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Monday Breakdown: Sales tax on 'buy one, get one free' offers

Origin of coupon determines taxable price and whether Md. sales tax is charged on full amount or a reduced amount as a result of coupon

February 17, 2013

An area resident recently submitted a question regarding how local restaurants are permitted to apply sales tax to orders when a customer uses a coupon, specifically a “buy one, get one free” offer.

In an email, the woman said she has used “buy one, get one” coupons at several area restaurants, but one in particular applies sales tax to the full amount of the bill prior to taking out the discount.

“When questioned on this, they say their accountant says they are allowed to do this,” the woman said in her email. “I disagree, as I should only have to pay taxes on the amount of the bill after the discount.”

According to a state Comptroller’s Office spokeswoman, Maryland sales and use tax law governs the way tax is to be charged on sales with coupons, noting that taxes are paid on the full “taxable price.”

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State law defines a taxable price as “the value, in money, of the consideration of any kind that is paid, delivered, payable or deliverable by a buyer to a vendor in the consummation and complete performance of a sale,” according to an email from spokeswoman Christine Feldman.

There are two types of coupons — those issued by manufacturers and those issued by vendors.

Manufacturers’ coupons promise a reimbursement to vendors, Feldman said, but no reimbursements are issued for vendor coupons.

The origin of a coupon determines the taxable price and whether sales tax is charged on the full amount or a reduced amount as a result of the coupon, Feldman said.

“A purchaser must pay sales tax on the price before a manufacturer’s coupon is applied because the coupon is consideration and therefore is included in the ‘taxable price’ of the item,” she said. “A purchaser must pay sales tax on the price after a vendor’s coupon is applied because a vendor’s coupon does not provide any consideration to the vendor.”

In essence, if a coupon is reimbursed by a third party, then the restaurant charges tax on the full amount, Feldman said. If not reimbursed, then tax should only be charged on what the customer pays.

Feldman said additional questions can be directed to the comptroller’s office at 1-800-MD-TAXES or by email at SUT@comp.state.md.us.

— Compiled by C.J. Lovelace

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Monday Breakdown
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Hagerstown MD 21740

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We will answer select questions each Monday. We will not tackle situations involving neighborhood or domestic disputes or consumer problems.

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