Today is June 28, the date in 2012 when the U.S. Supreme Court handed down NFIB v. Sebelius, upholding the Affordable Care Act as authorized under the Taxing Clause. Ours was one of the few briefs submitted that...
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- Coupons Shouldn't Be Taxed, but Government Vouchers ...
Coupons Shouldn't Be Taxed, but Government Vouchers Should
Recently, Best Buy sent checks for a few dollars to customers in Pennsylvania, Texas and Wisconsin. The checks are refunds for sales tax charged on the portion of their digital television converter boxes they paid for with federal government vouchers.* Those states' departments of revenue have ruled that the $40 voucher should be exempt from tax. As The Consumerist reports, one typical Texas customer received a letter of apology and a check for $3.30.
How did Best Buy, a huge national retailer, get confused about how it was supposed to tax these purchases? Well, there are over 7,400 sales tax-levying jurisdictions in the United States, and the differences between their rules about coupons can be confusing, even for a company with scores of lawyers.
Coupons and Sales Tax
The key area of confusion is that most states treat manufacturers' coupons differently from retailers' coupons.
If the retailer issues a coupon and expects no reimbursement from any other party (i.e., a retailer coupon), that is treated like a true reduction in price; first, the coupon is applied, then sales tax is calculated on the final sale price.
$40.00 original price
($10.00) retailer's coupon
$ 1.50 5% sales tax
$31.50 tax-inclusive price
However, if the retailer expects reimbursement from the manufacturer or another third party (as is typical with manufacturers' coupons) tax is charged on the price before application of the coupon.
$40.00 original price
$ 2.00 5% sales tax
($10.00) manufacturer's coupon
$32.00 tax-inclusive price
Other states treat all coupons as discounts, regardless if they will be reimbursed by the manufacturer. In other words, "Method #1" above applies to all coupons. States using this rule include Connecticut, Massachusetts, Pennsylvania and Texas.
Since Pennsylvania and Texas are both states where manufacturer's coupons are not taxable, it's somewhat surprising that Best Buy used "Method #2" in those states. Our guess is that Best Buy viewed the vouchers not as coupons but as gift cards. Gift card purchases are ordinarily taxable.
So, How Should Coupons Be Taxed?
Our guiding principles for sound tax policy include simplicity and neutrality. To make sales tax simple and neutral, a state should treat all coupons equally. Here's our thinking:
- Simplicity. Complicated rules on coupon purchases are burdensome to retailers, especially smaller ones or those that operate without modern Point-of-Sale equipment. Here, for example, are instructions from the New York State Department of Taxation on Finance on processing purchases that involve manufacturer's coupons, retailer's coupons, food stamps, and cash:
When a customer uses food stamps, cash, and coupons to purchase food and beverages, you: first, apply any store coupon to reduce the purchase price of the item to which the store coupon relates; second, apply any manufacturer's coupon to the purchase price of the item to which it relates; where the item is taxable, collect tax on the value of the manufacturer's coupon (that is, for example, a coupon encoded with mfg.); third, apply the food stamps to the remaining purchase price of any taxable, eligible items and then to the remaining purchase price of any exempt eligible items; and fourth, if the customer does not have enough food stamps to cover the entire bill, collect the tax on any remaining balance due on taxable items paid for with cash (or credit card).
Uniform tax treatment of coupons would be simpler and would reduce compliance costs.
- Neutrality. A neutral sales tax system should tax all consumption exactly once, at the same rate. The amount of consumption is determined by the consumer price of goods purchased. Therefore, a neutral sales tax should deduct coupon amounts before calculating tax, so that discounts by coupon are treated uniformly with discounts by other methods. Furthermore, a neutral sales tax should make no distinction between manufacturer's coupons and retailer's coupons: they both reduce the final price paid for the good, and whether that reduction is borne by the retailer or the manufacturer is not relevant in determining the amount of consumption.
What About Those DTV Converter Vouchers?
The Pennsylvania, Texas and Wisconsin departments of revenue have ruled, and these "coupons" aren't taxable in those states. However, we actually think Best Buy's instinct was right: unlike true coupons, the DTV vouchers really are gift cards, and so they should be taxed.
The government voucher doesn't represent a price reduction. All it does is shift part of the purchase cost from the consumer to the government, and so the amount of consumption is still properly viewed as the full price. When taxpayers received their stimulus checks earlier this year, they had to pay sales tax on whatever they bought with them. The fact that the DTV vouchers are earmarked for a specific purpose shouldn't make them different.
*Psst: you're entitled to two vouchers, worth $80! Apply here to get some of your tax dollars back in highly restricted form!
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