[author: Randy L. Varner]
Many individuals now use services like Facebook and Twitter as their primary tool to keep in touch with friends and family, as well as to keep up on news, sports and weather. It would be fair to compare these social network sites to a 21st Century version of a colonial town square. Even the term “posting” takes one back to colonial days when pamphlets and broadsides would be posted so that citizens could find out the news of the day. It is not difficult to imagine merchants of the time posting offers for dry goods, wagon wheels and the like in public places.
So too, in our 21st Century town square, merchants have taken to posting offers on social network sites. These postings often take the form of group “deals of the day” in which vouchers or coupons are sold by a marketing company which are redeemable for a particular merchant’s goods or services, assuming enough people purchase the vouchers.
For instance, I may agree to purchase a voucher redeemable for $100 worth of widgets at Joe’s Widget Shop for $75. If enough people join me and the deal goes live, my transaction with the online marketer is completed and I have my $75 for $100 voucher to use at Joe’s Widget Shop. While the seller of the wagon wheel in 1750 Philadelphia didn’t have to worry about collecting sales tax (and if he did, it would have been an easy calculation), the sellers of these vouchers--and ultimately the merchants of the goods and services accepting the vouchers--do. So, there are two sales tax issues that arise from these coupons: (1) whether the initial sale of the coupon is subject to sales tax; and (2) assuming the good or service covered by the coupon is subject to tax, how does the merchant determine the sales price of the transaction?
The Initial Sale of the Voucher
Recall that the initial sale of the voucher is not made by the merchant itself; rather, it is done by a third-party marketer who will keep a portion of the revenue as a fee. In most states, including Pennsylvania, this would not be a taxable transaction because it is not a sale of tangible personal property or an enumerated service subject to sales tax. In essence, when I buy the voucher I am exchanging $75 in cash for $100 in credit—which is not a taxable transaction. When I redeem my voucher at Joe’s Widget Shop, however, there will be a taxable event.
Redeeming the Voucher
The analysis with respect to the redemption of the voucher is much more difficult. Let us imagine that I am at the cash register at Joe’s Widget Shop and I have chosen $100 worth of his widgets to purchase with my $75 for $100 voucher. Joe will have to collect sales tax on the transaction—but how much? What is the actual purchase price? Should he collect it on $75 or $100…or some other amount?
A survey of states that have issued guidance shows that they take one of two approaches: (1) treating the transaction like a typical coupon or discount transaction resulting in charging tax on $75, the amount of the voucher; or (2) treating the transaction like a gift certificate transaction in which tax would be calculated on the full $100.
In examining the first approach, the voucher would simply represent a discounted price ($75) from the retail price ($100), and sales tax would be paid on the discounted price ($75), plus any additional consideration paid at the time of transaction. By way of illustration:
(a) If I picked out exactly $100 worth of widgets at retail price, Joe would calculate my sales tax on $75; and
(b) If I actually picked out $150 worth of widgets at retail price, I would owe Joe $50 above my voucher amount at the time of the transaction. Joe would calculate my sales tax on $125 (the voucher amount of $75 plus the additional $50).
It is important to note that some states require that the amount the customer paid for the voucher be listed on the face of the voucher or the retailer otherwise be aware of the amount the customer paid. In those states, absent those requirements, tax is required to be calculated on the full retail price.With respect to the second approach, in states that subscribe to the “gift certificate” method, the sales tax calculation is simply performed on the retail price. In effect, these states view the voucher as simply a credit to the total bill, one that does not affect the sales tax calculation.
Because there is not yet any guidance, it is not clear which approach Pennsylvania would use. Currently, with respect to “discounts,” Pennsylvania law provides the following:
(2) Discounts. Amounts representing on-the-spot cash discounts, employee discounts, volume discounts, store discounts such as “buy one, get one free,” wholesaler’s or trade discounts, rebates and store or manufacturer’s coupons shall establish a new purchase price if both the item and the coupon are described on the invoice or cash register tape.
61 Pa. Code § 33.2(b)(2) (emphasis supplied).
Therefore, my voucher for Joe’s Widget Shop, if not expressly covered by the regulation’s list of discounts, is certainly analogous to the items mentioned. Thus, a strong argument can be made that if Joe describes the widgets and the voucher on the invoice or cash register tape, sales tax should be calculated on $75. This argument is strengthened by the fact that at no time did I pay anyone over $75. Yes, I received $100 worth of widgets for my $75 voucher, but this is unlike a gift certificate or gift card situation where a third party vendor or Joe himself would have received $100.
That is not to say, however, that Pennsylvania would not take the “gift certificate” approach, other states have, and maintain that sales tax should be calculated on the full $100. In light of the regulation, however, that would seem to be a weaker argument.
As merchants and marketers become more creative with efforts to reach consumers in the digital age, sales tax issues like the ones in this article will continue to arise as new types of arrangements and transactions are developed. Unfortunately for those on the front lines, tax guidance on these developments will be sparse until states “catch up” to the ever changing commercial landscape. Until formal guidance is issued by states, taxpayers will be forced to analogize the new arrangements to existing authority. Hopefully states will recognize this difficulty and not penalize those who have acted in good faith to try to do the right thing.