Sales Tax Intricacies for Retailers:

Tackling Online Sales, Coupons,

Rebates, Nexus, Sourcing and More

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WEDNESDAY, JANUARY 8, 2014

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Sylvia F. Dion, Founder & Managing Member, PrietoDion Consulting Partners, Westford, Mass.

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Reproduced with permission from Tax Management Weekly State Tax Report, Volume 2012 Issue 33,08/17/2012. Copyright � 2012 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

Ta x B a s e

Sales tax treatment of internet-based discount coupons has been the subject of formal

guidance from a few states, with many others starting to take notice. In this article, state

tax consultant Sylvia Dion discusses the Massachusetts Department of Revenue’s newly is-

sued guidance on the collection and remittance of sales tax on ‘‘deal-of-the-day’’ vouchers,

illustrating how sales tax should be calculated when a qualifying promotional voucher is re-

deemed for a taxable product or meal.

Massachusetts Issues Final Directive on Applying Sales TaxTo Third-Party ‘‘Deal-of-the-Day’’ Qualifying Promotional Vouchers

BY SYLVIA F. DION, CPA

W ithin the last year, several states have come for-ward with formal guidance on the sales tax im-plications of deal-of-the-day transactions. Spe-

cifically, states have begun to address both the charac-ter and taxability of discount vouchers issued inconjunction with third-party deal-of-the-day promo-tions, and have identified the tax base on which salestax should be calculated upon redemption of suchvouchers. Last month Massachusetts issued Depart-ment of Revenue Directive 12-4, ten months after hav-ing issued the first of two working drafts. This articledetails the guidance in that final directive.

Massachusetts Issues Final Guidance On‘Deal-of-the Day’ Transactions

On July 16, 2012, the Massachusetts Department ofRevenue (the Department) issued Directive 12-4: Appli-cation of Sales Tax to Sales and Redemption of Qualify-

ing Promotional Vouchers.1 Directive 12-4 begins bydescribing a typical deal-of-the-day transaction as amarketing technique where vendors contract withthird-party marketers to sell and distribute vouchers onthe internet at below face value to potential customersfor subsequent redemption toward the purchase of tax-able property or meals at the vendors’ establishments.2

Noting that the promotional arrangements describedare known under various names in the marketplace, in-cluding Deal of the Day, Groupon and LivingSocial, theDirective defines a ‘‘qualifying promotional voucher’’ asone that clearly states ‘‘both the time limited promo-tional (face) value and the amount paid by the customerfor the voucher’’ and ‘‘must remain valid for redemp-tion for at least the amount paid by the customer indefi-nitely.’’ As discussed below, a third-party deal-of-the-day voucher that meets this definition receives the ben-eficial tax treatment set forth in Directive 12-4.

1 Mass. Dept. of Rev. Directive 12-4: Application of SalesTax to Sales and Redemption of Qualifying PromotionalVouchers, July 16, 2012. A directive is a public written state-ment, signed by the Massachusetts Commissioner of Revenue,which provides details or supplementary information; clarifiesambiguities; resolves inconsistencies; or explains or elaboratesupon issues, concerning current Department policy, practiceor interpretation. Mass. Regs. Code tit. 830, §62C.3.1(5)(b).

2 For a more detailed explanation of the mechanics of ‘deal-of-the-day’ transactions, see ‘‘State Tax Issues to Considerwith ‘Groupons’ And Other Third-Party ‘Deal of the Day’ Pro-grams’’, Tax Management Multistate Tax Report (Vol. 19, No.4), Bloomberg BNA, April 27, 2012, pg. 193.

Sylvia Dion is a CPA and State & Local TaxConsultant, and the creator, author, and pub-lisher of ‘‘The State and Local Tax Buzz’’—www.thestateandlocaltaxbuzz.com—a profes-sional tax blog focused on SALT issues anddevelopments. Sylvia can be reached viaemail at sylviadion@verizon.net or by phoneat (978) 846-1641.

Copyright � 2012 TAX MANAGEMENT INC., a subsidiary of Bloomberg BNA ISSN 1534-1550

Tax Management

Weekly State Tax Report™

Key Issues AddressedDirective 12-4 addresses two key issues:1. Whether the sale of a qualifying promotional

voucher that may be redeemed for taxable property ormeals at face value is subject to sales or use tax at thetime of sale.

2. The sales price subject to tax when taxable tan-gible personal property or meals are purchased using aqualifying promotional voucher.

This second issue deals with the impact of deal-of-the-day discounts on the sales price subject to sales tax.

As to issue 1, Directive 12-4 states that tax is not dueupon the initial sale of a qualifying promotionalvoucher.3 The Department concludes that the sale ofsuch vouchers issued by third parties should be treatedlike ‘‘gift certificates’’ at the time of sale and any result-ing tax is due when a voucher is redeemed, not when itis issued. This means that at the point in time when thethird-party deal-of-the-day marketer charges a sub-scriber’s credit card for the purchase of a qualifyingpromotional voucher, the transaction is the equivalentof a gift certificate sale even if the customer is purchas-ing specific taxable products or meals.

With respect to the second issue, Directive 12-4states that the sales price subject to tax in transactionswhere the retail customer uses a qualifying promotionalvoucher is ‘‘the amount paid by the customer for thevoucher plus any additional cash or other considerationpaid to the vendor by the customer in consideration forthe sale’’ of the taxable tangible personal property ormeal.4 The Directive adds that the vendor must reportthat amount as gross receipts subject to tax on its salesand use tax return, and separately state the sales tax onany receipt issued to the customer as required by theMassachusetts sales tax laws.5

Discussion of the LawIn its discussion of the law as it applies to the first is-

sue, the Department cites a 1981 Massachusetts LetterRuling6 in which the Department concluded that thesale of gift certificates (a ‘‘Company’s transfer of thecertificates to its customers’’) did not involve a transferof tangible personal property within the meaning of thesales tax law,7 and any sales tax due was to be collectedat the time when the vendor makes a sale of a meal orother taxable sale, and the purchaser presents a giftcertificate in lieu of cash.8 In Directive 12-4, the Depart-

ment concludes that ‘‘the sale of vouchers described inthis Directive issued by third parties should be treatedlike gift certificates at the time of sale; thus any tax isdue when the vouchers are redeemed, not when theyare issued.’’

For purposes of the second issue—determining theprice to which the sales tax applies—Directive 12-4highlights the statutory definition of ‘‘sale price,’’ stat-ing that ‘‘sale price’’ subject to sales tax ‘‘excludes (i)cash discounts allowed and taken on sales.’’9 The Direc-tive then points to the Massachusetts regulation on Dis-counts, Coupons and Rebates,10 the pertinent partwhich reads:

Manufacturer’s and Retailer’s Coupons. Forpurposes of 830 CMR 64H.1.4(2), a ‘‘manufactur-er’s coupon’’ is a coupon issued by the manufac-turer, supplier or distributor of tangible personalproperty to be redeemed by a retail purchaser ofthat property. A ‘‘retailer’s coupon’’ is a coupon is-sued by a retail vendor. Generally, manufacturer’scoupons and retailer’s coupons that entitle the re-tail customer to a reduction in the sales price atthe time of the sale will be treated like cash dis-counts. See 830 CMR 64H.1.4(1). 11 Other types ofcoupons will not be treated as cash discounts.12

[Footnotes added.]

The Directive then emphasizes that a ‘‘qualifyingpromotional voucher or coupon published on the Inter-net by a third party under a contractual arrangementwith the vendor as described in this Directive will betreated similar to a retailer’s coupon that reduces thevendor’s gross receipts subject to tax.’’ [Emphasissupplied.] Directive 12-4 further adds that ‘‘during theperiod of time that the promotional value is in effect (in-cluding any voluntary extension of stated promotionalperiod by the vendor), the difference between the pro-motional (face) value of the voucher and the amount ac-

3 Directive 12-4, Directive 1.4 Directive 12-4, Directive 2.5 Mass. Gen. L. ch. 64H, §5 requires that ‘‘[u]pon each sale

of tangible personal property taxable under the provisions ofthis chapter the amount of tax collected by the vendor from thepurchaser shall be stated and charged separately from thesales price and shown separately on any record thereof at thetime the sale is made, or on any evidence of sale issued or usedby the vendor.’’

6 Massachusetts Letter Ruling 81-4: Gift Certificates, Jan. 5,1981.

7 See Mass. Gen. L. ch. 64H, §1(15), defining ‘‘tangible per-sonal property’’ as ‘‘personal property of any nature consistingof any produce, goods, wares, merchandise and commoditieswhatsoever . . . but . . . not rights and credits . . . .’’

8 Letter Ruling 81-4 also concludes that when the purchaserpresents a gift certificate in lieu of cash, the ‘‘sales price’’ in-cludes the face value of the certificate as well as any cash or

other consideration paid. It should be noted that the letter rul-ing’s use of the term ‘‘face value’’ is intended to describe themonetary equivalent that a customer would be given credit forupon the presentation of the gift certificate described in the let-ter ruling. This appears to be consistent with the description offace value as used in Directive 12-4. Yet, the letter ruling con-cludes that the sales price subject to tax includes the face valueof the gift certificate and appears to be at odds with Directive12-4. However, the letter ruling is cited by the Directive strictlyfor proposition of when sales tax is due, not for determiningthe ‘‘sales price’’ on which the tax is calculated. Moreover, theletter ruling addresses gift certificates, not qualifying promo-tional vouchers.

9 Mass. Gen. L. ch. 64H, §1. The statute defines ‘‘salesprice’’ as ‘‘the total amount paid by a purchaser to a vendor asconsideration for a retail sale, valued in money or otherwise.’’And in determining the sales price ‘‘there shall be excluded. . .(i) cash discounts allowed and taken on sales.’’ To say thatcash discounts are excluded from sales price is to say that acash discount reduces sales price.

10 Mass. Regs. Code tit. 830, §64H.1.4.11 Mass. Regs. Code tit. 830, §64H.1.4(1) states ‘‘[c]ash dis-

counts allowed and taken at the time of sale are excluded fromthe sales price of tangible personal property upon which thesales tax is based.’’

12 Under Mass. Regs. Code tit. 830, §64H.1.4(2)(c), cap-tioned ‘‘Other Coupons,’’ coupons, certificates or vouchers is-sued in connection with ‘‘bundled transactions’’ are not manu-facturer’s or retailer’s coupons, and any resulting reduction inthe amount paid by the retail customer will not be treated as acash discount.

