Daily Deals Present Novel State Sales Tax Issues
Deal of the Day Companies, such as Groupon and LivingSocial, have transformed discount shopping by bringing impulse buying to the consumer’s e-mail inbox in the form of on-line vouchers (“Daily Deals”). One estimate claims there are more than 600 Deal of the Day Companies,1 generating billions in savings for discountsavvy consumers.2 The typical Daily Deal works by soliciting consumers to purchase vouchers directly from Deal of the Day Companies. Each voucher allows a consumer to obtain discounted goods or services from a particular vendor. For example, a Daily Deal could allow a consumer to pay $50 to obtain a voucher worth $100 of goods or services. Deal of the Day Companies retain a portion of the $50 paid as a commission-type fee and remit the remainder to the participating vendor.
Although innovative in form, Daily Deals conjure up familiar and recurring questions regarding appropriate application of sales tax laws, questions that several states have recently confronted. First, should the sale of such vouchers be subject to sales tax? Second, which amount should be taxed: the amount paid by the consumer, or the full retail value of the goods or services obtained? The answer will have important implications for consumers, local merchants, Deal of the Day Companies, and state departments of revenue.3 The combined state and local sales tax rate now averages 9.6%.4 If tax is imposed on the full retail value of the voucher, a Daily Deal entitling the consumer to pay $50 to receive goods valued at $100 will result in $9.60 of tax – 19.2% of the cost of the deal.5 If tax is imposed on the discounted price paid by the consumer, however, the tax will be only $4.80 -- 9.6% of the cost of the deal.
In answering these questions, states have attempted to classify Daily Deals under well-settled rules for taxing traditional discount coupons and gift cards, while paying attention to subtle distinctions among various forms of Daily Deals.
Sales Taxation of Traditional Discount Coupons and Gift Cards
Traditional discount coupons fall into two broad categories: (i) retailers’ coupons, and (ii) manufacturers’ coupons.6 Retailers’ coupons are issued by the retailer and, essentially, are equivalent to the retailer marking down goods for clearance. Manufacturers’ coupons allow the consumer to pay a discounted price, but the retailer receives a reimbursement from the manufacturer for the amount of the discount. Because most state statutes measure sales tax against the seller’s gross receipts or sales prices, it makes sense that sales tax traditionally applies to the reduced price when retailers’ coupons are used and to the pre-discount total price when manufacturers’ coupons are used. The key difference is that retailers’ coupons signify true price reductions, whereas manufacturers’ coupons do not reduce prices, from the seller’s perspective.7
Although sales tax is increasingly imposed on sales of certain services, it traditionally applies to sales of tangible personal property only. Accordingly, states generally do not tax gift card sales, since gift cards represent an intangible right to purchase personal property or services in the future. When the consumer uses the gift card to purchase taxable goods or services, sales tax is imposed as if the consumer paid with cash.
Recent Approaches to Sales Taxation of Daily Deals
The New York Department of Taxation and Finance recently published guidance detailing the application of sales tax to Daily Deals.8 New York’s analysis differs depending on whether the voucher is redeemable for (i) a specifically stated product or service, such as a pizza from a particular restaurant, or (ii) a specifically stated face value, such as $25 worth of food from a particular restaurant. New York defines “specifically stated product or service voucher” to include Daily Deals in which the normal or regular selling price is stated on the face of the voucher. In such a case, the amount subject to sales tax is the total price paid to the Deal of the Day Company by the consumer for the voucher (i.e., the discounted sale price). On the other hand, a “specifically stated face value voucher” is essentially equivalent to a gift card redeemable at a particular vendor, but not limited to particular goods or services. For specifically stated face value vouchers, New York computes sales tax on the full retail value of the underlying taxable goods or services before the voucher is applied against the purchase price.
In Kentucky and Iowa, the amount taxed depends on whether the voucher specifically states the amount paid by the consumer to purchase the voucher.9 If the voucher indicates its purchase price, sales tax is charged against the discounted amount only. If the voucher does not state the amount paid by the consumer, then the full retail value of goods or services that can be redeemed with the voucher is subject to sales tax.
California adopted the most taxpayer-friendly approach, electing to charge sales tax on the amount paid by the consumer only, regardless of the form of the voucher.10
Streamlined Sales and Use Tax Agreement (“SSUTA”)
In light of the uncertainty regarding proper sales taxation of Daily Deals, the Streamlined Sales Tax Governing Board11 has solicited comments on proposals to amend the SSUTA definition of “sales price” to account for such vouchers. A motion submitted to the Streamlined Sales Tax Board by Tennessee proposes that a Daily Deals sales price exclude the discount if the voucher identifies the price the consumer paid and the merchant is not reimbursed by any third party.12 Accordingly, Tennessee’s suggested approach focuses on whether the sales price is reduced from the seller’s perspective, such that Daily Deal vouchers would receive the same treatment that retailers’ and manufacturers’ coupons receive. Nebraska’s proposal contains two alternative approaches: (1) adopting New York’s full-retail-value taxation when the voucher has a specifically stated face value, and (2) taxing vouchers as retailers’ coupons if the amount the consumer paid for the voucher is known.13
Although many states have yet to weigh in on the issue, three aspects of Daily Deals should be non-controversial. First, states will most likely refrain from taxing the sales of Daily Deals since, like gift cards, Daily Deals represent an intangible right to purchase tangible personal property or services in the future. Second, transactions involving Daily Deals should not be subject to sales taxation unless the underlying goods or services obtained with the voucher are taxable under state law. Last, it appears that the form of the Daily Deal voucher will influence how it is taxed. States will likely examine factors such as whether the seller is reimbursed by a third party for the discount and whether the voucher more resembles a discount coupon or a gift card.