Paul L. Caron

Monday, February 21, 2011

How Do Sales Taxes Apply to a Groupon?

Groupon Forbes, Social Confusion: How Do Sales Taxes Apply to a Groupon?, by Janet Novack:

Have you used a Groupon or a Living Social coupon recently?

When you handed over your coupon, did the merchant collect tax from you? Did he calculate the tax based on the full face value of your purchase, or the discounted amount you paid for it? Did he force you to ante up any tax in cash, or did he allow you to apply your coupon towards the full bill,  including tax?

These aren’t academic questions–the answers could affect the attractiveness of Internet-based social coupon programs to consumers, merchants, and state tax collectors.  Ultimately, the question of how social coupons should be taxed is likely to end up in court. ...

In case you’ve missed this latest craze, in a typical deal you might pay $50 with your credit card to Living Social or Groupon over the Internet, and get via email a link to a coupon worth $100 at a  local shop. (The social part comes in because in some cases the deal only goes through if a certain number of folks buy it. Plus, there are often incentives for referring your friends.) Neither coupon site collects taxes when you make your purchase and they warn their vouchers can’t be used for sales taxes or tips—unless the merchant allows otherwise. Groupon states in its Merchant Self-Service Agreement that the merchant “shall be responsible for paying all sales and use taxes related to the goods and services described in the offer.”

But just what are those?  Spokesmen for tax administrators in three of the nation’s five most populous states—California, Florida and Illinois– told Forbes they expect merchants to collect sales tax on the face value of what you buy. In other words, they want their cut on $100 even though you only paid $50 and the local merchant collected maybe $25.  By contrast, if a store printed up its own half-off coupon and allowed you to buy an $100 item for $50, the tax men would only tax the $50 you forked over. ...

There’s a nice irony here: If the states can legally charge sales tax on the full face value of the Groupon, this could be a rare  case in which they get a windfall (as opposed to losing gobs of tax revenue) from e-commerce. They lose out from Internet shopping because web powerhouse, among others, doesn’t’ collect sales taxes from the residents of most states.

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@Tom Kelly: Yes many businesses will try to remit sales tax on only $25, but the states will have a much harder time collecting the other $25 from Groupon than the local biz. I guess it will come down to whether the business is "selling" a coupon/gift card to Groupon for $25, which is then selling it back to the consumer for $50, or whether the business is selling the coupon/gift card for $50 to the consumer, and merely using Groupon as a broker. I would think the latter since, as I understand it, Groupon carries no inventory of coupons/gift cards. And yes, the states may go after $100, but I think we all agree that's stupid.

Posted by: Matt | Feb 23, 2011 7:23:07 AM

On the other hand, when I use a coupon at a restaurant, I'm required to tip on the pre-discounted amount of the bill.

Posted by: Linda | Feb 23, 2011 4:29:40 AM

If you are going to an independent restaurant, I would bet large sums that the restaurant may be charging you tax on the whole amount, but remitting to the state/city only the tax amount of the coupon price Groupon paid them for the coupon.

The item the restaurant is selling is the coupon- to Groupon. There is no tax due on free food in any jurisdiction I've done business in unless it is used personally by the owners. Free food is routinely given away by major restaurant chains and tax is not collected on it.

Groupon is the one who will end up with huge tax problems. The buy coupons from business and then resell them. They are the ones who the states/cities will come after for sales tax on their coupon sales. Since Groupon will probably need to establish sales offices in many cities, they will have property for tax authorities to seize in order to collect the tax.

Posted by: Tom Kelly | Feb 22, 2011 9:43:26 PM

How foolish, while Amazon and other e-merchants don't collect sales tax on purchases, the buyers still owe the taxes to the state. This is not revenue lost to the states but uncollected revenue. When the states are forced to write of these accounts receivable there are couple of ways to treat it, but generally it should be considered an expense not a loss of revenue.

