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Why We Have to Pay Sales Tax on Coupons

November 3rd, 2008

coupons-sales-tax.jpgEarlier tonight I found out something that I didn’t know before — apparently coupon discounts are not exempt from sales tax. In other words, if you buy something and use a coupon to lower the price, you still have to pay tax on the original price of the item, not the discounted price that you actually pay. As this article by Shannon Christman explains, the rationale behind this is that the tax is applied to the price that the original product vendor actually receives, which includes both the amount that goes to the merchant and the amount of the coupon, which is usually paid by the manufacturer.

Interestingly, although the law in most states requires that sales taxes be paid on all coupon discounts, the last part of the article suggests that individual stores do not always enforce this. Out of curiosity, I might start paying attention to coupons more often so that I can run an experiment on which of our local stores are actually collecting tax on the coupon amounts.

It seems everything is taxable – even coupons!

Recently, a customer buying tires at a store in Pennsylvania questioned the sales tax on his bill: “Why should I pay sales tax on this $40-off coupon? You don’t charge sales tax when the price is lower because of a store sale. Using a coupon is the same thing – I still pay $40 less.” He made a valid point: Why do we pay sales tax on money we’re not paying for goods or services?

If a manufacturer prices a car at $21,499 and you bargain with the dealer so that you’re paying only $17,399, you would likely question the bill if you saw you were taxed on $21,499. But the difference in tax seems minor on smaller items bought at a discount, so few people complain. If you went to a toy store and paid a $15.00 sale price for a toy that’s usually $20.00, you might not even notice if you were charged thirty cents in tax on the extra $5.00.

In response to the customer questioning the tax on his tires, the tire clerk simply said, “The law says we have to.” An Internet search for details to support this claim yielded a reasonable explanation from the state of New Jersey: “When [manufacturers’] coupons are used, sales tax is charged on the full regular price because that is the amount which the vendor ultimately receives – in part from the customer, the balance from the manufacturer.” The same site explained that sales tax should not be charged for vendor coupons because the vendor never receives that extra money. That makes sense, but assuming the laws are the same in Pennsylvania, the tire customer could have made another argument against paying sales tax: the coupon he used had been a vendor coupon.

Retailers seem to be as confused by the law as consumers are. Some retailers never charge sales tax on discounts, whether they are in-store sales or manufacturer’s coupons. Some charge sales tax on all coupons, even those they have issued themselves. In the end, coupon users can expect to be charged sales tax on nearly all coupons and consider it a gift from the retailer when they are not.

5 Responses to “Why We Have to Pay Sales Tax on Coupons”

  1. comment number 1 by: ireland5

    I had known this and was always against it. However, I never gave it much thought as to the ‘why’ behind charging us the sales tax. I also don’t know about ’store’ coupons. Does anyone have experience from different cities or states? I’m in Texas and generally I see sales tax on the retail price.

  2. comment number 2 by: Kat

    Thanks for your postings. I was confused when I looked at my Wal-Mart sales reciept, and saw I was taxed twice! I had an competitor’s ad, in which the items purchased were almost half off. The cashier gave me the compeitor’s price, then totaled my order adding on Michigan’s 6% sales tax. She then scanned my many coupons, and when she totaled it again, my reciept shows another 6% sales tax! I did the math when I got home to find that I was taxed on the coupons! I wasn’t aware this was the law, so I appreciate your explaination. Thanks again! :) :)

  3. comment number 3 by: john

    Just another way to rip us off,
    For example I went to att store bought a expensive phone
    599.99 but if I upgraded to a 2 year service contract it was 199.99 I thought ok still paid tax on 599.99.
    they get you coming and going

  4. comment number 4 by: Brandy

    I am shocked to say the least. Is there any state in the US where you do not pay tax in this way?

  5. comment number 5 by: Brandy

    If I live in a state where you pay state tax and I buy a car in a state where you don’t pay state tax, which tax rule will apply to my purchase?

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