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tually paid by the retail customer for the voucher is ex-cluded from the sales price subject to tax as a cash dis-count.’’ However, ‘‘nonqualifying vouchers, includingany that do not state the amount paid by the retail cus-tomer for the voucher, will not be treated as retailer’scoupons and no reduction should be made to the salesprice subject to tax.’’13

In other words, a vendor should treat the differencebetween the full redemption value of the qualifying pro-motional voucher and the amount the customer paid forthe voucher as a cash discount, but cannot treat this dif-ference as a cash discount to reduce sales price if the is-sued voucher does not meet the ‘‘qualifying’’ criteria.

Finally, Directive 12-4 states that a vendor’s booksand records must accurately identify the source andtype of vouchers or coupons used by its customers, andthat such records must be kept for the amount of timespecified in the Record Retention Regulation,14 andmust be produced for review by the Department in thecourse of an audit of the vendor.

Directive 12-4 Examples

To illustrate the application of its guidance, Directive12-4 includes five examples.

The first example details a scenario in which a cus-tomer purchases a third-party deal-of-the-day qualify-ing promotional voucher for $20 which can be appliedtowards a $40 restaurant meal within a one year promo-tional period. The customer redeems the voucher withinthe promotional period for a $40 meal, the exact promo-tional value of the voucher. Because this qualifying pro-motional voucher was used within the promotional pe-riod, sales tax is due on the amount paid for the

voucher, or $20.15 The restaurant should report the $20of gross receipts on its sales and use tax return.16

In the second example, the same facts apply exceptthat the customer’s total restaurant bill is $75. Becausethe qualifying promotional voucher is redeemed withinthe promotional period, the $20 deal-of-the-day voucherdiscount is allowed to reduce the customer’s total billdown to $55 ($75 - $20 = $55), which is the amount sub-ject to sales tax. This is consistent with the Directive’slanguage that sales tax is due on the amount paid by thecustomer for the voucher, here $20, plus any additionalcash or other consideration paid to the vendor by thecustomer at the time of sale, $35 ($75 less the $40 pro-motional value of the voucher equals $35). In this sec-ond example, the restaurant should report the $55 ofgross receipts on its sales and use tax return.17

The same facts once again apply to the third exampleexcept that the customer’s total restaurant bill is $30;$10 less than the full $40 promotional value of thevoucher. The qualifying promotional voucher is onceagain, redeemed within the promotional period. How-ever, because the customer has purchased a meal total-ing less than the full promotional value of the voucher,the Directive’s example advises that the restaurantshould charge the customer sales tax on the amountpaid for the voucher which bears the same ratio as thevalue of the meal received to the full promotional valueof the voucher. In this case, the customer would owesales tax on $15, or 30/40 of the $20 amount paid for thevoucher. The restaurant should report $15 of gross re-ceipts on its sales and use tax return.

This third example also considers that a customermay request the restaurant to apply the unused value ofthe voucher ($10) to cover his sales tax due.18 The Di-rective emphasizes that a vendor who allows a cus-tomer to apply the voucher’s remaining value to coverthe sales tax due must still remit the full amount of taxdue on the transaction even if the vendor did not collectany cash from the customer.19

In a fourth example the same facts apply, i.e., a quali-fying promotional voucher for a $40 meal at a particu-lar restaurant is purchased for $20. However, in this ex-ample the customer redeems the qualifying promo-tional voucher after the expiration of the promotionalperiod and the restaurant honors the voucher only forthe amount the customer paid, or $20. In this case, salestax is due on the full $40 cost of the meal; what the cus-tomer paid for the voucher, $20, plus the additional $20the customer was required to pay since the voucher

13 From this point forward in the Directive, the Departmentrefers to the treatment of a retailer’s coupon and no longer ref-erences manufacturers’ coupons even though Massachusettsprovides the same treatment to retailers’ and manufacturers’coupons. The Department may have chosen to exclude furthercomparison to manufacturers’ coupons because the majorityof states do not treat discounts from manufacturers’ couponsas cash discounts allowed and taken, reducing sales price. TheDepartment may have realized that keeping a reference to thetreatment of a manufacturer’s coupon may cause confusion topractitioners and taxpayers who are more familiar with howmanufacturer’s discounts are treated in other states.

14 The Massachusetts record retention regulation, Mass.Regs. Code tit. 830, §62C.25.1, requires the preservation andmaintenance of ‘‘permanent books of account or records, suf-ficiently accurate and complete to establish the amount ofgross income, deductions, credits or other matters required tobe shown by such person in any return of such tax or informa-tion.’’ Records must be kept as long as their contents are ma-terial in the administration of Massachusetts tax laws. At aminimum, unless the Commissioner consents in writing to anearlier destruction, the records must be preserved until thelapse of the statute of limitations for making additional assess-ments for the period for which the return was due. Generally,this is three years after the due date of the return or the datethe return is actually filed, whichever occurs later. Mass. Regs.Code tit. 830, §62C.25.1(7).

15 Directive 12-4, ex. 1. Note that the tax would be calcu-lated based on the Massachusetts general state rate of 6.25percent plus the additional 0.75 percent local option tax rates,if the voucher is redeemed in a city or town that has adoptedthe local tax on meals.

16 Directive 12-4, ex. 1.17 Directive 12-4, ex. 2.18 Although the merchant agreements of two of the most

popular deal-of-the-day marketing programs state that mer-chants may not allow a customer to use any part of theirvoucher to cover sales tax, a customer who does not use thefull value of his voucher may not wish to produce any addi-tional cash to cover the sales tax due. In these circumstances,many merchants may decide, as a matter of good customer re-lations, to allow customers to apply a portion of their vouchersto cover the sales tax due where less than the full value of thevoucher is redeemed.

19 Directive 12-4, ex. 3.

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could no longer be applied to cover the entire $40 bill.The restaurant should report $40 of gross receipts on itssales and use tax return.20

Finally, a fifth example includes a scenario where acustomer purchases for $150 a qualifying promotionalvoucher for a $300 golf package. The package includesnon-taxable green fees normally valued at $250 and ataxable golf cart rental fee normally valued at $50. Be-cause the customer redeems his voucher within the pro-motional period, sales tax is due on the amount paid forthe voucher. However, as the $150 voucher price in-cluded both a taxable and a non-taxable component,the discounted voucher price must be prorated basedon the relative value of the components to determinethe amount of sales tax due. In this scenario sales tax iscalculated as follows: the $50 full value of the golf cartrental divided by the $300 total full value of the golfpackage times the $150 paid for the voucher times thesales tax rate (50/300 = 16.6 percent times $150 = $25times Massachusetts’ 6.25 percent tax rate = $1.56 salestax due).21

Journey to a Final Directive; Prior WorkingDrafts

On September 16, 2011, the Department released itsfirst draft guidance on the sales tax implications ofthird-party coupon discounts in Working Draft Direc-tive 11-XX, Application of Sales Tax to Sales and Re-demptions of Third Party Coupons.

Working Draft Directive 11-XX applied to third-partydeal-of-the-day promotional arrangements such asthose known in the marketplace as Groupon and Liv-ingSocial, and addressed two key issues: 1) whether thesale of a third-party certificate is subject to sales or usetax; and 2) what value should be used to determine theamount subject to sales tax when taxable personalproperty or meals are purchased using a third-partycertificate.22 Nine months later, on June 14, 2012, basedon public comments received, the Department issued asecond Working Draft Directive, 12-XX, Application ofSales Tax to Sales and Redemption of Qualifying Pro-motional Vouchers,23 which revised the working draftdirective originally released September 16, 2011.

Like the first Working Draft (11-XX), the secondWorking Draft (12-XX) stated that it applied to similartypes of deal-of-the-day promotional arrangements andaddressed the same two key issues. However, therewere significant changes between the two draft direc-tives.

The first significant difference was the second Work-ing Draft’s addition of the defined term ‘‘qualifying pro-motional voucher.’’ The first Working Draft Directive(11-XX) did not describe any minimum qualifying char-acteristics that a deal-of-the-day voucher must possess.The second Working Draft (12-XX), as adopted by final

Directive 12-4, required that the voucher clearly state‘‘both the time limited promotional (face) value and theamount paid by the customer for the voucher’’ and thatthe voucher ‘‘must remain valid for redemption for atleast the amount paid by the customer indefinitely.’’

The second difference between Working Draft11-XX and Working Draft 12-XX is of particular signifi-cance. In the later draft, the Department changed its po-sition regarding the sales price subject to tax when acustomer redeems a third-party certificate or couponfor taxable products or meals. In its first Working Draft(11-XX), the Department had concluded that a certifi-cate or coupon issued by a third-party (as described inDraft Directive 11-XX) did not qualify as a manufactur-er’s or retailer’s coupon, because it was issued by nei-ther manufacturer nor retailer and, therefore, wouldnot be treated as a cash discount that reduces the tax-able sales price. In the second Working Draft 12-XX(June 2012), the Department allowed third-party deal-of-the-day ‘‘qualifying promotional vouchers’’ to betreated like a retailer’s coupon reducing taxable salesprice.

Of particular interest is the department’s citation tothe same Massachusetts regulation on discounts, cou-pons and rebates24 in each working draft for its differ-ing conclusions on the proper sales tax treatment. Theregulation was also cited in the final Directive 12-4,which adopts the position of the second Working Draft.The change in the Department’s position, and the con-tinued viability of the regulation as supporting author-ity, was accomplished by adding qualifying require-ments for deal-of-the-day vouchers to function as retail-er’s coupons.25 For purposes of receiving sales taxtreatment similar to a retailer’s coupon, the vouchermust clearly state both the time limited promotional(face) value and the amount paid by the customer forthe voucher and must remain valid for redemption forat least the amount paid by the customer indefinitely.

As the Department had already addressed the mostsignificant changes in Working Draft 12-XX, there waslittle changed between the June 2012 Working Draft(12-XX) and the final Directive 12-4. The only notablechange was new parenthetical language, clarifying thatany voluntary extension of the stated promotional pe-riod by the vendor is to be included in the period of timeduring which the promotional value is in effect. The im-pact of this additional language is that a qualifying pro-motional voucher will be treated similar to a retailer’s

20 Directive 12-4, ex. 4.21 Directive 12-4, ex. 5.22 See ‘‘State Tax Issues to Consider with ‘Groupons’ And

Other Third-Party ‘Deal of the Day’ Programs,’’ Tax Manage-ment Multistate Tax Report at p. 197, (Vol. 19, No. 4),Bloomberg BNA, April 27, 2012, for a detailed discussion ofMassachusetts Working Draft Directive 11-XX.

23 Mass. Dept. of Rev., Working Draft Directive 12-XX, Ap-plication of Sales Tax to Sales Tax to Redemption of Qualify-ing Promotional Vouchers, June 14, 2012.

