Groupon Hopes Sales Taxes Will Favor Deals Model

As Internet shoppers know, online sales taxes have been a legal gray area since the Internet was first invented. Amazon.com (NAS: AMZN) has most famously exploited this issue, as the company has resisted calls to collect taxes in all but a handful of states where it has a "physical presence."

Now, 24 states are joining together to adopt a uniform policy on daily deals sites like Groupon (NAS: GRPN) , known as the Streamlined Sales Tax Agreement. Currently, tax policies on the online coupons take a variety of forms, including New York's, which requires collection on the full face value of vouchers for a specific dollar amount -- like $50 worth of food at a restaurant -- but only for the coupon's value on deals without a specified monetary value, like a yoga class. California, on the other hand, has ruled that taxes should only be applied to what the coupon buyer paid.

An unfavorable tax policy would affect the pure-play Groupon more than companies such as Google or Amazon, for which deals are a small portion of their business, or discount travel sites like Expedia (NAS: EXPE) and priceline.com (NAS: PCLN) , whose sales taxes are assessed on the fee the customer pays. From a tax perspective, transactions on such travel sites are considered buying hotel rooms at wholesale prices and reselling them to individual buyers. Earlier this week Groupon, perhaps with a nod to diversification, acquired FeeFighters, a service that helps small businesses compare payment-process providers.


So far the group of states has agreed that taxes should not be collected when the deal is purchased, but when the coupon is exchanged for the respective good or service. With average sales tax rates nationwide near 10%, the difference in being taxed on half the normal rate or the full rate amounts to a 5% fee over the purchase.

Expecting merchants to tax a consumer at the full rate seems odd when shoppers using store-produced coupons only pay taxes on what they spend.

Amazon's resistance to collecting taxes may serve as a warning for Groupon, as online shoppers are particularly price-sensitive, and daily deal hunters tend to be even more so. Reviewers on Yelp (NYS: YELP) , another Groupon competitor whose users often overlap, have complained about the policy charging them tax on the full amount of the bill.

Interestingly, a study discovered a negative correlation between Groupon offers and Yelp ratings. On average, researchers from Boston University and Harvard found that consumers who mentioned "Groupon" or "coupon" in their review gave an average rating 10% lower than their peers. The experimenters speculated the cause could be that Groupon users are more critical, or that there was a poor fit between the merchants' businesses and the new customers.

State-by-state legal questions have also arisen in other areas of Groupon's deals. In some states, for example, it's illegal to offer discounts on alcohol, though many Groupon merchants do so. Other states require coupons to last five years before expiring, a much longer period than Groupon uses. Sometimes shoppers receive cash back for redeeming coupons for less than their face value.

The group of 24 states could reach a decision as early as late May, when it holds its next meeting. Two of the states in the organization, Kentucky and Iowa, have already issued tax policies similar to California's. In those states, sales tax should be applied to what the consumer pays if the price is listed on the coupon, as it usually is; otherwise, they must pay tax on the full retail price.

Groupon Founder Andrew Mason said five years from now he envisions a much different retail climate guided by smartphones and tablets, but his company is just one of many businesses growing from the mobile revolution. Our experts have found a well-established company with triple-digit sales in mobile that got on the bandwagon early. Learn more about this hot stock in the Fool's special free report: "The Next Trillion Dollar Revolution." You can get your free copy by clicking right here.

At the time this article was published

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Emiko Howard

Last year, 332 billion coupons were offered. Use of digital coupons taken from websites like coupons and Printapons is increasing but only 10% most of the coupons are surprisingly from sunday paper

March 31 2012 at 2:46 AM Report abuse rate up rate down Reply