Different States’ Approaches on Sales Tax Treatment of “Deal of the Day” Instruments

By Jamie C. Yesnowitz, J.D., LL.M., Washington, DC; Chuck Jones, J.D., CPA, Chicago, IL; Angela McNeany, J.D., LL.M., Chicago, IL; Giles Sutton, J.D., LLM, Dallas, TX; and Dale Busacker, J.D., CPA, Minneapolis, MN

Editor: Greg A. Fairbanks, J.D., LL.M.

State & Local Taxes

During the past few years, the business model used by internet-based companies such as Groupon and LivingSocial, which issue prepaid discount vouchers or “deal of the day” instruments, has grown increasingly popular. Guidance on the sales tax treatment of prepaid discount vouchers or certificates purchased on internet sites has been provided by several states recently, with more likely to follow soon.

Discount Voucher or Certificate Business Model

A recent trend in marketing has been the use of a technique in which vendors contract with third parties (deal websites) to issue vouchers or certificates that are sold on the internet to potential customers at a price often well below face value, which frequently inspires significant interest. The third parties usually sell the vouchers or certificates to customers on just one day. Following purchase, the customer can redeem the vouchers or certificates to acquire property or meals from those vendors that normally would be subject to sales tax.

Generally, when a voucher is issued, a vendor agrees to redeem it at face value within a specified period of time. When the voucher is used, the vendor typically receives part of the consideration from the issuer that the customer paid for the certificate, and the issuer retains the balance. The vendor may also receive advertising services in conjunction with its contract with the certificate issuer.

New York

To date, New York has provided the most detailed guidance on the sales tax treatment of prepaid discount vouchers (TSB-M-11(16)S (9/19/11)). The New York State Department of Taxation and Finance ruled that sales tax is not due on the sale of the voucher by the deal site; however, if the voucher is redeemed for taxable products or services, sales tax is due at the time the voucher is redeemed by the customer. The amount subject to sales tax depends on whether the voucher is (1) a specific-product or service voucher or (2) a stated-face-value voucher.

Specific-product or service voucher: A voucher is redeemable for a specific product or service if the voucher has no stated face value. An example is a voucher for “one oil change.” A voucher will be considered redeemable for a specific product or service even if the normal regular selling price of the product or service is stated on the voucher. When the customer redeems this type of voucher for a taxable product or service, the amount subject to sales tax is the total price that the customer paid for the voucher. There are some situations where vouchers are redeemable for a specific product or service on multiple occasions and, in such a case, the amount on which the sales tax will be computed is determined by dividing the total amount the customer paid for the voucher by the number of times a voucher can be redeemed. For example, if a voucher is redeemable for “two oil changes,” the amount subject to tax each time a customer redeems the voucher equals the amount the customer paid for the voucher on the deal website divided by two. If a voucher that has no stated face value is redeemable for both taxable and nontaxable services, the sale of taxable and nontaxable items is treated as a single unit, and the sales tax is computed on the total price the purchaser paid to the deal site for the voucher.

Stated-face-value voucher: A stated-face-value voucher is one with a specifically stated value, and when it is redeemed, the seller applies the voucher toward the price of the product or service purchased by the customer. The sales tax on a transaction using this type of voucher is computed on the selling price of the items before the value of the voucher is applied against the purchase price. This type of voucher is treated similarly to a gift certificate. In other words, the voucher is treated as cash up to its stated face value. Accordingly, when a customer redeems this type of voucher, sales tax is computed on the selling price of the items before the value of the voucher is applied against the purchase price.

If a customer redeems a stated-face-value voucher for products or services that are both taxable and nontaxable, the sales tax is computed only on the total amount of taxable products or services sold. If a stated-face-value voucher is redeemed for products or services with a value equal to or more than the face value of the voucher, any sales tax due must be collected from the customer at the time the sale occurs. However, if the voucher is redeemed for products and services valued at less than the voucher’s face value, the business may (1) choose to collect the sales tax from the customer on the total value of the taxable products and services at the time of the sale or (2) allow the customer to use the voucher’s remaining value to pay the sales tax on the transaction.


