Introduction: As a marketing technique, vendors may contract with third parties to sell and distribute vouchers on the Internet to potential customers at below face value; the vouchers can subsequently be redeemed to purchase taxable property or meals from those vendors. The offer may require a minimum number of participants to sign up or the offer will be withdrawn. When a voucher is issued, the vendor agrees to redeem it at its promotional value, generally within a specified time period. Typically, when the voucher is sold, the vendor receives from the voucher distributor part of the consideration that the potential customer paid for the voucher, and the balance is retained by the distributor in compensation for the provision of advertising services. These promotional arrangements are known under various names in the marketplace including Deal of the Day, Groupon, and LivingSocial. A “qualifying promotional voucher” for purposes of this Directive must clearly state both the time limited promotional (face) value and the amount paid by the customer for the voucher, and must remain valid for redemption for at least the amount paid by the customer indefinitely.
Issue 1: Is the sale of a qualifying promotional voucher that may be later redeemed for taxable property or meals at face value subject to sales or use tax?
Directive 1: No, the sale of a qualifying promotional voucher that may be later redeemed for taxable property or meals 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 qualifying promotional voucher?
Directive 2: The sales price subject to tax in transactions where the retail customer uses a qualifying promotional voucher is the amount paid by the customer for the voucher plus any additional cash or other consideration paid to the vendor by the customer in consideration for the sale. 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:
As to Directive 1, the Department ruled in LR 81-4 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, any sales tax due is collected at the time of sale. The Department has concluded that the sale of vouchers described in this Directive issued by third parties should be treated like gift certificates at the time of sale; thus any tax is due when the vouchers are redeemed, not when they are issued.
With respect to Directive 2, 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 … In determining the sales price, the following shall apply: (a) no deduction shall be taken on account of … (ii) the cost of materials used, labor or service cost, interest charges, losses or other expenses … 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 qualifying promotional voucher or coupon published on the Internet by a third party under a contractual arrangement with the vendor as described in this Directive will be treated similar to a retailer’s coupon that reduces the vendor’s gross receipts subject to tax. During the period of time that the promotional value is in effect (including any voluntary extension of the stated promotional period by the vendor), the difference between the promotional (face) value of the voucher and the amount actually paid by the retail customer for the voucher is excluded from the sales price subject to tax as a cash discount, as discussed in greater detail in the examples below. Nonqualifying vouchers, including any that do not state the amount paid by the retail customer for the voucher, will not be treated as retailer’s coupons and no reduction should be made to the sales price subject to tax.
A vendor’s books and records must accurately identify the source and type of vouchers 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 Directive:
Example 1: A $40 restaurant voucher is sold and distributed on the Internet by a third party under contract with the restaurant for $20. The consumer pays $20 to the issuer and is e-mailed a voucher to redeem at the restaurant. The voucher’s promotional value expires in one year. The issuer keeps 50% of the revenue in compensation for advertising services, $10 in this case, and remits $10 to the restaurant at the time the voucher is purchased. The customer subsequently buys a $40 meal (within one year of issuance) at this restaurant by redeeming the voucher that the customer purchased for $20. The Massachusetts sales tax on the meal (both state tax and local tax, where applicable) is calculated on the $20 paid for the voucher. The restaurant should charge the customer $1.25 state tax and $ .15 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 $20 subject to tax.
Example 2: Same facts as Example 1, except the customer’s bill at the restaurant is $75. The Massachusetts sales tax on the meal (both state tax and local tax, where applicable) is calculated on the $20 paid for the voucher plus $35 additional cash paid by the customer. The restaurant should charge the customer $3.44 state tax and $.41 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 $55 subject to tax.
Example 3: Same facts as Example 1, except the customer’s bill at the restaurant is $30. The Massachusetts sales tax on the meal (both state tax and local tax, where applicable) is calculated on the prorated share of the $20 paid for the $40 voucher which was applied to the meal. Tax should be calculated on 30/40 x 20 = $15. The restaurant should charge the customer $.94 state tax and $.11 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 $15. Alternatively, the vendor may allow the customer to use the remaining value of the voucher to pay the sales tax on the transaction. For example, the remaining $10 value of the $40 voucher described in this example could be used by the customer towards the payment of $1.05 state and local sales tax. However, vendors must remit the full amount of tax due on the transaction even if the vendor did not collect any cash from the customer when it sold the meal.
Example 4: Same facts as Example 1, but the promotional value of the voucher has expired at the time the meal is purchased. The customer buys a $40 meal and pays by redeeming the voucher for the $20 originally paid plus $20 cash. The Massachusetts sales tax on the meal (both state tax and local tax, where applicable) is calculated on the $20 redemption value of the voucher plus $20 additional cash paid by the customer. 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 5: A $300 “golf package” voucher is sold and distributed on the Internet by a third party under contract with the golf course for $150. The consumer pays $150 to the distributor and is e-mailed a voucher to redeem at the golf course for a package valued at $300, which includes non-taxable greens fees priced at $250 and the taxable rental of golf carts priced at $50. The compensation for advertising services is similar to Example 1; the golf course receives a payment from the voucher issuer for $75. Upon redemption of the voucher within the promotional period, the golf course must collect and remit sales tax on the golf cart rentals of $1.56 ($25.00 x .0625) and report, on its sales and use tax return, gross receipts of $25.00 subject to tax. The amount paid for the voucher must be prorated between the non-taxable and taxable charges in the same manner as the non-discounted charges for the package.
Commissioner of Revenue
July 16, 2012