GROUPON / ONLINE VOUCHERS – BIG SALES TAX & ESCHEAT RISKS
For about the past year, Groupon and similar online voucher sites have been a hot topic in the legal and state and local tax communities. As a consumer, it is a great service to receive convenient and considerable discounts for products and services. Maybe you are like me and even receive a daily email from the various voucher sites that entice you to buy items, meals, or services that you don’t even realize you want or need. For businesses, it can be a phenomenal marketing tactic. However, on the flip side of the coin, there is the potential for significant risk to your business or your client. As a state and local tax attorney, who represents companies and merchants that participate in the Groupon / online voucher phenomenon I can attest that it is imperative to point out such potential sales tax and unclaimed property risks to your business or your client.
Sales and Use Tax
The first major issue with the online voucher sites is the sales tax component. Groupon and many of the online voucher sites are structured in a way in which the voucher site offers a specified good or service at a discounted rate to the customer. From a sales tax perspective, it is unclear whether the “tax base” (the price against which the sales tax rate is applied) is the amount the customer paid, the amount the merchant receives, or the face value (the original price of goods or services the customer is entitled to) of the voucher.
For example, a customer might pay $40 for a voucher that entitles the purchaser to receive $80 worth the goods or services at a local retailer. In a typical arrangement, the merchant gets $30, Groupon gets $10, and the customer presumably gets $80 worth of goods or services. Should sales tax be calculated on what the merchant received ($30), what the customer paid ($40), or the original price of the goods or services ($80)? As any good tax attorney can tell you, uncertainty in sales and use tax law can often result in the retailer receiving substantial tax assessments during a sales tax audit.
States such as New York, Florida, Illinois, and California say the merchant is responsible for the tax on the face amount, or $80, even though only $40 changed hands and the merchant may have only actually received $30. A few states, such as Texas and Massachusetts, claim that tax is only due from on the amount that has changed hands, or $40 in our example.
Another issue is whether the business may pay the sales tax for the customer or must charge the customer sales tax on top of the voucher price. This can be sticky issue for states, such as Florida, that require sales taxes to be separately stated and statutorily forbid a business to incorporate (hide) the sales tax into the final price.
If you do business in Florida, depending on the exact structure of the transaction, it seems reasonable that the Groupon concept is similar to a cash discount. In Florida, rule 12A-1.018(1), Florida Administrative Code (“F.A.C.”), states that if “a dealer quotes the purchaser a list price with a deduction as a trade discount, the tax is to be computed on the list price less the trade discount.” Conversely, the rule 12A-1.018(3), F.A.C., points out that is the manufacturer of an item issues the coupon or refund, then the reduction “is not to be construed as a reduction in selling price by the dealer.” The rule provides examples of each scenario and in regards to the “dealer coupon” scenario uses an example in which a dealer sells soap powder for $1.50 with a $.50 coupon. The rule states tax is due from the purchaser on the $1.00 purchase price.
According to the normal terms of online vouchers, the coupon is issued by the dealer. Therefore, if the Florida rule quoted above where to apply, then the dealer’s discount reduces the sales price subject to Florida Sales Tax. In our example, that would imply sales tax would be due from the merchant on the $40. However, as stated above, Florida has taken the inexplicable position that tax is due on the original, non-discounted price of the good or service. The logic Florida and many other states have applied does not logically follow and this may create an opportunity for your client or company to save sales tax in the Groupon online voucher scenario.
Escheat (Unclaimed Property) Issues
The second hot item and almost certainly overlooked by your company or your client is the escheat / state unclaimed property issue associated with the Groupon online voucher business model. Many online vouchers have an expiration period of six months or less created contractually. Often contained in the fine print, however, is language stating that the merchant may be forced to redeem your voucher after the expiration date. This arises because many state consumer protection laws (e.g. Florida, Section 501.95, F.S.) require that the merchant to give the subscriber the goods, services, or cash refund for the purchase price of the voucher. If the customer is entitled to the property by law and does not claim the property, all 50 states and Washington D.C. have escheat laws that apply. Under escheat laws, any unclaimed property will, eventually, become property of the state. The exact time frame differs but all jurisdictions require the holder (the merchant in this case) to turn the property over to the state after a certain period of time. States will often include escheat reviews of company records during a state tax audit and, given the budget deficits faced by most states, one can safely assume than this issue will not be overlooked. Even worse, there is usually no statute of limitations to prevent states from claiming escheat rights in property many, many years from now. Theme parks faced this issue in the late 1990s and early 2000s with financial statement altering results (imagine a dollar amount of escheat material enough that would cause something like SeaWorld or Universal Studios to possibly be required to change their financial statements). Many businesses and professionals are unaware of this law and can get hit with an unsuspecting unclaimed property / escheat bill from the state upon audit.
If you have any questions or comments about this article, then please don't hesitate to contact me for a FREE CONSULTATION at JerryDonnini@FloridaSalesTax.com or click on either of the "contact us" icons at the top of this page.
Daily Deal Vouchers & the Unclaimed Propoerty Laws - American Bar Association Section of Taxation, State and Local Tax Committee, by J. Biek, K. Tran-Trong, and G. Farrend, Oct. 21, 2011
Expanded Liability in Unclaimed Property: Are States Going to Far? - The Concerence Board, by J. Bianco and M. Andre, Jan. 2012
24 States Moving Towards Decision on Taxing Groupon, LivingSocial Deals, Forbes, Janet Novack (March 26, 2012)