Posted by: max | Feb 22, 2011 8:17:03 PM

I use groupon and living social coupons all the time. They operate more like a giftcard. You pay $25 for a $50 off at a local restaurant. WHen you go to said local restaurant and your bill is $65 (tax included) you give them the groupon + $15 + tip (on the whole tab, groupon says that a lot to remember to tip on the whole amount not the reduced amount). So they are getting sales tax as if you were paying the whole amount. Since its a good deal customers don't mind.

Posted by: meg | Feb 22, 2011 7:01:02 PM

Every time I've used a Groupon I've been charged sales tax for the pre-discounted price, so it's a moot point AFAIC.

Posted by: Calvin Dodge | Feb 22, 2011 5:35:15 PM

"They lose out from Internet shopping because web powerhouse, among others, doesn’t’ collect sales taxes from the residents of most states."

Yes. And millions of Americans like it just that way.

Posted by: 30yearProf | Feb 22, 2011 4:21:07 PM

Whew, no sales tax in Oregon!

Posted by: Kai Jones | Feb 22, 2011 4:05:48 PM

And once again, I'm happy to live in Oregon, where we have no sales tax. Although I'd semi-happily trade either property taxes or income taxes for it, as long as it came with some very strong controls.

Posted by: SSG Jeff (USAR) | Feb 22, 2011 4:01:02 PM

It's clearly not a $100 sales tax, as the consumer would not have bought it if it cost them $100. We don't have a VAT as much as our government overlords are clammoring for it. Sorry pigs, but you don't get to tax us based on value. Just what we pay. We pay $50, we get taxed on $50.

Posted by: chris | Feb 22, 2011 3:53:44 PM

What if you get a coupon sent was worth %50 off up to $100 and a $50 gift certificate/debit card? (separately if needed)

Posted by: anomdebus | Feb 22, 2011 3:50:01 PM

I'm no lawyer but I've owned many a restaurant. The restaurant has sold a coupon to Groupon for #25. That is what they pay tax on- 25/1.08 if the rate is 8%. Whoever redeems the coupon pays no tax, they get the food free and the free food is a business expense to the restaurant for marketing.

Posted by: Tom Kelly | Feb 22, 2011 3:49:02 PM

I paid $15 for a $30 coupon to Margaritaville Restaurant in Las Vegas. Our bill was going to come to $30.27 with tax, but when the waiter brought the actual bill it was only $28 & change. I was told there would be no sales tax on the food purchase because the entire purchase was paid by the Groupon. I'll bet that changes.

Posted by: Rick Moore | Feb 22, 2011 3:42:26 PM

Easy: Sales tax on $50 is paid by merchant. The $25 to groupon is a deductible expense to the merchant; groupon pays income tax on the $25 after its own expenses. CA, FL, IL, and others can expect their lawyers to be embarrassed for arguing any other result.

Posted by: Matt | Feb 22, 2011 7:30:15 AM

The problem is that the "gift card" for groupon is often not purchased at face value. I think we can agree that a $50 gift card purchase for $25 is subject to sales tax on the $50, but what happens if that gift card must be used on a purchase of $100 or more? I think it looks more like a coupon in those instances and tax should be owed on final price.

Posted by: ry | Feb 22, 2011 5:57:58 AM

In the case of both the coupon and the gift card (purchased at face value), the sales tax is collected on the actual value that changes hands in the transaction. From an economic standpoint, in both cases the actual price is the one on which sales tax is being collected; from an economic standpoint, in the example in the article, the actual price is $50. The only inconsistency here is the new one with groupon.

Posted by: dWj | Feb 21, 2011 5:42:43 PM

Interesting issue.

On one hand, a real coupon is treated as a discount from the price before sales tax is computed, as with grocery items etc.

On the other hand, a gift card is treated as a form of payment, and applied after the full bill is prepared including sales tax.

The Goupon "coupon" seems to fall in its own category, and a logical argument can be made that it is a real coupon and a logical argument can be made that it is gift card. Since the "Groupon" cannot be applied against tax or gratuity, it seems like the argument lies in favor of "coupon" treatment rather than "gift card" treatment.

Posted by: Sid (real one) | Feb 21, 2011 1:50:08 PM