California Sales Tax Treatment of Deal-of-the-Day Instruments Discussed

The California State Board of Equalization has issued a notice detailing the sales and use tax treatment for Deal-of-the-Day Instruments (DDI). Websites such as Groupon offer DDIs which feature coupons redeemable for merchandise or service at local or national retailers. Customers purchase the DDIs at discounted prices which allow them to buy a set amount of products or services from the retailer offering the DDI. In accordance with California regulation, DDIs with the specific terms and conditions listed in the notice are considered retailer coupons, so the retailer is the issuer of the DDI. The terms and conditions can be viewed here. When a DDI is redeemed by the customer, the retailer’s gross receipts subject to tax include the amount paid by the customer for the DDI plus any additional cash, credit, or other consideration paid to the retailer at the time of the purchase with the exception of sales tax. Therefore, the retailer must collect tax on the DDI selling price which the customer paid to the DDI Provider even if no additional revenue is collected at the time of redemption. If additional revenue is paid by the customer in conjunction with the redemption, that additional amount is also subject to tax.

The sale of the DDI is not considered a sale of tangible personal property or a service. Instead, the DDI is evidence of an intangible right to receive tangible personal property or a service at a later date. Therefore the sale of the DDI itself is not subject to tax. When the DDI is redeemed, it is that sale that may be subject to tax. If the type of sale is not normally subject to tax, then tax would not apply to the sale when a DDI is redeemed. Sales that are generally not subject to sales tax in California are sales of services, sales of cold food to go, and charges for admission to an event. (Special Notice L-297, California State Board of Equalization, November 2011)

Posted on December 13, 2011