24 Mass. Regs. Code tit. 830, §64H.1.4.25 Both Working Drafts and Final Directive 12-4 also cited

the decision in Lisa McGonagle v. Home Depot, U.S.A Inc., 915N.E.2d 1083. (Mass. App. Ct. 2009), appellate review denied,455 Mass. 1108 (Mass. 2009). At issue in Home Depot waswhether the retailer engaged in unfair or deceptive practicesbecause it did not allow a reduction in sales price for EnergyFederation Inc. (‘‘EFI’’) coupons in the calculation of sales tax.The court ruled in favor of the retailer, holding that it did notengage in unfair deceptive practice, in disallowing a reductionin the sale price, as the EFI coupons did not qualify as either amanufacturer’s or retailer’s coupon. In Working Draft Direc-tive 11-XX the Department inferred that the third-party deal-of-the-day coupons were like the EFI coupons in Home Depotand, thus, it was proper to disallow a reduction in taxable salesprice. However, in Working Draft Directive 12-XX and in Di-rective 12-4, the Department cited the same case, but this timedistinguished the qualifying promotional voucher discountsfrom the EFI coupon discounts.

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coupon even after the stated promotional period has ex-pired, if the vendor agrees to honor the full value of thevoucher. This language also implies that the expirationof the promotional period does not necessarily cause avoucher to cease to be ‘‘qualifying,’’ as a voucher isdeemed to be ‘‘qualifying’’ if it includes the documenta-tion required on its face and remains valid for redemp-tion for at least the amount paid by the customer indefi-nitely.

Also newly added to the final Directive 12-4, was Ex-ample 3, which as noted earlier, illustrates how mer-chants should calculate sales tax when a qualifying pro-motional voucher is redeemed within the promotionalperiod for a taxable product or meal that totals less thanthe full value of the voucher.

Effective DateAlthough Directive 12-4 does not explicitly state an

effective date, the Massachusetts regulation on PublicWritten Statements26 provides that a Directive is pro-spective in effect, except to the extent that it expresslyprovides otherwise.27 Directive 12-4 gives no indicationthat its guidance is retroactive. Therefore, the guidancein Directive 12-4 is prospective from the date issued,July 16, 2012. And although Working Draft Directive11-XX and Working Draft Directive 12-XX were indica-tive of the Department’s position on the treatment ofthird-party deal-of-the-day discounts, the guidance inboth Draft Directives was not final and, as seen in thishistory of Directive 12-4, subject to change.

Still some merchants may have followed the Depart-ment’s earlier guidance in Working Draft Directive11-XX and charged sales tax on the full value of the tax-able products or meals redeemed. In this case, a mer-chant may have over-collected and over-remitted salestax. Merchants should be advised that although techni-cally an opportunity to file a refund claim for over re-mitted sales taxes may exist, the Massachusetts regula-tion on abatements requires that a merchant first remitany over-collected sales tax to its customers and be ableto provide substantiation to that effect.28 This means

that from a practical perspective, a merchant wouldneed to refund its customers the overpaid sales taxprior to submitting an abatement claim. As the greatmajority of deal-of-the-day promotions are offered bylocal merchants, it is unlikely that a merchant wouldmake the extra effort of refunding over-collected salestax in order to file a refund claim. It is also unlikely thatmost customers would seek a refund of a few dollars ofoverpaid sales tax.29 Thus, the result is that to the ex-tent sales tax was over-collected based on following theguidance in the Working Draft Directive 11-XX, thesemonies will likely remain with the Department of Rev-enue.

Merchants should also be advised that in the event ofan audit, a merchant should not be penalized for failingto charge sales tax on the full-value of the taxable prod-ucts or meals redeemed as the guidance in WorkingDraft Directive 11-XX was never final and cannot beused by the Department’s enforcement division againsta taxpayer.

ConclusionThis evolution of Directive 12-4, and the change in

the Department’s position, highlights that until finalguidance is issued a Draft Directive is simply that – adraft position. The length of time involved in issuing afinal Directive, as well as the fact that, to date, less thanten states have issued formal guidance, also highlightsthat states continue to grapple with the sales tax impli-cations of deal-of-the-day instruments.30 Thus, taxpay-ers who participate in deal-of-the-day promotions inmultiple states should note that the guidance either var-ies from state to state or is at this time non-existent.

26 Mass. Regs. Code tit. 830, §62C. 3.1.27 Mass. Regs. Code tit. 830, §62C.3.1(5)(f).28 ‘‘Where an application for abatement is made by a ven-

dor subject to the sales and use tax, no refund of money shallbe made until the vendor establishes to the satisfaction of the

Commissioner, that it has repaid or credited or will repay orcredit any purchaser who has paid the tax to the vendor in theamount for which the application is made.’’ Mass. Regs. Codetit. 830, §62C.37.1(6)(b).

29 However, this would not preclude several taxpayers fromjoining together and filing a class action suit for their collectiveoverpaid sales tax.

30 For an overview of guidance issued in New York, Califor-nia, Maine, Iowa, Kentucky and Illinois, as well as an overviewof the Streamlined Sales Tax activities on developing an inter-pretive rule, see ‘‘State Tax Issues to Consider with ‘Groupons’And Other Third-Party ‘Deal of the Day’ Programs’’, Tax Man-agement Multistate Tax Report (Vol. 19, No. 4), BloombergBNA, April 27, 2012, pg. 193.

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Reproduced with permission from Tax Management Weekly State Tax Report, Vol. 2012 No. 12, 03/23/2012.Copyright � 2012 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

Ta x B a s e

How internet-based discount coupons should be treated for sales tax purposes has been

the subject of formal guidance from a few states, with many others starting to take notice.

Third-party marketers of discount coupons as well as merchants retailing the goods and ser-

vices need to know who is responsible for collecting and remitting the sales tax, and the

amount upon which the tax is calculated. In addition, discount coupons expiring without

being redeemed may raise unclaimed property issues under state escheat laws. In this ar-

ticle, state tax consultant Sylvia Dion discusses the business models and state tax implica-

tions associated with these internet transactions, commonly known as ‘‘deal-of-the-day’’

programs.

State Tax Issues to Consider With ‘Groupons’And Other Third-Party ‘Deal-of-the-Day’ Programs

BY SYLVIA F. DION, CPA

G roupon and LivingSocial are arguably the biggestand most widely subscribed to web-based ‘‘deal-of-the-day’’ discount coupon programs. As the

popularity of these programs continues to grow, and asnew competitors following the same business model en-ter the marketplace, state officials are taking an in-creased interest in the potential state tax implicationsassociated with deal-of-the-day transactions.

Where sales taxation is concerned, states are recog-nizing the potential for lost revenue because the exist-ing rules on the impact of discounts on sales price couldgreatly diminish the sales tax base. States are also rec-ognizing the potential for increasing state revenues by

asserting that expired deal-of-the-day instruments meetthe definition of unclaimed property for state escheatlaws.

This article discusses guidance that has been issuedby several states in the last few months and contraststhe various positions states are taking. It also toucheson unclaimed property issues associated with deal-of-day instruments.

Mechanics of ‘Deal-of-the-Day’Transactions

Understanding the process involved in deal-of-the-day transactions, and the roles and actions carried outby the various parties, is necessary for the ensuing dis-cussion on the tax implications of these transactions.Following is an overview of the how the most commondeal-of-the-day programs work.

Subscribers to Groupon, LivingSocial,1 and otherdeal-of-the-day sites receive a ‘‘Daily Deal’’ email in

1 Although Groupon and LivingSocial are considered thenumber one and number two players in the ‘‘deal-of-the-day’’marketing space, in the past few years several Groupon-typecompetitors have emerged. It is uncertain whether all deal-of-

Sylvia Dion is a CPA and State & Local TaxConsultant with extensive multistate expe-rience. She is also the creator, author,and publisher of ‘‘The State and Local TaxBuzz’’—www.thestateandlocaltaxbuzz.com—aprofessional tax blog focused on SALT issuesand developments. Sylvia can be reached viaemail at sylviadion@verizon.net or by phoneat (978) 846-1641.

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which discounted products and/or services2 are offered.Merchants offering these ‘‘deals’’ are predominantlyfrom within the subscriber’s local market.3 Subscribersare given a specified amount of time to ‘‘buy’’ the dailydeal, typically only a few hours or days. The psychologybehind this marketing tactic is to create a sense ofurgency—subscribers must quickly decide if they willpurchase ‘‘the deal.’’

For the merchant offering a Groupon, the primarybenefit is the potential to increase the merchant’s cus-tomer base and create repeat customers. If a minimumnumber of people choose to ‘‘buy’’ before the offer ex-pires, the deal becomes effective, or as Groupon says,‘‘the deal is on.’’4 Groupon obtains payment for thespecified deal by charging the subscriber’s credit cardand in turn makes available to the subscriber (or to thesubscriber’s designated transferee) a ‘‘voucher’’ thatthe customer may present as a printed certificate or vir-tual mobile device coupon. The voucher includes anyapplicable restrictions or limitations on its use as deter-mined by the merchant, including the expiration datefor presenting the voucher for redemption.

Although Groupon charges the subscriber’s creditcard and obtains the monies associated with the deal,Groupon does not charge or collect sales tax and explic-itly turns this responsibility over to the merchant. Grou-pon’s Merchant Account Terms and Conditions Agree-ment requires merchants to acknowledge that they areregistered for sales tax collection purposes and will beresponsible for collecting and remitting all applicabletaxes.5 Similarly, in its Subscriber’s Frequently AskedQuestions (FAQ), Groupon’s response to how muchsales tax subscribers should expect to pay on their dealsis that it is ‘‘every merchant’s responsibility to collectand remit tax as required by applicable law.’’6

After Groupon collects and processes the subscrib-er’s payment, Groupon remits the contracted percent-age of the payment to the participating merchant. A50/50 split is often quoted as a typical Groupon/merchant split, but because every deal is specifically de-termined by the merchant with the assistance of Grou-pon’s merchant account services representative, the ex-act split may vary. An example of a Grouponarrangement would be an offer of a product or servicevalued at $50 for the discounted voucher price of $25.7

Groupon would charge the subscriber’s credit card the$25 price and split this amount according to the agreedpercentage. Actual payment for all deals sold would beremitted to the merchant at some future date as dictatedby the payment terms of the merchant’s agreement.

