uncertainty StrikeS again: the “groupon” coupon – the lateSt unclaimeD property unknown

Uncertainty Strikes Again:
The “Groupon” Coupon – The Latest
Unclaimed Property Unknown
By Rocky B. Cummings and Christina Edson
It’s likely that the last time you checked your
personal email inbox, you found a number of
“special offers” allowing you to purchase goods
or services from your local area businesses at
deep discounts.
ne of the highlights among the many
“daily deal” offers I received this
month from Amazon, Living Social,
and Groupon was the “Spring Break, Groupon
Style”— a deal offering half-off for suntan
lotion, eco-friendly sandals, swimwear, and
my personal favorite, “84 percent off” of a
home teeth whitening kit.
As I was pondering how this particular vendor
came up with its exact “84 percent” discount,
I couldn’t help but wonder how these
merchants make a profit offering such steep
discounts while also paying the daily deal
website (i.e., Groupon) a percentage of the
amount received. It’s a complete mystery how
any local vendor can make a profit selling its
products and services in this way.
Perhaps the value of the advertising alone
makes up for any loss in profit. Or perhaps
vendors are hoping
a certain percentage of buyers will either lose
the voucher or never redeem it — something
we’ve all done on many occasions when we
receive coupons, gift cards, punch cards,
discount key tags and the like. However, there
are many hidden traps vendors need to be
aware of with unredeemed vouchers. These
vouchers, if not claimed within a certain time
period, may be escheated to the state and
become “unclaimed property” under state law.
Daily deal websites like Groupon and
Living Social have forever changed the art
of marketing by selling heavily discounted
vouchers for a merchant’s goods or services
to millions of their subscribers. 1 Once a
deal is activated, a purchaser is charged the
discounted price for the daily deal voucher,
which is then emailed to the subscriber to
print out and present at the vendor’s location
in exchange for the purchased goods or
services. The daily deal website and the vendor
typically split the proceeds from the sales. The
daily deal provider and seller then go their
merry ways and it’s “business as usual.”… Or
is it? What happens next with that daily deal
voucher or “e-coupon” may have an enormous
unexpected financial impact on the vendor,
and I’m not referring to an increase in sales. If
that voucher is not redeemed after a certain
period of time, it may become unclaimed
property and escheated to the state, creating a
financial liability on the vendor to that state.
All 50 states and the District of Columbia
have unclaimed property laws allowing them
to collect unclaimed property from a holder
with the intent to reunite that property with
its rightful owner. Because most states can use
the reported funds and related interest until
the owner stakes a claim (and many owners
never claim these funds), unclaimed property
enforcement has significantly increased in the
past several year (no coincidence at the same
time as state budget gaps have snowballed).
Unredeemed e-coupons may readily turn
into an unclaimed property exposure for the
unsuspecting merchant who is initially pleased
with the fact that its effective discount rate
for the product offered through a daily deal
website was much higher than the original
rate offered due to a certain percent of
vouchers not being redeemed within the
expiration period. When these e-coupons,
which are an intangible property right held by
a merchant (i.e., “a holder”), go unredeemed
for a specified period of time (i.e., “a dormancy
period”), merchant holders may be required to
file unclaimed property returns reporting the
liability in full. And since this is not a tax, 100
percent of the liability must be reported to the
Moreover, a company may have an unclaimed
property liability and filing responsibility
even though it has no business location
or physical presence within the state. For
example, a merchant that issues e-coupons
nationally through Groupon for its product,
which are to be redeemed by email and
shipped from its one and only New Jersey
location, may have no physical presence or
other connection with the buyer’s state, but
nonetheless the e-coupon sales in that state
may lead to an unclaimed property filing and
remitting obligation to that state. Additionally,
abandoned and unclaimed property results in
a contingent liability that must be accounted
and reserved for under ASC 450. 2
u Who Is Responsible?
