Massachusetts Issues Directive Addressing Applicability of Sales Tax to Promotional Vouchers

On July 16, 2012, the Massachusetts Department of Revenue issued Directive 12-4: Application of Sales Tax to Sales and Redemption of Qualifying Promotional Vouchers. Directive 12-4 clarifies that the sales of qualifying promotional vouchers that later may be redeemed are not subject to sales tax when purchased. Examples of such arrangements include Deal of the Day, Groupon, and LivingSocial. Only purchases of qualifying promotional vouchers or coupons are excluded from tax. Qualifying promotional vouchers must clearly state: 1) the face value of the voucher, 2) the time limit or expiration of the full face-value redemption period, and 3) the amount the customer paid for the voucher. Further, if the face value is not redeemed prior to the expiration date, the voucher is worth the amount the customer paid for it.

When the voucher is redeemed, the face value of the voucher, minus the amount actually paid by the customer, is treated as a retailer’s discount. A retailer’s discount is excluded from the sales price under Mass. Gen. Laws ch. 64H, § 1 and, therefore, reduces the base subject to tax. For example, if a customer purchases a $40 voucher for $20 and uses it to pay for a $40 meal, the base subject to tax is $20.

The Directive further provides that if the price of the customer’s ultimate purchase is greater than the face value of the voucher, the amount the customer paid for the voucher, plus any additional cash paid, is the base subject to tax. Under such a scenario, if a customer purchased a $40 voucher for $20 and used the voucher to purchase a $75 meal, the tax base would be $55 ($20 voucher price, plus the additional $35 paid by the customer). Directive 12-4 provides additional examples of the computation of sales tax for typical scenarios associated with the purchase of these vouchers.

TECHNICAL INFORMATION CONTACT:

Jeremiah T. Lynch
Principal
Ryan
212.871.3901
jeremiah.lynch@ryan.com