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Massachusetts Sales Tax on Online Coupons


The Massachusetts Department of Revenue issued a directive (12-4) explaining how sales tax applies to online coupons and vouchers purchased for taxable meals or products. 

General Guidance 

The Massachusetts directive offers sales tax guidance for "qualifying promotional vouchers" that vendors purchase from third parties, who ". . . sell and distribute [them] over the Internet to potential customers at face value."

The directive only applies to those vouchers that ". . . clearly state both the time limited promotional (face) value and the amount paid by the customer for the voucher, and must remain valid for redemption for at least the amount paid by the customer indefinitely." Popular providers of such coupons include Groupon, Deal of the Day and Living Social.

According to the directive, Massachusetts sales tax does not apply to the sale of the coupon itself. However, it does apply, when the customer redeems the coupon, to the amount the customer paid for the voucher, plus any ". . . additional cash or consideration paid to the vendor by the customer in consideration for the sale."

Specific Examples

Example 1:  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.

Example 2:  Same facts as Example 1, except the customer’s bill at the restaurant is $75.  The Massachusetts sales tax on the meal (both state tax and local tax, where applicable) is calculated on the $20 paid for the voucher plus $35 additional cash paid by the customer.  The restaurant should charge the customer $3.44 state tax and $.41 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 $55 subject to tax.

Example 3:  Same facts as Example 1, except the customer’s bill at the restaurant is $30.  The Massachusetts sales tax on the meal (both state tax and local tax, where applicable) is calculated on the prorated share of the $20 paid for the $40 voucher which was applied to the meal.  Tax should be calculated on 30/40 x 20 = $15.  The restaurant should charge the customer $.94 state tax and $.11 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 $15.  Alternatively, the vendor may allow the customer to use the remaining value of the voucher to pay the sales tax on the transaction.  For example, the remaining $10 value of the $40 voucher described in this example could be used by the customer towards the payment of $1.05 state and local sales tax.  However, vendors must remit the full amount of tax due on the transaction even if the vendor did not collect any cash from the customer when it sold the meal.

Example 4:  Same facts as Example 1, but the promotional value of the voucher has expired at the time the meal is purchased.  The customer buys a $40 meal and pays by redeeming the voucher for the $20 originally paid plus $20 cash.  The Massachusetts sales tax on the meal (both state tax and local tax, where applicable) is calculated on the $20 redemption value of the voucher plus $20 additional cash paid by the customer.  The restaurant should charge the customer $2.50 state tax and $.30 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 $40 subject to tax.

Example 5:  A $300 “golf package” voucher is sold and distributed on the Internet by a third party under contract with the golf course for $150.  The consumer pays $150 to the distributor and is e-mailed a voucher to redeem at the golf course for a package valued at $300, which includes non-taxable greens fees priced at $250 and the taxable rental of golf carts priced at $50.  The compensation for advertising services is similar to Example 1; the golf course receives a payment from the voucher issuer for $75.  Upon redemption of the voucher within the promotional period, the golf course must collect and remit sales tax on the golf cart rentals of $1.56 ($25.00 x .0625) and report, on its sales and use tax return, gross receipts of $25.00 subject to tax.  The amount paid for the voucher must be prorated between the non-taxable and taxable charges in the same manner as the non-discounted charges for the package.

 

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Avalara Author
Will Frei
Avalara Author Will Frei
Will Frei covers sales tax news including best practices, legislation and sales tax technology. He is the Social Media Manager at Avalara.