Which party is required to report and remit
the unused value or purchase price of the
unredeemed daily deal voucher as unclaimed
property to the states? Who is the holder of
the unclaimed funds — the daily deal website
or the vendor?
If the holder is the party who ultimately has
the outstanding liability with the purchaser
and bears responsibility for redeeming the
voucher by providing the goods and services
when the owner redeems the voucher, then
the holder would at first blush appear to be
the merchant. But what about those instances
where Groupon, for example, has a legal
obligation to redeem the voucher under the
consumer protection laws of a particular
In an effort to limit a merchant’s exposure
for redemptions, e-coupons typically have
a relatively short expiration period of six
months or less. Most daily deal websites
inform purchasers about possible longer
Read more on page 5
continued from page 4
Uncertainty Strikes Again
redemption dates by noting that if the
promotional offer stated on the voucher
has expired, applicable laws may require the
vendor to redeem the voucher beyond its
expiration date for goods or services equal
to the amount paid for it. However, Groupon
also provides that if applicable law entitles
the buyer to redemption and the vendor has
refused to redeem the cash value of an expired
voucher, Groupon will refund the purchase
price of the voucher. 3 So when this type of
scenario is triggered, isn’t Groupon the party
that ultimately has the outstanding liability to
the purchaser? Would it change if the vendor
intentionally refused to redeem the voucher
versus if, for example, the vendor went out of
business due to bankruptcy?
Most daily deal websites portray the
merchant as being the issuer of the voucher.
For example, Groupon’s published “Terms of
Usage” describe the merchant as being the
“sole issuer” of the Groupon that is sold to the
subscriber through the Groupon website. 4 By
making the vendor the issuer of the voucher
in this manner, does that mean that any
unclaimed property obligations related to
unused vouchers are the responsibility of
the merchant? And what if the voucher itself
does not indicate which party has issued the
voucher? How much disclosure to the buyer is
required regarding which party is the issuer of
the voucher for this type of contractual term
to shift the unclaimed property filing burden?
States will certainly have their own answers
to these questions regardless of Groupon’s
position taken in its terms of usage. But
until they issue some guidance in this area,
merchants should beware of daily deal
providers that single them out as the “sole
issuer” of the e-coupon.
u How Much Is the
If the merchant is deemed to be the
responsible party for unclaimed property
reporting of unredeemed vouchers, what is the
value of the property to be remitted? Is it the
discounted price of the item (i.e., promotional
value), the full cash value of the item (i.e.,
purchase value) at the time of issuance, the
current fair market value of the item, or some
other combination thereof? Should the value
be calculated differently if a daily deal voucher
is redeemable for a specified dollar amount of
the merchant’s goods or services (e.g., pay $10
for a voucher worth $25 of services at a spa)?
Additionally, what happens in the case where
a vendor shares the revenue from selling the
voucher with the daily deal provider who sent
the advertisement to the buyer? Will the
vendor have to pay the state the entire value
of the voucher, even though the vendor shared
the receipts received from the e-coupon with
the website? Is it fair to require a merchant to
pay the entire deemed value of the voucher if
the vendor shared the revenues with the daily
deal provider?
Would it make a difference if the merchant
paid a flat fee to the daily deal website versus
a percent of the receipts sold? Does having
such a fee structure more closely resemble a
traditional professional services arrangement
compared to a revenue-sharing agreement,
which may be interpreted as a joint venture
with the merchant? Certainly a joint venture
agreement between a merchant and a daily
deal website such as Groupon would seem
to indicate that both parties share an equal
ownership interest in the vouchers issued.
In this era of daily deal e-coupons, there are
many areas of uncertainty and certainly more
questions than answers among the states with
regard to the unclaimed property treatment of
unredeemed daily deal vouchers. As with any
new technology or product, it will take some
time for states to sort through all the variables
at issue. But in the unclaimed property world
where a single unintended sale of a product
to a customer 3,000 miles away can trigger
a 100 percent liability to a state that a local
merchant has never even visited, planning is
critical. Vendors need to make provisions for
potential unredeemed e-coupons issued by
daily deal providers they work with and not be
sidetracked in all the excitement of reaching
new customers around the country. Profits can
all too quickly evaporate when merchants are
not equipped to manage potential unclaimed
property liabilities resulting from uncontrolled,
albeit welcome, growth.
