March 28, 2013
You don’t have to be the next Groupon to include a daily (or less frequent) deal component into your business model. Many startups now are incorporating group buying or instant discounts into their offerings. When they do, important tax considerations come into play.
Fair warning…what this post is about to talk about is state and local taxation, also known by the acronym SALT. The acronym is appropriate because sometimes dealing with this area of tax can be like rubbing the contents of a box of salt into your own eyes.
On the plus side, if you understand the basics, you’ll be light years ahead of 99 percent of people, whether you’re selling daily deals or using them to generate customer traffic.
We’re talking about the basic daily deal here…in other words…Customer pays $12.50 for $25 worth of a product or service. For our purposes, let’s say the deal is good for $25 worth of food and beverage (and merriment) at a restaurant. Let’s also say that we’re in a state that collects sales taxes on the sale of restaurant food and beverage.
Here are a couple of scenarios involving one of pop culture’s favorite restaurant owners, Nat Bussichio of Beverly Hills 90210 fame…that’s right, proprietor of the Peach Pit.
Scenario 1 (No Deal): Brandon and Brenda come into the Peach Pit for lunch. The bill comes out to $25. The sales tax rate is 10%. $2.50 of sales tax is added to their bill ($25.00 X 10%). They pay $27.50 in total ($25.00 bill plus $2.50 sales tax). Nat keeps the $25 and gives the $2.50 of tax to the State of California.
Scenario 2 (With Deal): Brandon and Brenda come into the Peach Pit for lunch. Their bill comes out to $25. The sales tax rate is 10%. Brandon and Brenda pay with a daily deal voucher they bought a few months ago (they paid $12.50 for the voucher, which is worth $25 of food and beverage). Nat is totally confused as to whether he has to charge them tax on the full amount of the bill ($25) or only what they actually paid for the voucher ($12.50) or maybe even the amount of cash that Nat receives from the sale of the voucher ($3).
The answer to this question varies depending on the state. Illinois provided its answer about a year ago.
In Illinois, the answer hinges upon whether or not Nat knows how much Brandon and Brenda paid for their voucher. In other words:
- If Nat knows that Brandon and Brenda paid $12.50 for their $25 deal, Nat charges sales tax on the $12.50. So, Brandon and Brenda would pay their bill by giving Nat the $25 deal voucher plus paying $1.25 of sales tax ($12.50 X 10% Tax).
- If Nat doesn’t know that Brandon and Brenda paid $12.50 for their $25 deal, Nat charges sales tax on the full $25. So, Brandon and Brenda would pay their bill by giving Nat the $25 deal voucher plus $2.50 of sales tax ($25 X 10% Tax).
- It doesn't matter how much Nat actually gets out of the sale of the voucher itself.
Again, these are only the Illinois rules, and other states may or may not apply the same standards.
Whether you’re a startup that sells deals or a merchant that uses them to drive customer traffic, it’s important to understand how these rules work.
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