Different states 'approaches on sales tax treatment of "deal of the day" instruments.

• Author: Yesnowitz, Jamie C.

During the past few years, the business model used by internet-based companies such as Group on and Living Social, 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-llfl6)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...