Assuming a split of 50 percent to each, the merchantwould receive $12.50 on each deal sold. In essence, themerchant has sold a product or service valued at $50 for$12.50. Although the merchant also receives marketingand support services from Groupon, the $37.50 ‘‘dis-count’’ represents unreimbursed revenue—money themerchant has spent that is anticipated to bring in newbusiness.

Although the financial arrangements of most Grou-pon and comparable deal-of-the-day arrangementswork similarly, i.e., subscribers purchase discountedproducts or services for which the merchant ultimatelyreceives substantially less than full value, there is a nu-ance to consider. In some Groupon transactions, thesubscriber is prepaying for a specific item or service,e.g., a specific piece of jewelry or an hour’s massage,while in others subscribers are buying vouchers thatcan be used to purchase what they wish from the retail-er’s offerings. In the former, an actual sale of the prod-uct or service has occurred (even if possession does nottake place until a later date), while the latter operateslike a gift card or gift certificate in that what has beenpurchased is a cash equivalent that can be applied to-ward the purchase of any combination of products orservices offered by the merchant. However, as the spe-cifics of what will be acquired are not yet known,whether the redemption will result in sales tax beingdue may not be determinable upon the sale of thevoucher. Therefore, the nature of the Groupon arrange-ment may impact the amount subject to sales tax in thatthese transactions are not all the same.

Overview of State Tax TreatmentOf Retailers’, Manufacturers’ Discounts

In general, states express the impact of various typesof discounts, coupons, rebates, and the like on saleprice by defining what is includable in and excludablefrom sale price. That is, the general definition of ‘‘saleprice’’ is first explained, followed by an explanation ofitems that are excluded from or ‘‘not part of’’ salesprice.

the-day marketers structure their ‘‘deals’’ in exactly the sameway; however, given the success of the Groupon businessmodel, it is likely that many operate similarly. Therefore, theguidance issued by the states discussed in this article appliesto any Groupon-type transaction.

2 Although the terms ‘‘products’’ and ‘‘services’’ are usedthroughout this article and in the guidance issued by thestates, the offerings in Groupon-type promotions are not lim-ited strictly to tangible products or services. Also included aremeals, beverages, and experiences.

3 Although the great majority of deal-of-the-day promotionsare from local establishments, national retailers, including TheGap, Old Navy, and Bath and Body Works, also have marketedpromotions though Groupon.

4 Unlike Groupon, LivingSocial does not require that aminimum number of deals be sold for the promotion to go live.

5 Groupon’s Merchant Account Terms and ConditionsAgreement, Section 6: Representations and Warranties, re-quires merchants to represent that they (i) are registered forthe collection of sales, use, and other similar taxes in all statesand localities in which goods and/or services will be madeavailable pursuant to the terms and presentation of the vouch-ers; and (ii) will collect and remit all applicable state or localsales, use, hotel occupancy, and other similar taxes that mayapply to the redemption of the vouchers or the supplying ofgoods or services.

6 The following question and answer appear in Groupon’sSubscriber’s FAQ: ‘‘Q: How much sales and use tax should becharged when a Groupon is redeemed? A: States and cities of-ten have complicated sales and use tax laws that may be con-fusing to you. Factors such as where you live, where you re-deem your Groupon and for what goods or services you re-deem it may affect how the Groupon is treated for purposes oftaxation. It is every merchant’s responsibility to collect and re-

mit tax as required by applicable law.’’ See Groupon sub-scriber FAQ at: http://www.groupon.com/faq.

7 Groupon’s Subcriber’s Terms of Sale states that a voucherhas two separate values: (a) the ‘‘amount paid’’ and (b) thepromotional value. The ‘‘promotional value’’ is the additionalvalue beyond the amount paid. Together, the amount paid andthe promotional value equals the ‘‘full offer value’’ of thevoucher. See Groupon subscriber terms at: http://www.groupon.com/terms#terms-of-sale.

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Considering that a merchant may receive substan-tially less than the full value, i.e., normal sale price, ofthe product or service offered through the promotion,one might presume that an amount less than the fullvalue would be subject to sales tax. Two of the mostcommon types of discounts offered to entice customersto purchase a product or service are retailers’ andmanufacturers’ discounts.8 In general, states treat a re-tailer’s discount, such as one where a retailer creates itsown coupon, as a ‘‘cash discount allowed and taken.’’Because the retailer incurs an economic loss, a majorityof the states allow the ‘‘cash discount allowed andtaken’’ to be excluded from sale price. Thus, where a re-tailer’s discount has been offered and applied, sales taxis due on the sale price after discount.

A typical manufacturer’s discount is one where themanufacturer of a product offers a coupon or certificatethat a customer can present to a participating retailerwho in turn allows a reduction in the sales price for theamount of the manufacturer’s discount. When a retailerapplies a manufacturer’s discount to a sale, a majorityof the states do not treat these as allowable cash dis-counts. In essence, manufacturers’ coupons are treatedlike cash because a retailer who accepts them is ulti-mately reimbursed by a third party. When a manufac-turer’s discount coupon is used, sales tax is charged onthe full sale price because that is the amount the retailerultimately receives—in part from the customer, and thebalance from the manufacturer or another third party.

States Come Forward With ‘Groupon’Guidance

Given the popularity and growth of third-party, web-based social coupon programs, it is not surprising thatstates have been paying closer attention to these deal-of-the-day transactions. In particular, absent definitiveguidance, it is easy to see how a retailer that offers aGroupon may view and treat the Groupon discountsimilarly to a retailer’s discount. As noted, a retailerthat offers a Groupon receives substantially less thanthe full value of the product or service offered throughthe deal.

As there is no reimbursement of the forgone rev-enue, the merchant funds the entire discount and re-sulting loss of revenue. Therefore, in essence, a Grou-pon discount has many characteristics of a retailer’sdiscount. Perhaps this is why in recent months severalstates have issued guidance in the form of administra-tive pronouncements, informational and instructionalbulletins, and department website information.

New YorkIn September 2011, New York became one of the

first states to issue definitive guidance on the impact ofdiscounts associated with the purchase of third-partydeal-of-the-day vouchers on sale price. New York’sguidance, articulated in a technical services bulletin(TSB),9 is also the most comprehensive to date. Not

only does the TSB address whether sales tax is due atthe time a customer purchases the deal, it also differen-tiates the sales tax treatment based on the nature of thevoucher issued.10

The TSB confirms that sales tax is not due on the saleof the voucher by the deal site, but that sales tax is dueat the time the voucher is redeemed by the customer ifthe voucher is redeemed for taxable products or ser-vices. Regarding the value subject to sales tax, the guid-ance separates deal-of-the-day vouchers into two cat-egories: specific product or service vouchers, and statedface value vouchers. The amount of sales tax ultimatelydue depends upon the category into which the voucherfalls.

Specific Product or Service Voucher

According to the TSB, if the voucher is for a specificproduct or service (for example, one oil change, anhour’s massage, or a specific item or product), sales taxis due on the amount the customer paid for thevoucher—that is, tax is due on the sale price after apply-ing the promotional discount. In the guidance, the NewYork Department of Taxation and Finance added thatsales tax is due on the amount the customer paid for thevoucher even if the voucher lists the full price of theproduct or service the customer has purchased.11

The TSB also explained how a merchant should treatsituations where a specific product or service voucher isissued for multiple products or services. Where a spe-cific product or service voucher can be redeemed morethan once for a specifically identifiable taxable productor service, the department said the amount subject tosales tax on each redemption is determined by dividingthe total amount the customer paid for the voucher bythe number of times the voucher may be redeemed. Toillustrate this, the TSB included an example in which acustomer has purchased a $20 voucher redeemable fortwo oil change services at a New York-based business.Because this voucher is redeemable only for these spe-cific services, sales tax will be due on the amount thecustomer paid for the voucher, or $20. However, as thevoucher may be redeemed on up to two separate occa-sions, the merchant would divide the voucher price inhalf and charge sales tax on half of the $20, or $10, oneach of the two oil changes.12

In some situations, a customer purchases a specificproduct or service voucher that is redeemable for acombination of products and/or services, some of whichare taxable and some of which are not. If the voucherdoes not allow the customer the option of purchasingthe products or services separately, the TSB stated thatthe ‘‘transaction will be treated as the sale of taxableand exempt items sold as a single unit’’ and directed

8 Other types of discount that may be offered include ‘‘buyone, get one free’’ offers, early payment discounts, and super-market club card discounts.

9 A New York technical services bulletin is an informationalstatement of existing department policies or of changes to the

law, regulations, or department policies. It is accurate on thedate issued. Subsequent changes in the law or regulations, ju-dicial decisions, Tax Appeals Tribunal decisions, or changes indepartment policies could affect the validity of the informationpresented in a technical services bulletin.

10 N.Y. Dept. of Taxn. and Fin., TSB-M-11(16)S, Sales TaxTreatment Relating to the Sale and Redemption of Certain Pre-paid Discount Vouchers, 9/19/11.

11 As the subscriber can only redeem the voucher for a spe-cific product or service, it is not necessary for the full value ofthe deal to be listed on the voucher.

12 N.Y. Dept. of Taxn. and Fin., TSB-M-11(16)S, page 3, ex-ample 3.

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that merchants should compute sales tax on the totalprice the customer paid the deal site for the voucher.

In a separate example, the TSB illustrated a scenariowhere a customer has purchased a specific product orservice voucher for $6, which is redeemable for onemovie admission, one soft drink, and a box of popcorn.Under New York’s rules on sales tax exemptions, themovie admission is not subject to sales tax but the softdrink and popcorn are. The TSB stated that the movietheatre would be required to collect sales tax on the full$6 amount the customer paid for the deal voucher eventhough a component of what the customer receives is anontaxable service.13 Therefore, although this scenariodid not change the fact that sales tax is due on theamount the customer paid for the voucher, it does re-quire that sales tax be charged on both the taxable andnon-taxable components of the deal.

Additionally, because the redemption of a specificproduct or service voucher results in the entire value ofthe voucher being used, any resulting sales tax must becollected from the customer at the time of redemption.

Stated Face Value Voucher

The second type of discount voucher described inTSB-M-11(16)S, the stated face value voucher, can beapplied toward the purchase of products and/or servicesoffered by the merchant in the same manner as cash upto the stated face value of the voucher. As such, the TSBstated that it is generally treated in the same manner asa gift card. Because it functions like a cash equivalent,a merchant is required to charge sales tax on the fullvalue of the products or services obtained through thedeal before applying the value of the voucher as pay-ment. In New York’s analysis, this type of voucher is nodifferent from a gift certificate in that its value can beapplied toward the purchase of any product or servicefrom the retailer’s offerings.