This article is reprinted with the publisher’s permission from the
Journal of State Taxation, a bi-monthly journal published by
CCH INCORPORATED, a Wolters Kluwer business. Copying or
distribution without the publisher’s permission is prohibited. To
subscribe to the Journal of State Taxation or other CCH Journals,
please call 800-449-8114 or visit www.cchgroup.com.
For a discussion regarding the e-coupon business model and
sales and use tax consequences, see Rocky B. Cummings and
Christina Edson, Tax Trends, New Trends in E-Coupons Creates
Sales Tax Nexus, J. STATE TAXATION, Nov-Dec 2011, at 9.
For a discussion regarding ASC 450 reserves for unclaimed
property, see Joseph Carr and Christina Edson, Tax Trends, The
Unclaimed Property “Black Hole”: Are You Properly Reserved
for This Inescapable Liability? J. STATE TAXATION, July-August
2011, at 11.
At the bottom of every Groupon voucher, in fine print it says
the following “Legal Stuff We Have To Say: General terms
applicable to all Vouchers (unless otherwise set forth below, in
Groupon’s Terms of Sale, or in the Fine Print): Unless prohibited
by applicable law the following restrictions also apply. See
below for further details. Discount Voucher Expires On: (Month,
Day, Year). However, even if the promotional offer stated on
your Groupon has expired, applicable law may require the
merchant to allow you to redeem your Voucher beyond its
expiration date for goods/services equal to the amount you
paid for it. If you have gone to the merchant and the merchant
has refused to redeem the cash value of your expired Voucher,
and if applicable law entitles you to such redemption, Groupon
will refund the purchase price of the Voucher per its Terms of
Sale. Partial Redemptions: If you redeem the Voucher for less
than its face value, you only will be entitled to a credit or cash
equal to the difference between the face value and the amount
you redeemed from the merchant if applicable law requires
it. If you redeem this Groupon Voucher for less than the total
face value, you will not be entitled to receive any credit or
cash for the difference between the face value and the amount
you redeemed, (unless otherwise required by applicable law).
You will only be entitled to a redemption value equal to the
amount you paid for the Groupon less the amount actually
redeemed. Redemption Value: If not redeemed by the discount
voucher expiration date, this Groupon will continue to have
a redemption value equal to the amount you paid ($$) at the
named merchant for the period specified by applicable law. The
redemption value will be reduced by the amount of purchases
made. This Groupon expiration date above, the merchant will,
in its discretion: (1) allow you to redeem this Voucher for the
product or service specified on the Voucher or (2) allow you
to redeem the Voucher to purchase other goods or services
from the merchant for up to the amount you paid ($$) for the
Voucher. This Voucher can only be used for making purchases
of goods/services at the named merchant. Merchant is solely
responsible for Voucher redemption. Vouchers cannot be
redeemed for cash or applied as payment to any account unless
required by applicable law. Neither Groupon, Inc. nor the
named merchant shall be responsible for Groupon’s Vouchers
that are lost or damaged. Voucher is for promotional purposes.
Use of Vouchers are subject to Groupon’s Terms of Sale found
at http://www.groupon.com/terms.”
At the bottom of every Groupon voucher, in fine print it says
the following “Legal Stuff We Have To Say: General terms
applicable to all Vouchers … This Voucher can only be used for
making purchases of goods/services at the named merchant.
Merchant is solely responsible for Voucher redemption…”
Rocky B. Cummings, J.D., CPA, MST, is a partner
in the Multistate Tax Services Group of the
National Tax office of BDO. He can be reached
at [email protected]. Christina Edson, J.D., is
a senior manager at BDO. She can be reached at
[email protected].