General Fact Pattern:
Deal company (e.g., Groupon, Living Social, etc) sells a “voucher” to a consumer for $50. The voucher is redeemable at a Retailer’s place of business for $100 worth of goods or services. After the “promotional period” ends, the voucher can be redeemed for $50.
The proposed rule is only applicable if the face value and purchase price are visible on the voucher.
Under the proposed rule, no tax is due on the purchase or acquisition of the voucher.
Upon redemption of the voucher for the merchandise, tax is due on the discounted value.
Voucher Acquisitions/Transactions Between Deal Companies and Purchasers
Numerous questions have been raised regarding the acquisition of the voucher—either by “earning” it, getting it with points, or getting it for a discounted amount. Specific examples are addressed below. In general, the acquisition of the voucher does not give rise to a taxable transaction. As such, this is relevant only to the extent of what may be visible to the retailer.
- Example 1: $20 Voucher sold by Deal Company for $10. Arrives as two $10 vouchers. The two vouchers do not disclose the amount paid for each voucher. The Deal Company also offers a free voucher when 4 of your friends buy this deal. The “free” vouchers do not indicate that the voucher was provided at no charge.
Result: Voucher Rule Does Not Apply
Regarding the two $10 vouchers: The definition of a “voucher” in the rule specifically provides that a voucher is an instrument where both the face value and the amount paid by the purchaser are noted on the voucher. Based on the facts provided in Example 1, the two ten dollar “vouchers” do not disclose the amount paid for each voucher. As such, the rule would not apply to these instruments.
Regarding the vouchers that were provided at no charge, the rule would not apply at the time that the vouchers are acquired, whether provided free of charge, or earned by specific actions of the purchaser (i.e., getting 4 friends to sign up). No states have taken the position that the sale of the voucher is a taxable event. Upon redemption of the voucher for the $20, the rule would only apply if the customer provides the seller a voucher that shows a face value and amount paid by the purchaser. It is irrelevant whether the voucher was given to the purchaser (such as a gift). Rather, the tax applied on the redemption of the voucher will be determined based on the information on the face of the voucher.
- Example 2: $20 Voucher sold by Deal Company for $10. Frequent user of Deal Company earns free voucher by redeeming rewards points. The “free” voucher does not indicate that the voucher was provided at no charge. [We assume this means that the purchaser receives a voucher that shows the $20 deal and the purchase price of $10]
Result: Voucher Rule Applies Upon Redemption if $10 Price Paid is on the Face of Voucher
Similar to Example 1, the acquisition of the voucher is a non-taxable transaction. If the purchaser receives a voucher that indicates a redemption amount of $20, and a purchase price of $10, tax would apply based on the information on the face of the voucher. In this case, tax would apply to $10.
- Example 3: Deal of the Day offered discounts such as $10 off ANY voucher, or Buy one voucher, get one free.
Deal company advertises $10 off any voucher. Purchaser buys a voucher that provides $50 of merchandise for $25. Deal company charges purchaser $15. The voucher indicates that the face value is $50 and purchase price is $25.
Result: Voucher Rule Applies to Redemption Based on Information on Face of Voucher
Under the rule, tax applies to $25 because the face value and purchase price are stated on the instrument. Taxability of the redemption of the voucher is not impacted by discounts between the Deal company and the customer because the retailer was not a party to the discount between the deal company and the customer.
Redemption after promotional period
Example 4: Voucher sold for $20 entitles purchaser to $50 towards food and drinks. Purchaser redeems the voucher after the stated expiration date. Seller honors the voucher for the $50. Deal Company pays Seller $0 and retains $20.
Result: The rule does not specifically address the scenario where a retailer chooses to honor a voucher after the stated expiration date. Even though the retailer is not receiving anything from the deal company, tax would apply to the amount paid by the customer, or $20. The payment between the deal company and the retailer does impact the taxable price upon redemption.
Example 5: Voucher sold for $19 entitles purchaser to $99 of services. Purchaser redeems the voucher after the stated expiration date. Seller honors the voucher for $19. Deal Company pays Seller $0 and retains $19.
Result: If the customer purchases $19 of taxable items, and uses the voucher to pay for the items,tax applies to $19. If the customer purchases $99 of taxable items and provides the voucher and an additional $80, tax applies to $99. Similar to Example 4, the payment between the deal company and the retailer does not impact the amount of tax due on redemption.
Other Examples
Example 6: A voucher is sold for $20 which entitles purchaser to $50 towards food and drinks. Deal Company pays Seller $10 and retains $10. Seller credits $10 to advertising expenses; not sales revenue.
Result: Voucher Rule Applies Based on Information on the Face of Voucher
Assuming the face of the voucher has both the $50 value and $20 purchase price, tax applies to $20 upon redemption for the food and drinks.
Example 7: Voucher sold for $25 entitles purchaser to use of equipment for one day. Voucher does not identify the face value of equipment rental.
Result: Voucher Rule Does Not Apply
Since both the purchase price and face value of the item is not on the face of the voucher, the rule does not apply to this transaction.
Example 8: Voucher for $25 Gift Certificate sold by Deal Company for $16.25. Deal Company retains $16.25 and provides future advertising services to Seller.
Result: Voucher Rule Does Not Apply
No tax would apply to the redemption of this voucher. The voucher is redeemed for a non-taxable gift certificate. Further, the rule provides limitations on the use of a voucher including the conversion to a gift certificate. As such, the rule would not apply.