If the entire value of a stated face value voucher isapplied toward a customer’s purchase, the merchantwould need to collect the sales tax due from the cus-tomer. However, because a stated face value voucherfunctions like a gift card, a customer may request amerchant to accept a portion of the voucher’s unusedvalue to cover any resulting sales tax. Although the TSBstated that a merchant may allow the customer to usethe remaining value of the voucher to pay the sales taxon the transaction, the merchant will remain respon-sible for remitting the sales tax due even if no additionalfunds are collected from the customer.14

Thus, given the different treatment of specific prod-uct or service and stated face value vouchers, custom-ers in New York could end up with different sales taxbills even if they ultimately purchase the same item. Forinstance, assume a New York City bookstore offers aGroupon for one copy of Walter Isaacson’s biography ofSteve Jobs for $15, a book the store sells at full retail for$35. Because the book was acquired with a specificproduct voucher, New York’s guidance would allow themerchant to collect sales tax only on the $15 price thecustomer paid for the voucher, or $1.33 ($15 times thetotal sales tax rate of 8.875 percent).

If the same bookstore offered a Groupon for a $15voucher that could be applied toward the purchase of$35 worth of books or other items, a customer mightopt to use it to purchase the same $35 Steve Jobs biog-raphy. However, because the stated face value vouchercould be applied like a gift card against the customer’spurchase, the store would be required to charge salestax on the full $35 value of the book, or $3.11 ($35 timesthe total sales tax rate of 8.875 percent).

CaliforniaAlso in September 2011, the California State Board

of Equalization (SBOE) issued a tax information bulle-tin in which the board clarified the sales tax treatmentof deal-of-the-day instruments.15 In the bulletin, theSBOE advised that sales tax applies to ‘‘the amountpaid by the customer for the deal-of-the-day instrumentplus any additional cash, credit, or other considerationrequired to be paid when the product is purchased.’’16

Although the bulletin did not explicitly define dis-count vouchers as being specific product or service orstated face value vouchers, the SBOE offered two ex-amples illustrating that California’s treatment of a dis-count voucher for a specific product or service is simi-lar to New York’s treatment of specific product or ser-vice vouchers. The California bulletin illustrated this inan example in which a deal-of-the-day is offered for thepurchase of a $100 tennis racket for $50. The bulletinstated that sales tax is due on $50—the amount the cus-tomer paid for the deal. The same result would occurunder New York’s policy.

In a second example, a $50 deal-of-the-day is offeredfor $105 worth of custom picture framing. The cus-tomer redeems the coupon for a custom frame priced at$120 (i.e., the customer owes an additional $15 sincethe voucher only covers up to $105 worth of framing).The SBOE bulletin stated that sales tax is due on $65—the $50 the customer paid for the voucher plus the ad-ditional $15. Although this second example fits NewYork’s description of a stated face value voucher, Cali-fornia only expects sales tax on the amount the cus-tomer actually paid for the voucher plus any additionalcash, credit, or other consideration required to be paid.

In November 2011, the SBOE followed up with aSpecial Notice, Application of California Sales Tax toDeal-of the Day Instruments,17 which reinforced theguidance provided in the September 2011 bulletin andincluded two examples that were virtually identical, ex-cept for the products and services described, to the ex-amples above. One significant issue addressed in thespecial notice, which was not addressed in the bulletin,was the sales tax treatment upon the sale of the deal-of-the-day instrument to the customer. The notice statedthat the sale of a deal-of-the-day instrument is not re-garded as a sale of tangible personal property or a ser-vice, but as the sale of an evidence of an intangible rightto receive tangible personal property and /or services ata later date and as such, is not subject to sales tax at thetime of sale.

13 N.Y. Dept. of Taxn. and Fin., TSB-M-11(16)S, page 3, ex-ample 4.

14 N.Y. Dept. of Taxn. and Fin., TSB-M-11(16)S, page 4, ex-ample 7.

15 Cal. State Bd. of Equal., Tax Information Bulletin, Publi-cation 388, September 2011.

16 Tax Information Bulletin, Publication 388, pp. 3-4.17 Cal. State Bd. of Equal., Special Notice L-297, November

2011.

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Additionally, although the bulletin implied that Cali-fornia’s treatment of deal-of-the-day instruments is con-sistent with the state’s existing rules on the treatment ofcash discounts by referring to California’s regulation ondiscounts, coupons, and other incentives,18 the Novem-ber notice clearly stated that deal-of-the-day instru-ments that meet the specific terms and conditions19 de-scribed in the notice are considered retailers’ coupons.

MassachusettsIn September 2011, Massachusetts released draft

guidance on the sales tax implications of third-partycoupon discounts, Draft Directive 11-XX.20 The draftdirective clearly identified the promotional arrange-ments to which it applies as those ‘‘known under vari-ous names in the marketplace including Groupon, Liv-ingSocial and BuyWithMe.’’

The draft addresses two issues:s whether the sale of a third-party certificate is sub-

ject to sales or use tax (that is, whether the sale of avoucher that may be redeemed at a future point at facevalue for taxable personal property or meals is subjectto sales tax), and

s what value should be used to determine theamount subject to sales tax when taxable personalproperty or meals are purchased using a third-partycertificate.

The draft directive confirmed that tax is not due onthe sale of the third-party certificate, stating that thesale of such certificates should be treated, for sales taxpurposes, in the same manner as gift certificates issuedby a vendor.21 Effectively, this means that at the timewhen Groupon or another deal-of-the-day marketercharges a customer’s credit or debit card, the transac-tion is the equivalent of a gift certificate sale even if thecustomer is purchasing a specific taxable product orservice.

On the second issue, the draft directive first ex-plained Massachusetts’s current rule on the impact ofmanufacturers’ and retailers’ discounts on the defini-tion of ‘‘sale price’’ as detailed in the state’s sales taxregulations.22 The draft directive noted that while theMassachusetts regulation on discounts and coupons al-lows both manufacturers’ and retailers’ discounts to re-duce the sale price subject to tax, this regulation also

states that ‘‘other types of coupons will not be treatedas cash discounts.’’23

The draft directive concluded that a ‘‘certificate orcoupon issued by a third party . . . does not qualify as amanufacturer’s or retailer’s coupon because it is neitherissued by the manufacturer nor the retailer. . .’’ andadded that a ‘‘third party certificate is therefore nottreated as a cash discount that reduces the taxable salesprice.’’24

To illustrate the application of these rules, the de-partment included two examples. In the first example, aconsumer purchases a third-party certificate for $20 onthe internet that can be applied toward a $40 restaurantmeal (i.e., the consumer will be able to choose from therestaurant’s offering and tender the certificate as pay-ment). The draft directive indicated that state and localsales tax will be due on the full $40 value of the meal.25

In the second example, a consumer purchases a $280golf package for $140. The package includes non-taxable green fees normally valued at $200 and a tax-able golf cart rental fee normally valued at $80. Thedraft directive stated that the golf course must collectand remit sales tax on the full $80 value of the taxablegolf cart rental fee.26

The guidance in the draft directive is contrary to ad-vice offered in a private information letter (PIL)27 thatthe department issued in March 2010 describing a sce-nario that is virtually identical to the one described inthe first example in the draft directive. The depart-ment’s response in the PIL clearly indicated that thetaxpayer’s query involved discount restaurant couponsissued by Groupon and advised that sales tax would bedue on the discounted amount the customer paid for thecertificate, not the full value of the meal received. 28

Given the contrary guidance issued in the 2010 PIL,and the fact that the draft directive, although indicativeof the department’s position, is subject to change, Mas-sachusetts merchants do not have absolute guidanceuntil a final directive is issued.

18 Cal. Regs. §1671.1, Discounts, Coupons, Rebates andOther Incentives. Also see Cal. State Bd. of Equal., Sales andUse Tax Facts, Publication 113, Coupons, Discounts and Re-bates, December 2010.

19 See Special Notice L-297, p. 2, for the terms and condi-tions applicable to the deal-of-the-day instruments to whichthe notice applies.

20 Mass. Dept. of Rev., Working Draft Directive 11-XX: Ap-plication of Sales Tax to Sales and Redemptions of Third PartyCoupons, 9/16/11.

21 In its discussion of the law, the Massachusetts Depart-ment of Revenue cited Letter Ruling 81-4: Gift Certificates,1/5/81, in which the department ruled that the sale of gift cer-tificates did not involve a transfer of tangible personal propertywithin Mass. Gen. L. ch. 64H, §1, and that when a vendormakes a sale of a meal or other taxable sale, and the purchaserpresents a gift certificate in lieu of cash, the ‘‘sales price’’ in-cludes the face value of the certificate as well as any cash orother consideration paid.

22 Mass. Regs. Code §64.00: Sales and Use Tax.

23 Mass. Regs. Code §64H.1.4., Discounts, Coupons and Re-bates.

24 The department cited McGonagle v. Home Depot U.S.AInc., 915 N.E.2d 1083 (Mass. App. 2009), review denied 920N.E.2d 44, 455 Mass. 1108 (Mass. 2009). At issue was whetherHome Depot Inc. engaged in unfair or deceptive practices be-cause the retailer did not allow a reduction in sales price forEnergy Federation Inc. (EFI) coupons. The court ruled in favorHome Depot, holding that it was proper for Home Depot to dis-allow a reduction in the sale price as the EFI coupons did notqualify as either a manufacturer’s or retailer’s coupon.

25 Working Draft Directive 11-XX, ex. 1.26 Working Draft Directive 11-XX, ex. 2.27 A Massachusetts private information letter, as defined in

Letter Ruling Regulation, Mass. Regs. Code §62C.3.2, is in-tended to provide general information such as the potential ap-plicability of Department of Revenue public written statementsor well-established principles of tax law. It is not intended toprovide authoritative guidance on the application of the taxlaws to a specific set of facts; therefore, it is not a ‘‘ruling’’ or‘‘letter ruling’’ that is legally binding on the department.

28 This PIL was cited in numerous articles focusing prima-rily on Groupon’s consumer protection law violation. See‘‘Daily Deal Providers May Be Violating Consumer ProtectionLaws,’’ TechCrunch, 6/15/11 at: http://techcrunch.com/2011/06/15/daily-deal-consumer-protection-laws/. Also see ‘‘ConsumerProtection in Online Discount Voucher Sales,’’ MIT Whitepa-per, Benjamin Edelman and Paul Kominers, 6/14/11 at: http://www.benedelman.org/voucher-consumer-protection/.

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KentuckyThe Kentucky Department of Revenue issued a rev-

enue publication29 in December 2011 addressing thesales tax implications upon the issuance of Grouponsand the value on which sales tax should be calculatedwhen a Groupon voucher is redeemed.

