4 BDO TECH 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. O 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 state. 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 state? 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 BDO TECH 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 Exposure? 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. Footnotes 1 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. 2 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.” 3 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…” 4 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 rcummings@bdo.com. Christina Edson, J.D., is a senior manager at BDO. She can be reached at cedson@bdo.com.