April 17, 2015

Seller Beware: Collecting Sales Tax When Coupons Are Involved Is Not So Cut and Dried

If you are a retailer or a business that accepts or issues coupons, a slew of class action lawsuits should have you double-checking your sales tax collection practices. Recent lawsuits filed by consumers have accused retailers of fraud because of the miscalculation of sales tax when coupons are used, and significant compensatory and punitive damages have been sought against retailers.

The first problem is that not all coupons are created equal. Coupons come in two broad categories: store-issued and manufacturer-issued. Generally, store-issued coupons technically function as discounts to consumers, resulting in a reduction of sales tax owed to the state where the coupon is redeemed. When a store-issued coupon is redeemed, the sales tax is based on the discounted price — the cost of the item after the coupon is applied. However, manufacturer-issued coupons, which are typically issued by manufacturers of goods, generally do not reduce the amount of sales tax owed by the consumer. When a consumer uses a manufacturer-issued coupon, sales tax is based on the total price of the item before the coupon is applied. Compliance issues arise when a retailer does not have a process in place to deal with both types of coupons.

A further challenge for retailers is that lawsuits have also been filed because of the language on the coupon (or more specifically, language missing from coupons). In Illinois, for example, a company issuing a coupon owes the corresponding use tax on the value of the coupon, which means it remits the use tax on the value of the coupon. However, Illinois law allows the tax burden to shift to the consumer if the coupon’s small print indicates the bearer — in most cases, the consumer — assumes the tax liability.

Recently, two lawsuits against national retailers have been filed in Illinois because the manufacturer-issued coupon did not include such language. (Wong v. Target Corporation, 1:15-cv-01985 (N.D. Ill. Mar. 5, 2015); Wong v. New Albertson’s Inc., d/b/a Jewel-Osco, 1:20-cv-01732 (N.D. Ill. Feb. 26, 2015)). The lawsuits claim the consumer should not have been charged the sales tax because the coupon didn’t say the consumer was liable, and the retailer ends up caught in the middle. If the courts endorse this argument, retail clerks would need to carefully read the fine print on every coupon presented, and self-service lanes may have to disallow the use of manufacturer-issued coupons. These changes would be significant burdens in an industry built on consumer convenience.

So, what should retailers do so they don’t find themselves clipped by similar lawsuits? Since state law varies on coupon-redemption sales tax liability, retailers should review their tax collection process in all states where they do business and seek counsel on how to be compliant in those states. They may also want to put into place some review and control procedures with regard to the small print on manufacturer-issued coupons.

The authors gratefully acknowledge Emily Steeb, Faegre Baker Daniels law clerk, for her contribution to this article.

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