If at First You Don’t Succeed . . .

Rusty Little

The battle between online travel companies (“OTCs”) such as Expedia, Inc. and state taxing jurisdictions over the taxability of their “facilitation fees” has been raging for quite some time now. At issue is whether the service or facilitation fee that the OTC charges hotels for finding a customer and booking a room is subject to any applicable hotel occupancy tax. When this issue has been litigated, the OTCs have had mixed results in various jurisdictions all over the country but in most cases, the courts have ruled that the facilitation fees are subject to tax based on interpretations of individual state or local statutes.

On November 29, 2011, the Appellate Division of the Supreme Court of New York reversed a lower court’s order which had allowed New York City to change its hotel occupancy tax rules to tax the entire amount paid by a customer for a hotel room (including the portion attributable to the OTC’s facilitation fee). (See Expedia, Inc., et al. v. City of New York Dep’t of Finance, 2011 NY Slip Op 08648 (App. Div. 1st Dep’t, Nov. 29, 2011)).

The Appellate Division unanimously ruled that the statute (Local Law 43 enacted in 2009) violated the New York Constitution. The Appellate Division noted that “the plain language of the enabling legislation did not clearly and unambiguously provide the City with broad taxation powers with respect to imposing a hotel occupancy tax. Rather, it permitted the City to impose the tax on ‘hotel occupants.’” In other words, the statute permitted tax to be assessed on the charges for the room but not on the facilitation fees, and the City should not be allowed to arbitrarily expand the definition of the tax base.

Not surprisingly, the City has filed a motion to re-argue and/or appeal the case and “try again.” Among the City’s arguments is one that the Appellate Division “overlooked or misapprehended the facts or law” in its reversing decision. The City also argues that the statute changed the method of calculating the occupancy tax and that the tax is based on the full price of the room “regardless of whether such an amount is received from a hotel occupant by a hotel operator, or a room marketer.”

With regard to post-2010 facilitation fees, the motion filed by the City is somewhat of a moot point anyway because legislation was passed in 2010 that does in fact give the City the right to subject the facilitation fees to tax. Regardless of the outcome of this case, this is another example of a taxing jurisdiction pushing their existing tax statutes to the limit and/or enacting new tax statutes, to target business models which would otherwise legitimately avoid tax.

State Tax Alerts - This Week's Stories Worth a Second Look

Rusty Little

In case you missed them, the following is a summary of a few key state tax developments, news articles, and observations during the past week:

• Two cases were decided in the ongoing sales tax saga between the online travel companies and the states. One in Texas and one in the District of Columbia.
• On the same topic of online travel company sales taxation, South Carolina issued a directive to online travel companies to collect sales tax on gross proceeds and stated that the online travel companies must issue resale certificates to the hotels (kind of interesting when the agreements between the travel companies and the hotels do not require an inventory of rooms to be purchased).
• Interesting case in Indiana where it was decided that the Indiana Department of Revenue must apply all available methods under the statutes before attempting force combination of a taxpayer. AE Outfitters Retail Co. v. Indiana Dept. of State Revenue
• Yet another online retailer sales tax collection bill is about to be introduced (this will be the third) – from the Puget Sound Business Journal

REMINDER: Upcoming Audio Teleconference: EMERGING STATE TAX BATTLEFIELDS Thursday, November 10, 2011 2:00 p.m. - 3:00 p.m. CLICK HERE to register.

Opening Up A Can Of Worms – Groupon, Living Social, et al.

Image via photobucket.com

Rusty Little

A can of worms to be used as bait by a fisherman is easy to open, but not so easy to close. Once the wriggling worms discover the opportunity to escape, it is difficult to contain them.

Groupon and Living Social are two of the most popular Internet companies offering online discount vouchers for deals at your favorite restaurant, golf course, auto mechanic, or other local business. Since Groupon is the largest and most popular, we’ll use it here as an example.

Snapshot of how it works:

• Groupon sends an e-mail alert notifying the customer that a restaurant has posted a $20 voucher for sale at a price of $10.
• Customer goes online and purchases the $20 voucher for $10.
• Customer dines at restaurant and incurs a bill of $25 (ignore sales tax for the time being).
• Customer gives the $20 voucher to the restaurant along with $5 cash for the difference.
• Restaurant notifies Groupon that the voucher has been redeemed; Groupon sends 70% of the $10 voucher purchase price to the restaurant; and Groupon retains 30% as a “promotion and distribution fee.”
• At the end of the day, Groupon has received $3; the restaurant has received $12; and the customer has paid $15 for the meal.

