($50 paid by the customer over the value of the voucher plus $25 paid for the voucher, equaling $75 x 6% = $4.50).

The Indiana Department of Revenue has followed an approach similar to Kentucky.  When asked to rule whether the entire list price of a Groupon or Living Social voucher is taxed or if it is the discounted price which is subject to Indiana sales tax, the Department of Revenue responded that the gross retail income of a retail transaction in Indiana does not include discounts or coupons that are allowed by a seller and taken by a purchaser when not reimbursed by a third party. Thus, in our example, only the discounted price of the golf cart rental ($25) is subject to Indiana sales tax.

Kentucky and Indiana’s approach is in line with guidance given by other states, such as Alabama, Arkansas, California, Colorado, Illinois, Maine, Mississippi and Tennessee.

How to tee up your business

What does this tax system mean for your business? Like the golf course owner, you will need to properly document the discounts offered through sites like Groupon or Living Social. You will also want to inform your staff or set up an automated process for calculating the tax owed when the customers stream through the door.

While Groupon is only four years old, no one can predict what will emerge as the next big consumer marketing tool. Business owners need to be informed of how ever-changing marketing techniques can impact their tax obligations, and how to avoid playing in the rough.

If you have questions about collecting state sales tax on Groupon and Living Social deals, please contact a member of our Tax and Finance Practice Group.

DISCLOSURE REQUIRED BY CIRCULAR 230. This Disclosure may be required by Circular 230 issued by the Department of Treasury and the Internal Revenue Service. If this article, including any attachments, contains any federal tax advice, such advice is not intended or written by the practitioner to be used, and it may not be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Furthermore, any federal tax advice herein (including any attachment hereto) may not be used or referred to in promoting, marketing or recommending a transaction or arrangement to another party. Further information concerning this disclosure, and the reasons for such disclosure, may be obtained upon request from the author of this article. Thank you.

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