Ben Edelman - Last updated: May 9, 2013
When a consumer uses a coupon or discount voucher to reduce cost at a restaurant, what tax should the consumer pay? This page presents relevant rules from selected states. See also Consumer Protection in Online Discount Voucher Sales, which evaluates various other consumer protection issues in online discounts.
In California, a consumer need not pay tax on the amount of a restaurant discount voucher. A letter from Lori Mayoya, Business Taxes Specialist at the California State Board of Equalization, confirms that the amount of the discount is not taxable.
Example: A consumer pays $20 on the Groupon web site and receives a printable DDI [deal-of-the-day instrument] valid for $50 for the purchase of taxable meals at a participating restaurant. The consumer dines at the restaurant and redeems the DDI for exactly $50 and pays no additional amount for the meals other than the amount for "sales tax." The amount subject to tax is $20 which equals the amoun the customer paid for the DDI.
The September 2011 California Tax Information Bulletin confirms that sales tax is only payable on the amount the customer paid for a discount voucher:
In general, tax applies to the amount paid by the customer for the deal-of the day instrument plus any additional cash, credit, or other consideration required to be paid when the product is purchased. ... For example: An Internet-based company advertises a deal-of-the-day offer for $105 worth of custom picture framing for $50. A customer pays $50 for the coupon. The customer redeems the coupon for a custom frame priced at $120. The amount subject to tax is $65, which equals the amount paid for the coupon ($50) plus the additional $15 required to be paid to purchase the custom picture frame.
A letter from Richard Parsons, Tax Law Specialist in the Technical Assistance and Dispute Resolution section of the Florida Department of Revenue, offers inconsistent statements. On one hand, Parsons cites Florida Section 212.05, F.S., for the proposition that "sales price" is "the total amount paid" -- meaning that a discount, which a consumer does not pay, is not taxable. However, Parsons proceeds to state that "when the voucher is redeemed, sales tax is based on the full retail price of merchandise acquired" because "the online voucher is treated the same as ... a gift card."
I find Parsons' reasoning unconvincing. For one, Parsons does not consider the puzzle of charging consumers tax on amounts that were never paid by consumers or anyone else. Furthermore, Florida Administrative Code §12A-1.018 specifically provides that "discounts allowed and taken at the time of sale are deducted from the selling price, and the tax is due on the net amount paid" -- inconsistent with Parsons' conclusions.
If a discount voucher states on its face the price paid by the purchaser, then sales tax is colected on that amount. See Iowa Department of Revenue "What Are Groupons?"
If a discount voucher states on its face the price paid by the purchaser, or if the merchant knows and retains documentatino of the discounted price, then sales tax is colected on that amount. See Kentucky Sales Tax Facts newsletter, December 2011, at heading "Tax Treatment for Groupons."
When a voucher or gift certificate is purchased for less than its face value, Maine indicates that the difference between face value and purchase value may be treated by the retailer as a discount (and hence not taxed), since the retailed will not recover that discount from any other source. See Maine Revenue Services, Sales Fuel & Special Tax Division, Instructional Bulletin No. 39 - Sale Price Upon Which Tax Is Based, at heading 4.c.
In Massachusetts, a consumer need not pay tax on the amount of a restaurant discount voucher. Publicly-available documents confirm the relevant rules:
1) Massachusetts Department of Revenue Letter Ruling 84-74 provides that when a restaurant offers a discount, and receives little or no monetary compensation when the consumer redeems the discount, the amount of the discount is not taxable.
Example: A customer dines at a restaurant, buys $40 worth of food (at menu prices) and pays in part with a $25 Restaurant.com gift certificate (purchased online for $3). Despite the "gift certificate" label on the customer's voucher, Restaurant.com does not actually reimburse the restaurant. (Instead, the restaurants profits through generating repeat business and worth-of-mouth, as well as through the net $15 received and through gratuity paid on the full $40.) Because the restaurant receives no monetary compensation when the consumer redeems the discount, the discount is not taxable. The consumer should be charged tax only on the $15 actually paid to the restaurant, and not on the full $40.
The Massachusetts Sales Tax on Meals page is in accord:
If a vendor offers customers, upon presentation of a coupon, a discount from the usual price of a meal, the sales price subject to tax is the actual amount the vendor charges the customer.
2) Massachusetts Directive 12-4: Application of Sales Tax to Sales and Redemption of Qualifying Promotional Vouchers provides that the amount of the discount is not taxable when a consumer redeems a voucher sold at a discount from face value. Specifically, the amount of the discount (difference between face value and purchase price) is not subject to tax, so long as the voucher indicates the amount paid by the retail customer.
The Directive offers the following example::
A $40 restaurant voucher is sold and distributed on the Internet by a third party under contract with the restaurant for $20. The consumer pays $20 to the issuer and is e-mailed a voucher to redeem at the restaurant. The voucher's promotional value expires in one year. The issuer keeps 50% of the revenue in compensation for advertising services, $10 in this case, and remits $10 to the restaurant at the time the voucher is purchased. The customer subsequently buys a $40 meal (within one year of issuance) at this restaurant by redeeming the voucher that the customer purchased for $20. The Massachusetts sales tax on the meal (both state tax and local tax, where applicable) is calculated on the $20 paid for the voucher. The restaurant should charge the customer $1.25 state tax and $ .15 local tax (if sold in a city or town that has adopted the local tax on meals) and report, on its sales and use tax return, gross receipts of $20 subject to tax.
A letter from Miriam Giannini, Assistant Administrator in the Technical Services Section of the State of Michigan Department of Treasury, confirms that a consumer in Michigan should pay sales tax only on the total price actually received by the restaurant. When a consumer pays with a prepaid discount voucher, the restaurant receives at most the amount the consumer paid for the discount voucher, even if the voucher offers a greater face value. Typically, the voucher service takes a fee, in which case the restaurant receives even less.
Example: Suppose a consumer dines at a restaurant, buys $50 worth of food (at menu prices) and pays with a $50 Groupon voucher which the consumer purchased for $20. Suppose Groupon retains $5 and pays the restaurant $15. Under Giannini's letter, the consumer may be taxed on only $15 (the amount the restaurant actually received). The consumer may not be taxed on the $50 (the ordinary menu price for the food the customer ordered).
New York Technical Memorandum TSB-M-11(16)S advises restaurants to charge sales tax based on ordinary prices when a consumer redeems a "stated face value" voucher (e.g. a $50 voucher), even if the consumer purchased that voucher at a discount from face value.
A letter from Phyllis Shambaugh, Counsel, Sales & Use Tax Division of the Ohio Department of Taxation, argues that because a customer purchases a Groupon for value, the entire face value of the Groupon is taxable.
Forbes' Janet Novack reported in February 2011 that Texas Comptroller spokesman Allen Spelce says Texas consumers should be taxed on what they actually paid, even if they make a purchase using a voucher with a larger face value. Indeed, Texas Administrative Code Title 34, Part 1, Chapter 3, Subchapter O, Rule 3.301(e) provides that "When coupons or certificates are accepted by retailers as a part of the selling price of any taxable item, the value of the coupon or certificate is excludable from the tax as a cash discount."
Example: Suppose a consumer dines at a restaurant, buys $50 worth of food (at menu prices) and pays with a $50 Groupon voucher which the consumer purchased for $20. Consistent with Spelce's comment and Texas Administrative Code, the consumer may be taxed on only $20 (the amount the consumer actually paid). The consumer may not be taxed on the $50 (the ordinary menu price for the food the customer ordered).
I have written to various other states' tax departments to seek their views on this question. I will post their letters upon receipt.