United States: Coupon Discounts Raise Sales Tax Issues For Retailers

Last Updated: May 8 2015
Article by Deborah Savarese Sloan, Kirk Lyda, Tamara Marinkovic Hines, Emmanuel E. Ubiñas, John M. Allan, Mark P. Rotatori and Morgan R. Hirst

Most Read Contributor in United States, September 2019

Contingent fee lawyers across the country continue to throw their hats in the sales tax ring, filing lawsuits against retailers who honor discount coupons, alleging they overcharge consumers for taxes. Individual and class action lawsuits are being filed contending retailers overcollect tax by charging on the original retail price rather than the discount price. Transforming what would ordinarily be a mundane tax dispute into a much more controversial tort case, plaintiffs often allege not only state tax violations but also consumer protection and fraud claims, giving rise to punitive damages on top of penalties and interest. The claims are simple to plead and easy to understand, making it easy for the same firms to duplicate nationwide and others to copycat. The implications for retailers are substantial, given the number of retailers that honor coupons, the frequency with which they are used, and the added complexity of online sales. Even when collected taxes are remitted to tax authorities, exposure may still exist if there have been overcollections.

Whether sales tax is owed on the original retail price or the discount price, and whether retailers are exposed to liability for overcollecting taxes subsequently remitted, differs state-to-state. The ability of consumers to sue retailers is also subject to challenge in many jurisdictions. Retailers would be wise to confirm their understanding of the tax laws in jurisdictions where they maintain retail outlets and consider implementing precautionary measures to avoid being the next target.

Claims and Lawsuits

While lawsuits against retailers that honor discount coupons are not new, more recent case filings indicate an upward trend in this type of sales tax case. In the past year alone, several putative statewide class action lawsuits have been filed against major retailers in multiple states across the country. In most instances, a single named plaintiff with a receipt from one store visit is enough to file suit. The crux of the complaint is generally the same—retailers improperly calculate sales tax on the full amount of an item rather than the discounted amount after a coupon has been applied. The causes of action, while not always identical, follow a similar pattern and include violations of state sales tax statutes, violations of state consumer protection and unfair trade practice statutes, and common law claims such as fraud, unjust enrichment, conversion, and the like.

Legal Commentary

The correct tax treatment of coupons varies by coupon type and jurisdiction. A store coupon reducing the sales price paid by the consumer is typically excluded from sales tax. If the retail store receives other consideration, such as a reimbursement from the manufacturer, some states tax the original undiscounted retail price (the discounted price plus the reimbursement) while others tax the discounted price. It may not be apparent to the consumer whether the retail store was reimbursed.

Consumers who believe they overpaid sales tax have a variety of remedies that often differ from state to state. Some states prohibit consumers from filing lawsuits against retailers to recover tax that was allegedly overcollected. Accordingly, lawsuits may be suspect both as to whether the tax was overcollected in the first place and whether the lawsuit is the proper forum to make that determination. It is certainly questionable whether one consumer can represent a class of other consumers when the facts and law might vary from one consumer to the next.

What Retailers Should Do Now

Retailers can do several things now to protect themselves against claims or to better position themselves in the event litigation occurs.

  • Review customer agreements and disclosures and consider whether the potential exists to benefit from contractual limitations.
  • Ensure you are using effective software to manage multistate sales tax.
  • Conduct an internal review to ensure you understand exactly what practices are being followed jurisdiction-to-jurisdiction and whether it is consistent with state and local law. To the extent discrepancies are discovered, consult with professionals experienced in negotiating disclosures and settlements that minimize expense and cut off past liability.
  • If significant issues are revealed after internal review, consult with lawyers with track records for successfully handling these types of claims. Draw upon good relationships with state tax administrators throughout the country. Explore all options for resolving or mitigating the issue, including new or more fulsome disclosures or modifications to customer agreements.
  • Consider whether the right circumstances exist for voluntary disclosures. These can be advantageous; believe it or not, the tax collector can even sometimes be an ally.
  • If litigation ensues, position yourself for efficiency and success by engaging firms capable of handling multijurisdictional disputes with centralized teams and with experience defeating class certification. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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