For most transactions, calculating sales 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. is simple: multiply what the consumer paid by the tax rate. This morning, I paid $3 for a donut and milk, and since the DC tax on meals is 10 percent, I owed 30 cents in tax.
It’s those minority of cases that create complexity: different tax rates, different taxes, and exempt items. One such complication follows the rise of “deal of the day” websites like Groupon (available in about 150 U.S. cities), LivingSocial (available in key large cities), and about a hundred others. States tax these under dramatically different rules (PDF). For the uninitiated, the Wikipedia article on Groupon explains how it works:
The company offers one "Groupon" per day in each of the markets it serves. The Groupon works as an assurance contract using ThePoint's platform: if a certain number of people sign up for the offer, then the deal becomes available to all; if the predetermined minimum is not met, no one gets the deal that day. This reduces risk for retailers, who can treat the coupons as quantity discounts as well as sales promotion tools. Groupon makes money by keeping approximately half the money the customer pays for the coupon.
For example, an $80 massage could be purchased by the consumer for $40 through Groupon, and then Groupon and the retailer would split the $40. That is, the retailer gives a massage valued at $80 and gets approximately $20 from Groupon for it (under a 50%/50% split). The consumer gets the massage, in this example, from the retailer for which they have paid $40 to Groupon.
So, taking that massage example, is 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. imposed on $80, $40, $20, or $0?
- If we’re taxing the value of the service provided to the consumer, that’s $80. However, we generally measure value of a transaction by the amount that changed hands, not one side’s subjective valuation.
- If we’re taxing the amount the consumer paid, that’s $40.
- If we’re taxing the amount the retailer received for providing the service, that’s $20. This only works if you ignore the Groupon receipt as a taxable transaction.
Leave it to the good people at the Streamlined Sales Tax Governing Board to have a series of fruitless meetings to try to figure this out. Agreement is actually pretty widespread: while state officials disagree on a question like “who is the seller,” they for the most part agree that tax should be collected when the voucher is redeemed, based on the amount that the consumer paid for the voucher. Only Arizona and Ohio, it appears, insist on the right to tax the full “stated value” of the good. (In our example, $80 for the massage.)
Nebraska officials, it turns out, are the stumbling block: represented by Department of Revenue official Ellen Thompson, they are insisting that any standardized rule on taxing deal of the day transactions allow states to tax that full “stated value.” (They analogize it to gift cards, the full value of which are generally taxed at the time of purchase.) Tennessee officials are heroically pushing a rule that only lets states tax the amount paid by the customer. Some other states are searching for a compromise.
Tennessee is right and Nebraska is wrong: tax should be paid on the amount paid by the consumer, not some subjective value that the consumer didn’t pay. John Buhl’s excellent Tax Notes piece (subscription req'd) cites AT&T’s Deborah Bierbaum warning that “retailers could face class action lawsuits by taxing customers on the full face value even if the voucher shows the reduced price the consumer actually paid.” Not to mention that it would result in angry customers demanding to know why they’re paying tax on $80 for something they only paid $40 for.
Deal of the days should be treated like coupons and discounts, and states should only be taxing actual money that changes hands, not subjective valuation by one side. I hope Nebraska backs off.Share