The revenue publication stated that the initial sale ofthe discounted voucher is treated in the same manneras the sale of a gift card,30 which is a nontaxable trans-action for sales and use tax purposes. It continued withthe general rule that sales tax is due on the total pricethe customer paid for the voucher, i.e., the discountedvalue, rather than total value of the voucher. However,in order for the sales tax to be calculated on the dis-counted value of the voucher, either:

s the voucher must indicate the discounted price, ors the local retailer must know and retain documen-

tation of the discounted price.If neither of these two requirements is met, sales tax

is due on the total face value of the voucher, i.e., the fullsales price or full value of products or services forwhich the voucher can be redeemed.31

As a practical matter, merchants who enter into acontract with Groupon or other, similar third-partyweb-based marketer are involved in establishing thespecifics of the deal offer and likely would be aware ofand have retained documentation of the discountedsales price. Therefore, in most Groupon situations it ap-pears that Kentucky sales tax would be due on the dis-counted value of taxable products or services.

MaineOn Jan. 17, 2012, Maine Revenue Services (MRS) is-

sued a revision to its Instructional Bulletin No. 39, SalePrice Upon Which Tax Is Based.32 Unlike New York’s,Massachusetts’s, California’s, and Kentucky’s guidancedocuments, which specifically address the sale and re-demption of Groupon or similar third-party deal-of-theday vouchers/certificates, Maine’s guidance simplyclarified that deal-of-the-day discounts meet the defini-tion of ‘‘discounts allowed and taken on sales’’ providedcertain conditions are met.

MRS began the instructional bulletin with the gen-eral definition of ‘‘sale price’’33 and followed with a dis-

cussion of the impact of ‘‘discounts allowed and takenon sales,’’ i.e., cash discounts. The discussion of cashdiscounts and gift certificates stated that ‘‘when a giftcertificate is purchased for less than its face value, thedifference between the face value and the purchasevalue may be treated as a retailer discount since thatvalue will not be recovered from any other source.When the certificate is later redeemed, the retailer dis-count would reduce the taxable sale price of the trans-action provided the retailer is able to document or oth-erwise reliably establish the value paid for the certifi-cate and is treating the difference as a retailerdiscount.’’

The only indication that this guidance is intended toapply to Groupon discounts is found in a supporting ex-ample, which MRS used to illustrate a customer’s pur-chase of a deal-of-the-day certificate, valued at $100, for$75. The guidance added that ‘‘when the certificate isredeemed, the retailer, having made prior arrange-ments for this offer to occur, has documentation thatthe amount paid for the certificate was $75. If the trans-action amounted to $150, $25 of the certificate ($100less the amount paid of $75) is treated as a retailer dis-count, reducing the taxable sale price to $125 ($150 -$25). The amount paid for the certificate, $75, is treatedas cash toward payment of this transaction.’’

Thus, for Maine sales tax purposes, the discountcomponent of a deal-of-the day certificate is excludedfrom sale price in the same manner as a cash discountallowed and taken.

IowaRecently the Iowa Department of Revenue posted a

web page on Groupons and Iowa Sales Tax.34 The webpage briefly stated that ‘‘in most situations, sales taxshould be charged on the full price of the item pur-chased.’’ The department included a supporting ex-ample in which a customer purchases a certificate froman online service for $50 that can be used toward thepurchase of a restaurant meal worth $100. When thecustomer redeems the certificate for a meal valued at$100, the restaurant collects sales tax on the full $100.

However, despite this general rule, Iowa’s guidanceadded that ‘‘if the certificate states on its face the pricepaid by the purchaser to the online buying service, taxis collected on that amount (i.e., the discountedamount), rather than the full price of the item pur-chased.’’ Using the above example, sales tax would bedue on the $50 purchase price of the certificate.

IllinoisAlthough the Illinois Department of Revenue (IDOR)

has not yet issued a directive or information bulletin,tax practitioners received some guidance from IDORrepresentatives during the department’s Annual Tax

29 Ky. Dept. of Rev., Kentucky Sales Tax Facts, A RevenuePublication for the Business Owner, December 2011.

30 In the section immediately preceding the revenue publi-cation’s discussion on the tax treatment for Groupons, thepublication addressed the tax treatment of gift cards. It said‘‘the sale of a gift card is an offer of an intangible right and notin essence the sale of tangible personal property . . .’’ The pub-lication added that ‘‘the retail sale of the card itself is not sub-ject to Kentucky sales tax; however, sales tax is due at the timeof redemption of the gift card, provided the item being pur-chased is subject to Kentucky sales and use tax.’’

31 The application of the general rule and the alternativerule is illustrated in examples 1 and 2 in the Kentucky revenuepublication.

32 Maine Revenue Services bulletins are intended solely asadvice to assist persons in determining and complying withtheir obligations under Maine tax law. Although MRS bulletinsdo not have the same legal force and effect as rules, justifiablereliance upon this bulletin will be considered in mitigation ofany penalties for any underpayment of tax.

33 Me. Rev. Stat. Ann. §1752(14) defines ‘‘sale price’’ tomeans the total amount of a retail sale valued in money,

whether received in money or otherwise. A sale price includes(1) any consideration for services that are a part of a retail sale;and (2) all receipts, cash, credits, and property of any kind andany amount for which credit is allowed by the seller to the pur-chaser, without any deduction on account of the cost of theproperty sold, the cost of the materials used, labor or servicecost, interest paid, losses, or any other expenses.

34 The Iowa Department of Revenue web page,‘‘Groupons—Iowa Sales Tax,’’ is available at: http://www.iowa.gov/tax/business/groupons.html.

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Practitioner Meeting on Feb. 3, 2012.35 Practitionerssubmitted written questions prior to the meeting, andIDOR published these questions and the department’sresponses.36

Regarding Illinois’s treatment of Groupons for salestax purposes, the IDOR response noted that the depart-ment is currently in discussions to try to develop a prac-tical solution for retailers that also conforms to the Illi-nois statute. Further, the department noted that aunique aspect of a deal-of-the-day type transactionmakes it not exactly a ‘‘gift card’’ or a ‘‘coupon.’’ Afteran explanation of how a typical deal-of-the-day transac-tion works, the department went on to say, ‘‘If the re-tailer knows the amount that the customer paid for thevoucher, then the amount that the customer paid for thevoucher is taxable when the voucher is redeemed.’’

Illinois acknowledged that a cashier may not know

at the time of redemption how much the customer

paid for the deal-of-the-day voucher.

It continued, ‘‘The Department realizes that it maybe difficult for a cashier to know at the time of sale/redemption of the deal-of-the-day voucher how muchthe customer paid for the voucher. As a result, the De-partment is considering a proposal that would allow re-tailers that do not have this information to calculate taxon the full value of the voucher.’’

The response followed up with four examples. In thefirst example, a customer purchases a $25 voucher goodfor $50 worth of food. The customer redeems thevoucher for exactly $50 worth of food. If the retailerknows at the time of the redemption that the customerpaid $25 for the voucher, then the amount subject to taxis $25. However, in the second example, the retailerdoes not know how much the customer paid for thevoucher, and therefore the entire $50 value of the mealis subject to sales tax.

The response and examples provided in the IDOR’stax practitioner Q&A document were reiterated in a pri-vate letter ruling issued by the department on Feb. 28,2012.37 The PLR was issued in response to a taxpayer’squery regarding a third-party internet-based marketer’sobligation to pay or collect sales tax on the sale of dis-counted promotions to customers for use at unrelatedeating and drinking establishments. In its response, the

IDOR included the discussion and same four examplesthat were in the Q&A document.

One issue addressed in the PLR but not in the Q&Adocument was the treatment of the sale of discountedpromotions by the third-party marketer. On this point,the PLR stated, ‘‘persons who are engaged in the busi-ness of selling cards or coupons, or vouchers, which en-title purchasers to the right to redeem those cards fortangible personal property, are not engaged in sellingtangible personal property. Rather, they are makingsales of intangibles. Such sales are not subject to theRetailers’ Occupation Tax.’’

Illinois’s proposed approach is similar to the guid-ance issued by Kentucky and Iowa, in that the amountultimately subject to tax (full value of the products orservices received or discount voucher price) is contin-gent upon documentation and/or knowledge of whatthe customer paid for the voucher. Although the IDOR’sQ&A response and the guidance given in the PLR maybe indicative of its view of how Groupon-type transac-tions should be treated for sales tax purposes, this guid-ance is merely an indication because the IDOR has notissued a formal directive or tax bulletin.

Comparison of Approaches TakenBy States That Have Issued Guidance

So how do the states’ positions compare? CurrentlyMassachusetts’s position in Draft Directive 11-XX isperhaps the most aggressive, or at least the most inflex-ible, as the state would require that sales tax be chargedon the full value in all instances regardless of how atransaction is structured. In the draft directive, Massa-chusetts has taken a very literal approach in findingthat because a Groupon or deal-of-the-day discountdoes not meet the definition of either a manufacturer’sor retailer’s discount, it is not treated as a cash discountthat reduces taxable sales price.

Where stated face value vouchers are issued, NewYork has taken a similar position—sales tax is calcu-lated on the full value of the products or services ac-quired before applying the value of the voucher. NewYork’s rationale is that this type of voucher functionslike a gift card as it can be treated like cash up to itsstated value. But where a specific product or servicevoucher is redeemed, sales tax is due only on theamount the customer paid for the voucher since thecustomer is only entitled to the product or service forwhich the voucher was obtained and the voucher other-wise has no stated face value.

In two states, Kentucky and Iowa, the redemption ofa Groupon may result in sales tax being charged eitheron the full value or the amount the customer paid forthe voucher; which amount is taxed is contingent on theretailer’s knowledge and/or documentation of theamount the customer paid for the deal. For instance, Io-wa’s general rule is that ‘‘in most situations, sales taxshould be charged on the full price of the item pur-chased.’’ However, ‘‘if the certificate states on its facethe price paid by the purchaser to the online buying ser-vice, tax is collected on that amount, rather than the fullprice of the item purchased.’’ Kentucky’s rule works inan opposite manner; the general rule is that sales tax isdue on the discounted sales price, but only if thevoucher indicates the discounted price or the local re-tailer knows and retains documentation of the dis-

35 IDOR Tax Practitioner Meeting Agenda: http://www.iltax.com/Announcements/2012_Practitioners_Meeting.htm.

36 IDOR Tax Practitioner Question and Answers to AdvanceQuestions Submitted Prior to Meeting: http://www.iltax.com/Announcements/Questions.pdf.