(For more details, you can review the Groupon Merchant Account Terms and Conditions here).

That all seems straightforward enough until you consider the can of worms it opens up for sales tax purposes. What is the purchase price of the meal? Is it the $25 on the total bill? Is it the $15 the customer actually paid? Is it the $12 that the restaurant ultimately received? Is the discount voucher being offered by the restaurant or by Groupon (possibly similar to a third party coupon)? Is this simply a reduction in sales price by the restaurant? Is this really a gift certificate? What is really happening here?

New York and Massachusetts attempted to address these issues recently in TSM-M-11(16)S and Working Draft Directive 11-XX, respectively. Even in the titles of these two state releases, there are notable differences in semantics with New York referring to them as “prepaid discount vouchers” and Massachusetts calling them “third party coupons.”

Not surprisingly, both New York and Massachusetts determined that sales tax should be based on the $25 in the example above. New York stated that it will treat the discount certificates as stated face value vouchers and, although no statutory basis for its conclusion was provided, that the gross sales price is the taxable amount. Massachusetts essentially classified the “third party coupons” as gift certificates based on its statutory definition of gift certificates and determined that the gross sales price in a purchase is subject to sales tax accordingly.

However, another worm that attempts to wriggle out of the can is the fact that many (possibly most) Groupon deals are for a specific item or service and are not denominated in dollars. The Groupon may be “$20 for two seafood dinners,” “$20 for a one hour massage,” or “$50 for a one-night hotel stay.” Interestingly, New York did address specific product offers such as these and reached a contradictory conclusion. For specific product vouchers, the taxable value is the amount paid for the voucher and not the value of the product (assuming the product or service is taxable in New York). How can New York tax the entire “value” of the meal in our example above, but only tax the amount paid for the certificate if the deal had been denominated by the product and not in dollars?

Regardless of the conclusions reached by New York and Massachusetts, there is a good case to be made that the $15 price in our example is the taxable amount. The terms of the Groupon Agreement are too extensive to restate here but, in a nutshell, the merchant is the party that makes the offer for a discount deal and not Groupon. It seems clear under the terms of the agreement that the “deals” are nothing more than the merchant choosing to offer a discount on its prices, and it is the discounted price, therefore, that should be subject to sales tax.

In addition, if the merchant chooses to do so, a deal does not go “live” unless a minimum number of purchases are made. This is the group buying power model that Groupon was built on, and a “negotiated” lower price should be the amount subject to sales tax. If a merchant chooses to reduce its sales price because of the buying power of its customer(s), then the discounted sales price has always been the sales tax base for sales tax purposes. But as discussed in our recent SALT To Taste article, the states have already proven in the recent highly publicized discount travel company cases that they are willing to recharacterize what is being sold (and by whom) for their benefit.

The can of worms opened with the Groupon business model is not just limited to sales tax issues. Unclaimed property comes immediately to mind, but we’ll save that discussion for a later day.

State Tax Alerts - This Week's Stories Worth a Second Look

Rusty Little

In case you missed them, the following is a summary of a few key state tax developments, news articles, and observations during the past week:

• SALT To Taste: Missouri Got It Right, But Will It Be Of Any Use? - In a recent decision, the Supreme Court of Missouri ruled in favor of a group of travel companies on a sales tax issue for which the travel companies have had limited success in other states.  Although this was a favorable decision, it is a reminder that these internet service business models are susceptible to attack. See full text of article here.
• California Governor Jerry Brown signs bill (AB 155) to delay "Amazon Law" until September, 2012 - from the LA Times
• Massachusetts and New York address sales tax issues relating to Groupon/Living Social arrangements - Massachusetts Working Draft Directive 11-XX and New York TSB-M-11(16)S
• Colorado amnesty program begins October 1 and runs to November 15 - details from their website

SALT To Taste: Missouri Got It Right, But Will It Be Of Any Use?

Marshal Kline; Rusty Little

In a recent decision, the Supreme Court of Missouri ruled in favor of a group of online travel companies, deciding they were not required to collect hotel and tourism taxes on the difference between the discounted amount received for a room by participating hotels and the amount that the travel service received for their services.  Cases similar to this are nothing new to the online travel companies, but it may be only a matter of time before the states begin launching similar attacks on other business models.  

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