Are you paying double tax on your Groupon?
States disagree over how deal purchases should be taxed. California has decided to levy sales tax only on what you pay, but New York argues you should pay tax on the full value.
This post is by Janet Novack of Forbes.com.
Good news for California deal-of-the-day addicts: The sales tax they have to pay when they use coupons purchased from Groupon, LivingSocial or other Internet daily deal sites has gone down.
In a special notice issued last month, the California State Board of Equalization said sales tax should be levied only on what a Groupon user has paid for an item, not the list price of the item he’s getting.
So if you paid $50 for a $100 Groupon that you use at a California merchant to buy a $100 item, the sales tax applies to only $50. If you buy a $115 item with that $100 Groupon plus $15 in cash, the sales tax applies to $65 — the $50 you paid to Groupon plus the extra $15 you had to fork over to the merchant.
The new ruling is significant because back in February a spokeswoman for the California BOE, which administers the state’s sales tax, said the board expected merchants to collect sales tax on the full face value of the item purchased — meaning the full $100 or $115. At that time, however, she also said the BOE had asked its legal counsel to review whether its position was correct.
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The new, more sensible California policy stands in sharp contrast to the position of New York state tax administrators, who concluded in this Technical Memorandum issued in September that merchants have to collect sales tax on the full face value of items purchased — if the deal vouchers have a dollar value printed on them. In other words, New York wants its cut on $100 even though you paid only $50 and the local merchant collected maybe $25. (More on the New York tax grab is here.)
The local daily deal business is now dominated by Groupon and LivingSocial (which countsAmazon.com as a major investor), but both Google and Amazon have gotten into the space themselves. BIA/Kelsey, an adviser to companies in the local media industry, estimates consumer spending on daily deals sites will grow from $873 million in 2010 to $1.97 billion this year to $4.2 billion in 2015.
Both California and New York agree that the sale of a Groupon itself isn’t taxable — what’s changing hands is an intangible right to receive property, not taxable tangible property itself — and that tax should be collected only when the Groupon is actually used.
Forcing local merchants to collect tax on the full face value of an Internet coupon could make daily deals less attractive to both consumers and local retailers, given how high sales taxes have climbed. In some parts of Los Angeles, residents pay a stiff 9.75% sale tax. In New York City, the combined state and city tax comes to a hefty 8.875%.
Ultimately, the proper taxation of Internet discount coupons will likely end up in litigation. There’s ample precedent– cities and counties have had extensive court battles with Expedia, Priceline and Orbitz over the proper taxation of discounted hotel rooms sold over the Internet.
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