July 9, 2008
Coupons Shouldn't Be Taxed, but Government Vouchers Should by Josh Barro
Recently, Best Buy sent checks for a few dollars to customers in Pennsylvania, Texas and Wisconsin. The checks are refunds for sales tax charged on the portion of their digital television converter boxes they paid for with federal government vouchers.* Those states' departments of revenue have ruled that the $40 voucher should be exempt from tax. As The Consumerist reports, one typical Texas customer received a letter of apology and a check for $3.30.
How did Best Buy, a huge national retailer, get confused about how it was supposed to tax these purchases? Well, there are over 7,400 sales tax-levying jurisdictions in the United States, and the differences between their rules about coupons can be confusing, even for a company with scores of lawyers.
Coupons and Sales Tax
The key area of confusion is that most states treat manufacturers' coupons differently from retailers' coupons.
the retailer issues a coupon and expects no reimbursement from any other party (i.e., a retailer coupon), that is treated like a true reduction in price; first, the coupon is applied, then sales tax is calculated on the final sale price.
Method #1:
$40.00 original price
($10.00) retailer's coupon
$30.00 subtotal
$ 1.50 5% sales tax
$31.50 tax-inclusive price
However, if the retailer expects reimbursement from the manufacturer or another third party (as is typical with manufacturers' coupons) tax is charged on the price before application of the coupon.
Method #2:
$40.00 original price
$ 2.00 5% sales tax
$42.00 subtotal
($10.00) manufacturer's coupon
$32.00 tax-inclusive price
The above is the rule in a preponderance of states, including (for example) California, Minnesota, Mississippi, New Jersey, New York, Ohio and Tennessee.
Other states treat all coupons as discounts, regardless if they will be reimbursed by the manufacturer. In other words, "Method #1" above applies to all coupons. States using this rule include Connecticut, Massachusetts, Pennsylvania and Texas.
Since Pennsylvania and Texas are both states where manufacturer's coupons are not taxable, it's somewhat surprising that Best Buy used "Method #2" in those states. Our guess is that Best Buy viewed the vouchers not as coupons but as gift cards. Gift card purchases are ordinarily taxable.
So, How Should Coupons Be Taxed?
