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.

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:

U.S. Court of Appeals for the Third Circuit Affirms District Court of New Jersey's Orders - On January 5, 2012, the U.S. Court of Appeals for the Third Circuit (“Third Circuit”) affirmed the District Court of New Jersey’s (“District Court”) grant of preliminary injunction with respect to the retroactive enforcement of Chapter 25 (as it relates to stored value cards) and the prospective enforcement of the place-of-purchase presumption and the accompanying Treasury Guidance. Read more HERE


A few more states have introduced online sales tax/click-through nexus legislation:

• Georgia – click HERE
• Hawaii – click HERE
• Minnesota – click HERE

Two more states have recently addressed the sales tax ramifications of Groupon-type deals:

• Kentucky – click HERE
• Maine (see bottom of page 4) – click HERE

(Note - both Kentucky and Maine treat these deals correctly, unlike the other states discussed HERE)

It has been relatively quiet in the area federal online sales tax legislation, but here is the text of each piece of the currently proposed online sales tax legislation for your reference in the meantime.

Many states have various tax proposals in front of their Legislatures right now, so stay tuned . . .

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:

Groupon and Living Social are two popular Internet companies offering online discount vouchers for deals at your favorite business establishment.  This business model opens up a can of worms for sales tax - Opening Up A Can Of Worms 
 
The US Supreme Court declines to hear the KFC Corp v. Iowa and Lamtec v. Dept of Rev. of Washington cases - from the Tax Foundation
 
California FTB issues guidance on series LLCs - from TEI's blog
 
SEC/EDGAR filing is considered a "telecommunications service" in Tennessee - from the CCH Community blog

The latest with Amazon:

• Amazon to collect Tennessee sales tax beginning in 2014 and will add 2,000 full-time jobs at new distribution centers - from The Charlotte Observer
• Pennsylvania introduces click-through nexus bill (H.B. 14) - from CCH

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.

Wal-Mart and Amazon.com - Strange Bedfellows??

Rusty Little

Wal-Mart and Amazon.com probably don't see eye-to-eye on many things because they are in fierce competition in the retail marketplace (nor do any of the other big box retailers and the other large online sellers). 

But arguably, they are in the same boat with regard to many sales tax collection issues.  Beginning yesterday, there have been a lot of stories in the main stream media regarding Wal-Mart not collecting sales tax on certain online sales.  This article from the LA Times attempts to sum up the recent revelations regarding Wal-Mart's "failure to collect California sales tax" on sales by CSN Stores (based in Boston) that are made through Wal-Mart's website.

Sure, there is some degree of comic irony in the fact that Wal-Mart is one of the leaders in the fight to force Amazon.com to collect sales tax on its online sales.  Furthermore, it doesn't help the public's perception that CSN Stores has posted on its website (in broad daylight, no less) that "one of the best things about buying through CSN Stores is that we do not have to charge sales tax . . ."

However, the thing that the media frenzy on this subject will not indicate is whether Wal-Mart is legally required to collect sales tax on these particular sales.  It all depends on the facts (and many times, the facts seem to be unimportant in the mainstream media).

Wal-Mart is a great company, and they collect sales tax when they are legally required to do so.  Amazon.com is also a great company, and they collect sales tax when they are legally required to do so.  There is nothing wrong with that.  Just because these companies dominate in their respective markets doesn't give the states carte blanche to force them to collect sales tax because it is easy for them to do so, or because the states think they are missing out on potential tax revenues.

Wal-Mart and Amazon.com could become strange bedfellows in an environment where states are attempting to cross legal boundaries just because they need budgetary relief from what the U.S. Constitution has limited them from doing.

North Carolina Information Request Violates First Amendment

A U.S. District judge has ruled that Amazon.com is not required to turn over critical personal information as part of a sales tax audit to the North Carolina Department of Revenue.  

Read announcement here.