Overturning a 6-1 en banc decision by the Pennsylvania Commonwealth Court, the Pennsylvania Supreme Court held that a coupon does not reduce the price upon which sales tax must be collected unless the coupon is adequately described and “linked” with the taxable item in accordance with Pennsylvania Department of Revenue (DOR) regulations. The case was brought by a retail customer seeking a sales tax refund on the difference between the retail price of the product and the discounted price as the result of a coupon. The decision instructs retailers on the application of coupon discounts when collecting sales tax. The decision may also provide comfort to retailers facing class action lawsuits in Pennsylvania for collecting sales tax on full invoice prices without taking discounts from coupons into account.
The case examined three transactions between a retailer and customer. In two of the transactions, the customer purchased a single taxable item and used a single coupon. In the other transaction, the customer purchased six taxable items and used five coupons of varying amounts. The receipt provided in each transaction identified each coupon as a “SCANNED COUP” and identified the discount provided with each coupon but did not further describe the coupon nor link the coupon as a discount to any specific item purchased. In all three transactions, the retailer collected sales tax on the full purchase price without taking the coupons into account. The customer sought a sales tax refund from the DOR, maintaining that sales tax should have been collected on the discounted price. The DOR denied the refund claim.
The Pennsylvania Supreme Court agreed with the DOR’s position that under Pennsylvania regulations, “sales tax is owed on the full purchase price” (disregarding any coupons) unless an invoice or receipt (1) separately states and identifies the amount of the taxable item and the coupon and (2) provides a description of both the taxable item and the coupon. Further, the Court agreed that a satisfactory description in the receipt must contain a “linking” element, meaning the coupon must be adequately described to show that it applied to a specific item. The Court explained that such a description on the receipt was necessary because, under Pennsylvania law, “there are discounts or coupons that do not establish a new [taxable] purchase price, such as a discount for shopping on a specific day, discounts from a minimum purchase amount, and sales tax absorption coupons.”
In recent years, state tax departments have been very aggressive in asserting that coupons and discounts do not reduce the sales tax base. This decision serves as a reminder to retailers that the description of coupons on invoices is critical in determining the amount of sales tax to collect. In Pennsylvania, the coupon must be separately identified and “linked” to the taxable product upon which the discount is applied.
This decision highlights the dilemma many retailers face when collecting tax on discounted products: if they collect on the full retail price, they face the potential for customer class action suits for alleged overcollection of sales tax. If they collect on the discounted price, they risk having to pay the additional sales tax out-of-pocket in the event of an audit.
This decision should provide some relief to certain retailers in the former camp—at least in Pennsylvania. In a footnote to the decision, the Pennsylvania Supreme Court stated that the retail customer brought a separate class action against the retailer, “which has been stayed during the pendency” of the tax refund case brought against the DOR. Because the retailer’s sales tax collection from the customer was deemed correct by the Court, it seems likely that the class action suit will be dismissed. Accordingly, the Court’s decision could be helpful to the retailer in that class action and to other Pennsylvania retailers facing class action cases with similar facts.
The Pennsylvania Supreme Court’s opinion included a lengthy discussion of a dissent to the lower court’s decision in favor of the retail customer. The Court stated that the dissenting judge “explained that Pennsylvania law does not require vendors to have the capability of linking coupons to a particular item on the receipt,” even though in such instances “there can be no reduction of the purchase price and therefore no reduction in sales tax.” Rather than concluding such an instance would establish a cause of action against a retailer, the dissenting judge stated that “[i]f a taxpayer is dissatisfied with this practice, they are free to take their business elsewhere.” Although the Court’s own analysis did not explicitly confirm such analysis, it ultimately concluded that the retail customer “did not meet his burden” to “prove he was entitled to a refund of sales tax,” suggesting that the dissenting judge’s views were correct. The Court held that a retailer does not have to adequately describe and link the coupon, but if it does not, it must collect sales tax on the full retail price of the taxable product. As a reminder, this is not the rule in all states.
Practice Note: This is a reminder to retailers to consider state regulations when it comes to the application of coupons in collecting sales tax. This is a hot topic for state tax departments on audit. Form matters and every discount does not reduce the sales tax base. Retailers should ensure that their point-of-sale systems, marketing and invoices are adequately describing and processing coupons that they will apply when computing the sales tax base.
Please contact the McDermott Will & Emery State & Local Tax team for more specific advice on compliance with the various state rules governing the application of coupon discounts in computing the sales tax base or if you need support or representation resolving an audit on this issue.