Tax First and Ask Questions Later

Rusty Little

In a previous article (Opening Up a Can of Worms), we discussed the trend of states beginning to address the sales taxation of the popular “Deal of the Day” or Groupon” online coupon business model. This is a brief update of a few more states that have issued guidance in this area since the time of the previous article.

Iowa has recently issued guidance on its website regarding its treatment of Groupons (see details HERE). Similar to the treatment of New York and Massachusetts that we previously discussed, Iowa has indicated that the sales tax base for a Groupon is the gross value stated on the voucher. For instance, if the customer paid $50 for a $100 voucher, the sales tax base is $100. In an interesting twist, Iowa does state that if the discounted price is printed on the voucher (something that Groupon does not normally do), then the discounted price is the sales tax base.

Our opinion is that the amount subject to sales tax should be the $50 since that is the amount that the retailer is choosing to discount its price to, and the amount actually paid by the customer (i.e. in this example, the $50 discount is a “phantom” amount since $50 in cash actually never changed hands).

Iowa (along with New York and Massachusetts) is continuing the recent trend of states “taxing first and asking questions later.” The facts of the transaction and the terms of the Groupon Agreement are being completely ignored.

Fortunately, two other states (Kentucky and Maine) have recently addressed the Groupon sales tax issue, and those states seem to have come to the appropriate conclusion (albeit in a round about way). In the December, 2011 issue of Kentucky Sales Tax Facts, Kentucky addressed the sales taxation of Groupons and concluded that the discounted price (the price paid by the customer) is the sales tax base if one of two conditions are met: (1) The discounted price must be indicated on the voucher (similar to Iowa), or (2) the local retailer must know and retain documentation of the discounted price. Presumably, retaining documentation of the discounted price will not be a problem for the retailer since the retailer’s account will be thoroughly documented in the dashboard on Groupon’s website, so we’ll give Kentucky the benefit of the doubt that they got this issue correct.

In Maine Revenue Service Sales, Fuel & Special Tax Division Instructional Bulletin No. 39, page 4, Maine indicates that the discounted value of the Groupon would be the sales tax base as long as the retailer can “reliably establish the value paid for the certificate and is treating the difference as a retailer discount.” As indicated above, this documentation should be more or less “automatic,” so we’ll put Maine in the “got it right” category.

Since informal guidance such as referenced above does not necessarily have statutory weight, retailers should carefully evaluate their particular facts in determining whether or not to counter a state’s position. Just because a state “taxes first” does not mean they have a basis to do so.