The California State Board of Equalization (BOE) has provided guidance regarding the application of sales and use tax to purchases of tangible property from retailers using certificates such as Groupon or LivingSocial coupons. Special Notice L-297, California State Board of Equalization (Nov. 2011). In particular, the BOE addressed transactions in which retailers contract with Internet-based third parties to issue to retail customers “deal-of-the-day instruments” (DDI) that are redeemable to purchase tangible property at a discount from those retailers.

The BOE advised in a special notice that the sale of a DDI is not a taxable transaction because the DDI is treated as evidence of an intangible right to receive tangible personal property at a later date. However, when a customer subsequently purchases tangible property from the retailer and pays in whole or part with a third party certificate, the sales tax applies to the amount the customer paid for the DDI plus any other consideration paid to the retailer at the time of purchasing the tangible property.

By applying sales tax only to the sum of the consideration paid for the DDI and the tangible property, the BOE has, in fact, opted to treat these certificates as reducing the tangible property’s purchase price. In other words, the coupons are deemed to be the equivalent of “cash discounts” issued by the retailers themselves. California’s position is significantly different from other states where the DDI is not treated as a reduction of the property’s sale price, and the coupon’s price discount is disregarded for sales tax purposes. See, e.g., Massachusetts’s Working Draft Directive 11-XX: Application of Sales Tax to Sales and Redemption of Third Party Coupons (Sept. 16, 2011) (providing that sales and use tax is applied on the coupon’s entire face value plus any additional consideration paid to the retailer).