Over the last few years, online social networking has taken the marketing world by storm. Social networking and technology companies are clamoring to take advantage of this new medium and the direct connection to consumers that it offers.
One of the marketing trends to emerge from the social networking phenomena has been the so-called deal of the day voucher. While the details differ from marketer to marketer, the deals of the day generally involve the sales of a voucher that is redeemable for goods or services from local merchants that have contracted with the third-party online marketers, who sell the vouchers and collect a portion of the revenue as an advertising fee. Marketers inform consumers about the deals through the marketer’s electronic mailing list and through posts on social networking sites, and most require a minimum number of people to purchase them before the deals go live.
The third-party marketers sell the deal of the day vouchers through their websites on behalf of merchants. The purchaser of the voucher later redeems the voucher for the specified good or service from the merchant.
Two important sales tax issues arise as a result: whether the sale of the voucher itself is taxable; and how to determine the sales price to use in calculating sales tax when the voucher is redeemed. Taxing authorities across the country have begun to address these issues, but at this point, only a handful of states have issued some form of guidance on the taxability of these transactions.
Is the initial sale of the voucher subject to sales tax?
Nearly all of the states issuing guidance agree that the initial sale of the voucher is not subject to sales tax. States and localities levy sales tax on the sales price of tangible personal property and any enumerated services, with sales price generally being defined as the total amount of consideration for which personal property or services are sold.
Because the sale of the vouchers does not involve the transfer of tangible personal property, the transaction is not taxable. Cash is exchanged for credit, and the purchaser is buying a future right to use that credit. The tax is then collected when the voucher is redeemed and tangible personal property or taxable services are actually exchanged.
What price should be used in calculating sales tax upon redemption?
The more complex issue arises on redemption of the voucher for the products or services. As tax is to be collected at this point, the question becomes, what is the total amount of consideration for which personal property or services have been sold, and thus what is the sales price to which the sales tax rate is to be applied?
States that have weighed in on the issue have generally taken one of two approaches: treating vouchers as they do gift certificates, which does not reduce the sales price, or treating them as they do retailers’ discounts that do reduce the sales price.
Some states have treated the vouchers as they would a retailer coupon, calculating sales tax on the reduced deal price.
California, Illinois, Iowa, Kentucky, Maine, and South Dakota have issued guidance along these lines. Cal. St. Bd. of Equalization, Technical Info. Bulletin Pub. 388 (Sept. 2011); Ill. Dep’t of Revenue, IDOR Practitioners Meeting–Questions Submitted in Advance of Meeting (Feb 3 2012); Iowa Dep’t of Revenue, Groupons—Iowa Sales Tax, http://www.iowa.gov/tax/business/groupons.html (last visited Feb 20 2012); Ky. Dep’t of Revenue, Sales Tax Facts (Dec 2011); Me. Revenue Servs., Sales, Fuel & Special Tax Div., Instructional Bulletin No. 39 (Feb 1 1965, revised Jan 17 2012); S.D. Dep’t of Revenue, Taxation (Jul. 2011).
In these states, the voucher represents a discounted price or discount from the retail price. Sales tax is calculated on the amount paid by the consumer for the voucher plus any additional cash, credit, or consideration paid at the time of redemption. For example, if a consumer in California redeems a $50 for $100 voucher for $100 worth of goods, sales tax is calculated on $50. If that same consumer redeems the voucher for $125 worth of goods, sales tax is computed on $75, the $50 value of the voucher plus the $25 additional consideration.
Illinois, Iowa, and Kentucky have included certain caveats providing that sales tax is computed on the reduced sales price only if the voucher states the amount the consumer paid for it on its face, or if the retailer is aware of the price paid. If the retailer is unaware of the price paid by the consumer, or it is not listed on the face of the voucher, the transaction is taxed at the full retail price, as if no voucher were used.
On the other end of the spectrum are states that treat deal of the day vouchers as similar to gift certificates, requiring that sales tax be collected on the full retail price. In these states, the voucher is merely a credit applied to the total bill; the voucher does not reduce the sales price. For example, when a consumer redeems a $50 for $100 voucher for $100 worth of goods, sales tax is calculated on the $100 retail price.
Kansas, Massachusetts, Nebraska, and Texas use this approach. Kan. Dep’t of Revenue, Questions & Answers—Retail Promotional Deals (June 8 2011); Mass. Working Draft Directive 11-XX (Sept 16 2011); Neb. Dep’t of Revenue, Frequently Asked Questions, http://www.revenue.ne.gov/question/slstax_faq.html#s25c (last visited Feb 28 2012); Tex. Comptroller of Pub. Accounts, Tax Policy News—Sales Tax, STAR 201106112L (June 2011).
A few states, such as Minnesota, Pennsylvania, and Ohio, have indicated in informal communications that they also subscribe to this approach.
New York has adopted a hybrid approach. N.Y. St. Dep’t of Taxation and Fin., Technical Memorandum TSB-M-11 (16)S (Sept 19 2011). New York categorises vouchers as either specific product vouchers or stated face value vouchers.
Specific product vouchers are vouchers that may only be redeemed for a specified product or service and have no specific stated value. In the case of specific product vouchers, the amount subject to sales tax is the total price that the customer paid to the deal site for the voucher. For instance, if a consumer purchases a voucher for five oil changes for $50, sales tax is computed on a price of $10 each time the consumer redeems the voucher for an oil change.
A stated face value voucher is a voucher with a specifically stated value that when redeemed, is applied to the price of the products or services purchased. Sales tax is computed on the total price of the goods purchased, similar to gift certificates. If a consumer redeems a $50 for $100 voucher for $100 worth of goods, sales tax is calculated on the $100.
Future guidance
The increased use of deal of the day vouchers as a marketing tool has put taxpayers in the difficult position of needing to tread carefully with respect to tax collection, reporting, and remittance, and the need for guidance from the states more important than ever. As new forms and iterations of daily-deal vouchers are created, the confusion and uncertainty will increase.
Taxpayers will likely encourage more uniformity among the states as more multistate retailers engage third-party marketers and offer these vouchers to customers. The dichotomy between the states regarding the sales price definition has prompted the Streamlined Sales Tax Governing Board to examine the issue. However, guidance will likely continue to be split as states examine the new approach to marketing in the context of their existing sales tax law.
This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.