37 PLRs are issued by the department in response to specifictaxpayer inquiries concerning the application of a tax statuteor rule to a particular fact situation. A PLR is binding on thedepartment, but only as to the taxpayer who is the subject ofthe request for ruling and only to the extent the facts recited inthe PLR are correct and complete Illinois Dept. of Rev. PrivateLetter Ruling, ST 12-0009-GIL can be viewed at: http://www.iltax.com/LegalInformation/Letter/rulings/st/2012/ST-12-0009.pdf.

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counted price. Otherwise, sales tax is due on the fullvalue.

California’s and Maine’s guidance documents are es-sentially confirmations that Groupon discounts are tobe treated in the same manner as ‘‘cash discounts al-lowed and taken.’’ California’s rule states that sales taxis due on the amount the customer paid for the deal-of-the-day instrument plus any additional cash, credit, orother consideration given at the time of redemption.Under Maine’s guidance, Groupon-type discounts areto be treated in the same manner as a retailer’s dis-count.

What Approach Will Other States Take?With so few states having released definitive guid-

ance on deal-of-the-day discounts, it is fair to assumethat other jurisdictions will rule differently on howthese deals should be treated for sales tax purposes.

Illinois has indicated that it is working to develop apractical solution for retailers that also conforms to theIllinois statute, and other states responding toBloomberg BNA’s 2012 State Tax Department Surveyhave mentioned their existing regulations on the treat-ment of ‘‘cash discounts allowed and taken’’ in answerto a question about Groupon-type discounts. The surveyis scheduled for publication in April 2012.

Practitioners also can expect the Streamlined Salesand Use Tax (SST) project to weigh in on the subject.The project’s State and Local Advisory Council (SLAC)met Oct. 4, 2011, to discuss the application of sales taxto prepaid discount vouchers or certificates. BothStreamlined Sales and Use Tax Agreement memberand non-member states were allowed to participate inthis discussion. Of the more than 20 states that partici-pated, none proposed taxing the actual sale of thevoucher or certificate.

On the issue of whether sales tax should apply to thefull value or the amount the customer paid for thevoucher, states appeared to be split on this approach(which is consistent with the issued guidance to date),while at least a few states indicated that the amount themerchant actually received (the merchant’s ‘‘cut’’ fromGroupon) would be subject to tax. None of the statesthat have issued guidance to date have taken this ap-proach.

Further, a SLAC workgroup assigned to addresssales price for vouchers and layaway fees held a Feb. 1,2012, teleconference to discuss an issue paper on giftcards, vouchers, and layaway fees.38 A second telecon-ference on this issue was scheduled for March 22. Ac-cording to an outline for the issue paper, ‘‘several SLACdelegates have indicated that their states have receivedquestions concerning what is the measure subject to taxwhen the customer tenders a deal voucher, such as pro-vided by Groupon or Living Social, to make purchasesof products from a retailer. The issue has also beenraised by members of the business community.’’39

In March 2012, the SLAC workgroup published a re-vised issue paper40 addressing the concerns in the out-line, but more significantly, also included a survey thatstate officials were requested to complete by March 19.The survey included questions covering several aspectsof the deal-of-the-day transaction, such as:

s which party—the deal company or the retailer—the state considers to be the seller of the voucher,

s whether the sale of the voucher is considered asale of tangible personal property,

s what value the state considers to be the tax base,s whether the amount retained by the deal company

is considered a cost or expense of the retailer that is ex-cludable from sale price,

s what the tax base is when a voucher is redeemedafter the expiration of the promotional period, and

s whether the state would make a distinction be-tween a voucher issued for a specific product or serviceor one with a stated value.

The information obtained from this survey will beused by the SLAC workgroup to assist in the group’screation of an SST interpretive rule.41

It is clear from these developments that states arevery concerned with appropriately addressing the im-pact of Groupon type discounts on sale price and thatthe SST project intends to take an active role in devel-oping guidelines.

State Unclaimed Property IssuesOther questions to consider are whether expired

Groupon and other third-party deal-of-the-day instru-ments are unclaimed property for state escheat pur-poses,42 what the escheatable value of these instru-ments should be, and who is considered the holder ofthe abandoned property.43

38 Streamlined Sales Tax Governing Board Inc., notice ofteleconference can be found at: http://www.streamlinedsalestax.org/index.php?page=current-meeting-materials.

39 The SLAC Gift Cards, Vouchers and Layaway Fees IssuePaper Outline can be viewed at: http://www.streamlinedsalestax.org/uploads/downloads/SLAC%20Meeting%20Materials/2012/SL12001%20Sales%20price%20vouchers%20layaways%201_12.pdf.

40 The March 2012 SLAC Gift Cards, Vouchers and Lay-away Fees Issue Paper and State Survey can be viewed at:http://www.streamlinedsalestax.org/uploads/downloads/SLAC%20Meeting%20Materials/2012/SL12003%20Sales%20Price%20vouchers%20March%202012%20survey%20clean.pdf.

41 To assist in the SLAC workgroup’s discussion, the SLACSteering Committee also prepared a Sales Price Voucher Dia-gram illustrating the flow of funds. The diagram can be viewedat: http://www.streamlinedsalestax.org/uploads/downloads/SLAC%20Meeting%20Materials/2012/SL12002%20Sales%20Price%20Voucher%20Diagram%20Draft%202.pdf.

42 In determining whether a deal-of-the-day instrumentmay be considered escheatable property, state unclaimedproperty administrators may look to federal and state con-sumer protection laws and the outcome of the many casespending in the state courts regarding whether Groupon, Liv-ingSocial, and other third-party internet marketers are violat-ing consumer protection laws by issuing vouchers with expira-tion dates that are substantially shorter than those required forthe issuance of gift certificates by the federal Credit Card Ac-countability, Responsibility and Disclosure Act and corre-sponding state consumer protection laws. That is, if such liti-gation finds that deal-of-the-day instruments are deemed to begift certificates or gift cards for consumer protection law pur-poses, they may also be deemed to be the same type of instru-ment for state unclaimed property purposes.

43 In a June 2, 2011, filing with the Securities and ExchangeCommission, Groupon acknowledged that ‘‘Groupons may beconsidered gift cards, gift certificates, stored value cards orprepaid cards and therefore governed by, among other laws,the CARD Act and state laws governing gift cards, stored valuecards and coupons.’’ The Form S-1 added that ‘‘Some states

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All 50 states and the District of Columbia have un-claimed property laws that require businesses to reportand remit outstanding liabilities that have gone un-claimed by an employee, vendor, supplier, customer,shareholder, or other payee. Although an unclaimedproperty liability is not a tax, because a great percent-age of unclaimed property that escheats44 to the state isnever claimed by the rightful owner, this property even-tually adds to the state’s coffers.

If prepaid deal-of-the-day instruments are consid-ered unclaimed property, at what value should they es-cheat to the state? Would it be the full value for whichthe voucher was redeemable, the amount the customerpaid for the voucher, or the amount the merchant actu-ally received?

Another issue is who should be deemed the holder,that is, the party responsible for remitting the value ofan ‘‘abandoned’’ prepaid voucher to the state. Is itGroupon or another third-party deal-of-the-day mar-keter, or is it the merchant?45 Will state unclaimedproperty administrators recognize that the easiest ‘‘tar-get’’ of their enforcement efforts might be the third-party marketers? Their records would show paymentsreceived from all subscribers and the terms of the offer,including the offer’s expiration date, the ‘‘promotionalvalue,’’ and whether the voucher was issued for a spe-cific product or service or for a stated face value. Pursu-ing third party marketers would arguably be easier thanauditing hundreds or thousands of individual mer-chants.46

As the popularity of Groupon and other web-basedmarketing programs continues to grow, merchants whooffer deal-of-the-day promotions, and possibly thethird-party deal-of-the-day marketers, may be morelikely to be targeted for unclaimed property audits.47

This is because the deal-of-the-day vouchers often havea short expiration period—for example, many vouchersmust be redeemed within six months. Although sub-scribers are informed that state law may require alonger expiration date, and even though a voucher thathas lost its ‘‘promotional value’’ may still be redeemedfor the amount the subscriber paid for the deal-of-the-day instrument, many customers may simply believethe voucher is no longer usable.

ConclusionAs states have begun to recognize the need to ad-

dress the sales tax implications associated with third-party deal-of-the-day transactions, they have started is-suing guidance on how these instruments impact saleprice in their jurisdictions. Issuing this guidance is im-perative in particular for states that view these instru-ments differently than a typical retailer’s discount.

Without guidance, merchants may treat a voucherdiscount in the same manner as a ‘‘discount allowedand taken,’’ which in turn would diminish a state’s salestax base.

While only a handful of states have issued formalguidance to date, it is likely many more states will fol-low. What positions these states will take—whethersales tax should be charged on the full value or theamount the customer paid for the voucher—remains tobe seen. However, the result of actions and future rec-ommendations by the SLAC Committee of the SSTproject could greatly impact guidance issued by SSTmember, and possibly non-member, states.

Many issues arise in the area of state unclaimedproperty as well. Here again, absent definitive guid-ance, the states risk losing what ultimately may becomea significant source of revenue.

As states continue to deal with budget deficits, willthey assert their economic nexus standards on Grou-pon, LivingSocial, and other third-party deal-of-the-daymarketers? Groupon, for one, has become a householdname, and it would not have achieved this status with-out establishing a marketing presence in virtually everystate. This may seem absurd to some, but only twoyears ago a trademark owned by a company with nophysical presence in a state was deemed sufficient tocreate an economic nexus, and many states are adopt-ing economic nexus standards.48

This is yet one more area where technology and theway commerce is transacted are evolving faster thanthe existing state tax rules.

and foreign jurisdictions also include gift cards under their un-claimed and abandoned property laws . . . We do not remit anyamounts relating to unredeemed Groupons based upon our as-sessment of applicable laws. The analysis of the potential ap-plication of the unclaimed and abandoned property laws toGroupons is complex, involving an analysis of constitutionaland statutory provisions and factual issues, including our rela-tionship with customers and merchants and our role as it re-lates to the issuance and delivery of a Groupon. We are cur-rently subject to several actions claiming that Groupons aresubject to various unclaimed and abandoned property laws.’’Groupon’s S-1 filing may be viewed at: http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm#dm79801_selected_consolidated_financial_and_other_data.

44 States have the authority to claim abandoned propertyunder the derivative rights doctrine, which means that statesacquire the same rights to the unclaimed property as theowner held in the property. The state takes custody of the un-claimed property on behalf of the missing owner until thatowner reclaims it from the state.