The California State Board of Equalization has issued a notice that provides guidance on the sales tax treatment of deal-of-the-day instruments (Special Notice L-297 (November 2011)). California sales tax generally applies to the amount paid by the customer for the “deal of the day” instrument plus any additional cash, credit, or other consideration the customer is required to pay when the product is purchased. If the type of sale is normally not subject to tax, the tax does not apply to the sale when the customer redeems the coupon.

The California notice provides two examples that illustrate the different treatment between specific-product vouchers and stated-face-value vouchers. California treats specific-product voucher transactions in the same manner as New York (tax on the amount paid for the coupon). As for stated-face-value vouchers, California subjects to tax only the amount paid for the coupon plus any additional amount above the intrinsic value of the deal-of-the-day offer, unlike New York, which would subject to tax the full value of the product.


The Massachusetts Department of Revenue recently issued a working draft directive addressing the application of sales tax to the sale and redemption of certificates sold by third parties on the internet (Working Draft Directive 11-XX, “Application of Sales Tax to Sales and Redemption of Third Party Coupons” (9/16/11)). The draft directive provides that the sale of a third-party certificate that may be redeemed for taxable property or meals at face value is not subject to sales tax.

According to the draft directive, the sales price subject to tax in transactions where the retail customer pays in whole or in part with a third-party certificate is not reduced by the amount of the certificate. Thus, assuming that the taxable item has a sales price equal to 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 consideration paid. Similar to New York, Massachusetts treats this type of transaction in the same manner as a gift certificate transaction. The draft directive does not address how Massachusetts will tax specific-product or service vouchers that have no stated value.

The draft directive specifically states that a certificate does not qualify as a manufacturer’s coupon or retailer’s coupon under Massachusetts law. A manufacturer’s coupon is one that is 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 one that is issued by a retail vendor (830 MA Code Regs. §64H.1.4(2)). Generally, cash discounts allowed and taken on sales are excluded from the definition of “sales price” (MA Gen. Laws ch. 64H, §1). A third-party certificate is not treated as a cash discount that reduces the taxable sales price.

In Massachusetts, a vendor’s books and records must accurately identify the source and type of certificates or coupons used by its customers (830 MA Code Regs. §62C.25.1). When accepting a certificate for taxable goods or services, the vendor must report the amount of the sales price as gross receipts subject to tax on its sales and use tax return as well as separately stating the tax on any receipt issued to the customer.

Other States

At a recent Streamlined Sales Tax Project (SSTP) meeting, many other states indicated that they are in the process of developing positions on their sales tax treatment of this type of transaction. While no state proposed to tax the original sale of the certificate, states are developing very different approaches concerning the taxation of the redemption of the certificate for products or services. For example, some states are likely to require the merchant to charge tax on the regular sales price of the product, while others may subject to tax the discounted price paid for the product, or the actual amount of consideration received by the merchant.


As states are starting to realize that a source of revenue may be available from the collection of sales taxes on purchases of discount vouchers or certificates, sellers will need to make a determination of what constitutes the proper measure of the sales tax base. It is unlikely that a consistent approach will take hold. Customers may be paying sales tax on the amount paid for the voucher, or may be paying sales tax on the entire face value of the taxable product or service. Undoubtedly, states will issue additional guidance that addresses the taxation of these transactions. It will be interesting to see whether the majority of states ultimately follow a gift certificate, coupon, or some kind of hybrid approach.

This item is an updated version of material that appeared in Grant Thornton’s State & Local Tax Alert.


Greg Fairbanks is a tax senior manager with Grant Thornton LLP in Washington, DC.

For additional information about these items, contact Mr. Fairbanks at (202) 521-1503 or greg.fairbanks@us.gt.com.

Unless otherwise noted, contributors are members of or associated with Grant Thornton LLP.

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