WORKING DRAFT FOR PRACTITIONER COMMENT 9/16/11
Sales Tax
Draft Directive 11-XX
Application of Sales Tax to Sales and Redemption of Third Party Coupons
Introduction: As a marketing technique, vendors may contract with third parties to issue certificates that are sold on the Internet to potential customers at below face value and can be redeemed to purchase taxable property or meals from those vendors. Such an offer may require a minimum number of participants to sign up and may lapse where this minimum is not obtained. When a certificate is issued, the vendor agrees to redeem it at face value, generally within a specified time period. Typically, the arrangement is that when the certificate is used, the vendor receives from the certificate issuer part of the consideration that the potential customer paid for the certificate, and the balance is retained by the issuer. The vendor also receives advertising services in conjunction with its contract with the certificate issuer. These promotional arrangements are known under various names in the marketplace including Groupon, LivingSocial, and BuyWithMe.
Issue 1: Is the sale of a third party certificate that may be redeemed for taxable property or meals at face value subject to sales or use tax?
Directive 1: No, the sale of a third party certificate that may be redeemed for taxable property or meals at face value is not subject to tax.
Issue 2: What is the sales price subject to tax when taxable tangible personal property or meals are purchased using a third party certificate?
Directive 2: The sales price subject to tax in transactions where the retail customer pays in whole or part with a third party certificate is not reduced by the amount of the third party certificate. Thus, assuming that the taxable item has a sales price equal or greater than the face value of the certificate, the "sales price" includes the face value of the certificate as well as any cash or other consideration paid. The vendor must report that amount as gross receipts subject to tax on its sales and use tax return. The vendor also must separately state the sales tax on any receipt issued to the customer as required by G.L. c. 64H, § 5.
Discussion of Law:
In LR 81-4, the Department ruled that the sale of gift certificates did not involve a transfer of tangible personal property within the meaning of G.L. c. 64H, § 1, and that when a vendor makes a sale of a meal or other taxable sale, and the purchaser presents a gift certificate in lieu of cash, the "sales price" includes the face value of the certificate as well as any cash or other consideration paid. The Department has concluded that the certificates described in this TIR issued by third parties should be treated the same as a gift certificate issued by a vendor for sales tax purposes.
For purposes of determining the price to which the sales tax applies, "Sales price" is defined as the total amount paid by a purchaser to a vendor as consideration for a retail sale, valued in money or otherwise … there shall be excluded (i) cash discounts allowed and taken on sales…." G.L. c. 64H, § 1. The Department's regulation on Discounts, Coupons and Rebates, 830 CMR 64H.1.4 further provides as follows:
Manufacturer's and Retailer's Coupons. For purposes of 830 CMR 64H.1.4(2), a "manufacturer's coupon" is a coupon issued by the manufacturer, supplier or distributor of tangible personal property to be redeemed by a retail purchaser of that property. A "retailer's coupon" is a coupon issued by a retail vendor. Generally, manufacturer's coupons and retailer's coupons that entitle the retail customer to a reduction in the sales price at the time of the sale will be treated like cash discounts. See 830 CMR 64H.1.4(1). Other types of coupons will not be treated as cash discounts. …
A certificate or coupon issued by a third party as described in this Directive does not qualify as a manufacturer's or retailer's coupon because it is neither issued by the manufacturer nor the retailer [1] nor is it the result of any joint arrangement between the manufacturer and the retailer, as is the case with scan cards issued by some supermarkets. [2] A third party certificate is therefore not treated as a cash discount that reduces the taxable sales price.
A vendor's books and records must accurately identify the source and type of certificates or coupons used by its customers. These records must be kept for the amount of time specified in the Record Retention Regulation, 830 CMR 62C.25.1, and must be produced for review by the Department in the course of an audit of the vendor.
The following examples illustrate the provisions of this TIR:
Example 1: A $40 restaurant certificate is sold on the Internet by a third party (not the vendor) for $20. The consumer pays $20 to the issuer and is e-mailed a certificate to redeem at the restaurant. The certificate may expire in one year or less. The customer subsequently obtains a $40 meal at this restaurant by redeeming the certificate that the customer purchased for $20. The issuer keeps 50% of the revenue, $10 in this case, and remits $10 to the restaurant at the time the certificate is redeemed. The restaurant also receives advertising services from the issuer. The Massachusetts sales tax on the meal (both state tax and local tax, where applicable) is calculated on the $40 price for the meal. The restaurant should charge the customer $2.50 state tax and $ .30 local tax (if sold in a city or town that has adopted the local tax on meals) and report, on its sales and use tax return, gross receipts of $40 subject to tax.
Example 2: A $280 "golf package" certificate is sold on the Internet by a third party (not the golf course) for $140. The consumer pays $140 to the issuer and is e-mailed a certificate to redeem at the golf course for a package valued at $280, which includes non-taxable greens fees regularly sold at $200 and the taxable rental of golf carts regularly sold at $80. The revenue sharing arrangements are similar to those in Example 1; the golf course receives a payment from the certificate issuer as well as advertising services. Upon redemption of the certificate, the golf course must collect and remit sales tax on the golf cart rentals of $5.00 ($80.00 x .0625) and report, on its sales and use tax return, gross receipts of $80.00 subject to tax.
WORKING DRAFT FOR PRACTITIONER COMMENT 9/16/11
[1] See Lisa McGonagle v. Home Depot, U.S.A, Inc., 915 N.E.2d 1083. (Appeals Court, 2009). Further appellate review denied. 455 Mass. 1108 (SJC, 2009). "EFI" (an acronym for "Energy Federation, Inc.") coupons used in conjunction with the purchase of energy efficient light bulbs did not reduce the taxable sales price. The EFI coupons did not qualify as manufacturer's or retailer's coupons because their originator was a third party contributing (by redemption of its coupons) to the "gross receipts" of vendor for the purchase in question.
[2] See LR 97-3 and 830 CMR 64H.1.4 pertaining to scan cards.