Groupon Is a Headache for State Tax Administrators

While the sale of online coupons for local merchants boomed in 2011 – Living Social sold $750 million and Groupon sold an astounding $1.62 billion in online coupons last year – state governments are still trying to play catch up and figure out how to ensure these sales are taxed fairly.

The central question facing the states is whether a state or local sales tax should be applied on the cost of the online coupon, or on the face value of the coupon, meaning the list price of the product for which the coupon is being redeemed. For example, if you were to buy a Groupon for $25 that allows you to purchase $50 worth of books at a local bookstore, the question is whether sales tax should be assessed on $25 (the cost of the coupon) or $50 (the face value of the coupon). Whatever the amount, the tax could be collected either at the time of coupon purchase or product purchase.

As Forbes’ Janet Novack reports, right now states are treating online coupons for sales tax purposes differently, or in many cases don’t even have a definitive answer to this question. For example, New York requires that sales tax be collected by retailers on the full face value of the items purchased with coupons, but only in the case where the coupons are for a specific dollar amount of spending. California, by contrast, only applies the sales tax to the price paid for the coupon itself in any case.

So why isn’t Groupon itself collecting sales tax on the original coupon purchase, rather than having the tax collected by the merchant?  After all, it’s reasonable to compare their service to the one provided by  Expedia, Orbitz, Priceline and other travel sites who sell discount hotel rooms, as should be done in our view. The difference is that online coupon sites consider what they do to be advertising and, in fact, it’s part of Groupon’s contract with merchants that merchants handle all the taxes. Discount travel sites are more properly reselling those hotel rooms.

A promising development is that 24 states who collaborate in the Streamlined Sales and Use Tax Agreement, which grapples with state sales tax issues, are moving to tackle the coupon question head on by surveying member states and putting out model policy for all states, possibly as soon as May. The Streamlined Sales Tax Governing Board, of course, faces a difficult task because it’s a brave new world of e-commerce.  While there is more than one good way to solve the problem – as states like New York and California have shown – states need to act sooner rather than later.

Photo of Movie Ticket Groupon via Groupon Creative Commons Attribution License 2.0