While “deal of the day” vouchers from companies like Groupon can get you into a pricey art exhibit or let you eat at your favorite steak house for half the cost, they’ve caused some headaches in the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. world. Groupon offers the customer the chance to purchase a good or service for a significant discount with the retailer sharing in the revenues. There are currently questions about how to apply states’ sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. laws to these vouchers. Most states agree that the customer should be taxed at the price they pay for the voucher, not the face value from the retailer. Some states, like Nebraska, want the option to tax customers at the face value. For more detail on Nebraska’s proposed solution, see Joseph Henchman’s previous post on the subject.
The Streamlined Sales Tax Project (SSTP) Governing Board recently gave initial approval to a proposal that would require states to tax at the price paid unless the discounted price wasn’t clearly stated on the voucher. In another step in the right direction, SSTP didn’t even consider a proposal that would give the states the option to tax the vouchers at their face value. Not surprisingly, state tax officials from Nebraska opposed this vote, along with Georgia, Kansas, and New Jersey.
SSTP’s move to a unified rule on taxing the price paid for vouchers is good policy. People should pay sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. d on what they are spending, not based on an arbitrary value. Paying a tax on the face value from the retailer would be like buying a $50 sweater on clearance for $25 but then paying taxes on the $50. Customers would be outraged because the store indicated with the clearance sale that the sweater is now valued at $25.
Additionally, simplifying the tax to always apply to the price paid would lower the risk of class action law suits against the state for over collecting taxes. These lawsuits are costly and often outweigh the benefits of the additional tax revenue. The rule makes it obvious to both customers and retailers how many taxes should be collected at the time of purchase and severely reduces the risk of error.
While this all sounds like good news for the customers, there are still barriers in place before it can take effect. An additional affirmative vote is required and SSTP is establishing a work group to spend more time on the issue and examine other models for deals of the day. We won’t judge this too early but it’d be problematic to develop several different tax rules specific to each deal of the day model.
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