California – Application of Sales Tax to Deal of the Day Instruments

SALT Report 1228 – The California State Board of Equalization issued a Special Notice regarding the application of sales and use tax to “deal-of-the-day instruments” (DDI). These websites, such as Groupon and Living Social, offer “Deals of the Day” which feature coupons that can be redeemed for merchandise or services.  Customers are able to purchase DDI’s online at discounted prices from the retailer offering the Deal of the Day.

The sale of a DDI to a customer is not regarded as a sale of tangible personal property or a service. The DDI is evidence of an intangible right to receive tangible personal property and/or a service at a later date therefore the sale of the DDI is not subject to tax. However, when the DDI is redeemed, it is that sale that may be subject to tax.

According to California Regulation 1671.1, DDI’s that meet the specific terms and conditions provided below may be taxable.
Sale of DDI to Customer

The sale of a DDI to a customer is not regarded as a sale of tangible personal property (merchandise) or a service. The DDI is evidence of an intangible right to receive tangible personal property and/or a service at a later date, and, therefore, the sale of the DDI to the customer is not subject to tax. However, when the DDI is redeemed, it is that sale (the use of the DDI to purchase a good or service) that may be subject to tax.

Application of Tax Upon Redemption of DDI by Customer

When the DDI is redeemed for a taxable merchandise or service, the retailers’ gross receipts subject to tax include the consideration paid by the customer for the DDI plus any additional cash, credit, or other consideration paid to the retailer when the product is purchased with the exception of sales tax.

Example – A customer purchases a Deal-of-the-Day from an online company. The DDI is for “A $100 baseball bat for $50.” The customer uses the DDI to purchase the baseball bat and pays no additional amount for the baseball bat other than the amount for “sales tax.” The amount subject to tax is $50 which equals the amount paid for the DDI.

When Sale Is Not Subject to Tax

If the type of sale is normally not subject to tax, then tax would not apply to the sale of the merchandise or service when that DDI is redeemed by the customer. Common sales not generally subject to sales tax include sales of services (such as cleaning or cosmetology services), sales of cold food to go (such as ice cream and yogurt), and a charge for admission to an event (such as entertainment and sports admissions).

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