Tangible or intangible? The tangled taxability of discounts and deals

by Chuck November 01, 2012

complicate taxability

complicate taxability

Retail offers, manufacturer coupons, rebates and other savings enticements complicate the sales tax situation

daily deal discounts affect taxabilityJust when retailers thought they had the rules nailed down on the taxability of different kinds of discounts, daily deal companies like Groupon have enticed states to revisit the conventions.

With just a little variation in a few states, the amount discounted through coupons, trade ins and savings offers created by retailers are generally not subject to tax if the retailer does not recoup the discounted amount.

The amount discounted through coupons and rebates offered by manufacturers that repay or refund the retailer generally ARE subject to sales tax.

The sale of gift certificates are generally not taxed since the tax is applied when the consumer returns to the store and purchases a tangible item. This gets complicated however when online “daily deal” vouchers come into play.

Questions similar to those encountered by online discount travel companies come up, questions like who owes the tax – the vendor or the discount voucher seller, or both? Is the sales tax due on the full retail value or the discounted amount? Are these vouchers equivalent to gift cards or do they constitute sale of tangible items?

States are responding to this opportunity for increased revenue in different ways. In a recently published New York State guidance on the matter, the state choose to treat the daily deals differently depending on whether the advertised item was tangible or whether it was more of a gift card-type transaction. For instance, NY will charge sales tax on the discounted value paid by the consumer to the voucher company if the item or service has a specifically advertised face value, such as a $25 pedicure discounted to $10. In this case, NY would charge sales tax on the $10.

If the advertised deal is worded more like a gift card, say a $25 voucher good for $50 worth of any product, then NY would look to receive sales tax on the full retail value of the underlying taxable goods or services, in this case, the $50 amount.

Other states are varied in their findings. Kentucky and Iowa look solely at the published face value of the voucher while California turns out to be one of the more tax-friendly states in this case, ruling that the sales tax is to be applied to the amount paid by the consumer regardless of the type of voucher. Different proposals put forth by Tennessee and Nebraska are currently under consideration by the board of the Streamlined Sales and Use Tax Agreement.

Charles F. Spielmann

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