45 For instance, LivingSocial’s Terms and ConditionsAgreement states that ‘‘the Merchant is the issuer of theVoucher. . .and shall be fully responsible for . . . any unclaimedproperty liability arising from unredeemed or partially re-deemed Vouchers.’’ See Section 7, LivingSocial Terms andConditions at: http://livingsocial.com/terms.

46 In the same way that states are attempting to force megaonline retailers to collect the use tax owed on thousands of in-dividual purchases by enacting ‘‘Amazon laws,’’ state un-claimed property administrators may similarly view the easewith which unclaimed funds can be collected by focusing theirefforts on the largest of the deal-of-the-day marketers.

47 See also, ‘‘Estimating Groupon’s Disclosed Yet Unquan-tified Liabilities,’’ Seeking Alpha, 10/31/11, in which the authordiscusses Groupon’s Refund Reserve and the significant dol-lars that may represent unclaimed monies, at http://seekingalpha.com/article/303640-estimating-groupon-s-disclosed-yet-unquantified-liabilities.

48 Geoffrey Inc. v. Comr. of Rev., 453 Mass. 17 (Mass. 2009).

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E-Commerce Law & Policy - December 2013

Act 96-1544), which was largelymodeled after New York's 2008 law.A suit was soon brought before theCircuit Court of Cook County,Illinois by the PerformanceMarketing Association, Inc.(‘PMA’), an organisation thatsupports and advocates for theperformance marketing industry.The Circuit Court agreed with thePMA's assertions that the Illinois‘click-through’ nexus law ispreempted by federal law andviolated the Commerce Clause ofthe US Constitution.

The Illinois Supreme CourtdecisionOn 18 October 2013, the IllinoisSupreme Court agreed with alower Circuit Court's decision thatthe Illinois ‘click-through’ nexuslaw was preempted by the federalInternet Tax Freedom Act of 2007(‘IFTA’), in accordance with the USConstitution's Supremacy Clause,rendering the Illinois law void andunenforceable. Performance Mktg.Ass'n Inc. v. Hamer, No. 114496(Ill. 18 Oct 2013).

In holding that federalpreemption applied, the IllinoisSupreme Court focused primarilyon two key elements of the IFTA:whether the requirement to collectthe Illinois use tax met the IFTA'sdefinition of a ‘tax’ and whetherthe ‘tax’ was a prohibited‘discriminatory tax on electroniccommerce.’

On the first point, the IllinoisSupreme Court held that the ‘click-through’ nexus provision, whichexpanded the definition of aretailer or serviceman required tocollect the Illinois use tax, met theIFTA's definition of a ‘tax’ whichthe IFTA does not limit to ‘revenueraising’ measures, but extends to‘the imposition on a seller tocollect and to remit to agovernmental unit any sales or usetax imposed on a buyer by agovernmental unit.’

The Illinois Supreme Court thenfocused on the ‘discriminatory’nature of the Illinois law. Here theCourt noted that the ‘click-through’ law specifically targetedout-of-state internet retailers with‘online’ marketing affiliatecontracts, but did not apply to out-of-state retailers who engage in‘offline’ marketing affiliatecampaigns such as with printpublishers (catalogues, magazines,newspapers) and over-the-air(radio, TV) broadcasters eventhough both operate similarly.Whereas ‘online’ affiliate marketingcampaigns generally involveaffiliates posting web-links on theirsites that refer visitors to theretailer's online store where theycan consummate a sale for whichthe affiliate is compensated, ‘offline’affiliate marketing campaigns mayinvolve promotional codes beingadvertised in a local periodical orover the air. Customers who makea purchase from the retailer andcite the promotional code alsogenerate a commission or othercompensation for the ‘offline’marketing affiliate. The IllinoisSupreme Court opined thatbecause ‘online’ affiliate marketingcampaigns are treated differentlyfrom those conducted ‘offline,’Illinois' ‘click-through’ provisionimposed a ‘discriminatory tax onelectronic commerce.’ On thispoint, the defendant argued thatthe ‘click-through’ nexus law wasnot discriminatory because a usetax collection obligation wasalready imposed on ‘offline’affiliates under a differentprovision within the Illinoisstatute. (35 ILCS 105/2(3)) TheCourt, however, found theprovision to which the defendantreferred required that the ‘offline’promotion be ‘disseminatedprimarily to consumers located inthe State and only secondarily tobordering jurisdictions,’ whereasthe publicly available webpages of

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08

Since 2008, several US states haveenacted nexus expanding lawswhich focus on the use of internetmarketing affiliates: unrelatedparties (individuals/businesses)that post web-links on their sitesthat link to the online stores ofinternet retailers and that arecompensated when website visitors‘click-through’ to the retailer'sonline store and complete apurchase. These so-called AmazonLaws have been enacted in aneffort to circumvent the physicalpresence requirement establishedin the 1992 US Supreme Courtdecision, Quill Corp. v. NorthDakota, 504 U.S. 298 (1992).Because a state cannot compel anout-of-state retailer to collect itstax unless the retailer has‘substantial nexus’ to the state(which Quill defined as a physicalpresence), states with ‘click-through’ nexus laws have taken theposition that in-state marketingaffiliates are effectively ‘agents’ ofthe out-of-state retailer whichthereby satisfies the physicalpresence standard.

In 2011, Illinois enacted a ‘click-through’ nexus law (Illinois Public

US Supreme Court may ruleon the ‘click-through’ nexusIllinois' Supreme Court ruled inOctober that Illinois Public Act 96-1544, a 'click-through' nexus lawrequiring out-of-state internetretailers to collect sales tax if theycommission to Illinois affiliates wholink to the retailer's website, isunenforceable. Sylvia Dion, Founderand Managing Partner of PrietoDionConsulting Partners LLC, aspecialist tax consulting firm,analyses the background to the‘click-through’ nexus law andwhether the US Supreme Court willissue its decision on whether to hearthese cases.

an ‘online’ marketing affiliate couldbe accessed from any computer orother digital device locatedanywhere in the world.

Finding that preemptionrendered the Illinois law void andunenforceable, the Illinois SupremeCourt did not reach the secondargument, that being whether theIllinois ‘click-through’ law violatedthe US Commerce Clause. Thiscame as a great disappointment tothe Court's one dissentingmember, Justice Karmeier, whonoted that the IFTA is a temporarymoratorium set to expire on 1November 2014 and once lifted,the Illinois' ‘click-through’ lawwould once again be valid and theCommerce Clause challenge wouldagain present itself. JusticeKarmeier noted his opposition tothe conclusion and added that hadpreemption been the sole basis forthe Circuit Court's ruling, judicialprocedure would have obligatedthe Illinois Supreme Court totransfer the appeal to the AppellateCourt and that the one issue thatwould have given the Courtjurisdiction to render an opinionwas whether the Illinois lawviolated the US Constitution.

Will the US Supreme Courtrender an opinion?Earlier this year, the Court ofAppeals of New York State (thatstate's highest court), consideredand rejected a Commerce Clausechallenge to New York's ‘click-through’ nexus law(Overstock.com, Inc. v. New YorkState Department of Taxation &Finance, 987 N.E. 2d 621, 622 (N.Y.2013)). Thus, to date, two differentstates have rendered oppositeopinions on whether to upholdwhat are essentially identical ‘click-through’ nexus laws.

It should be noted, however, thatthese conclusions were based ondifferent principals. The New Yorkcourt specifically addressed the

Commerce Clause challenge andheld that in-state marketingaffiliates met the substantial nexusstandard in Quill as they, in effect,solicited sales for the out-of-stateinternet retailer. As discussedabove, the Illinois Supreme Courtdid not address the CommerceClause issue because it found thatfederal preemption rendered theIllinois ruling void andunenforceable. Still, many in thelegal community believe these two‘conflicting’ rulings will spur theUS Supreme Court to finally weighin on ‘click-through’ nexus.

On 23 August, Amazon.com andOverstock.com, who challengedthe New York law, filed a petitionfor writ of certiorari with the USSupreme Court (Overstock.com,Inc. v. New York State Departmentof Taxation and Finance, DocketNo. 13-252; Amazon.com, LLC v.New York State Department ofTaxation and Finance, Docket No.13-259). Several interested partiesfiled amicus curiae briefs urging theCourt to review the case.

However, on 26 November, thedate on which it was anticipatedthat the US Supreme Court wouldissue its decision on whether tohear these cases, the Amazon andOverstock petition were excludedfrom the list of cases the SupremeCourt agreed to review. TheSupreme Court is expected toofficially list the cases it has deniedon Monday 2 December. At thatpoint, it will be clear whether theSupreme Court will weigh in on‘click-through’ nexus.

Impact of federal legislationOn 6 May 2013, the US Senatepassed federal legislation, theMarketplace Fairness Act of 2013(S. 743), which if enacted wouldgrant certain states the authority torequire many out-of-state (andforeign) sellers to collect tax onsales to in-state customersregardless of whether the seller has

a physical presence in the state. Asit currently reads, the proposaldoes not require states to complywith the federal law meaning thatstate ‘click-through’ and othernexus expanding laws would notcease to exist. The proposal’sprospect for final enactment isunclear. One reason is because theChairman of the House JudiciaryCommittee, Bob Goodlatte (R-VA), to which the legislation hasbeen referred, has publicly voicedhis concern that the legislationdoes not require enough of statesthat would benefit from it.

But federal ‘internet tax’legislation is not the onlylegislation that could impact thefate of ‘click-through’ nexus laws.Since the beginning of the year,there have been several proposalsintroduced by the US Congresswhich seek to make the IFTApermanent (two such proposals areH.R. 3086, the Permanent InternetTax Freedom Act, introduced 12September 2013; and H.R. 434, thePermanent Internet Tax FreedomAct, introduced 29 January 2013).If the IFTA becomes permanentprior to 1 November 2014, the dateon which the current moratoriumis set to expire, not only would theIllinois law likely remain void andunenforceable, but this would openthe door to IFTA challenges inother states with ‘click-through’nexus laws.

ConclusionWithout a doubt, these current USdevelopments could havesignificant impact on whetherinternet retailers, in the US andabroad, will be required to collecttax on sales to customers in statesin which they have no physicalpresence. There is much to come!

Sylvia Dion FounderPrietoDion Consulting Partners LLCsylviadion@verizon.net

E-Commerce Law & Policy - December 2013 09

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Federal‘internet tax’legislation isnot the onlylegislationthat couldimpact thefate of ‘click-through’nexus laws.Since thebeginning ofthe year,there havebeen severalproposalsintroduced bythe USCongresswhich seekto make theIFTApermanent.