We've noticed similar practices at Livingsocial, BuyWithMe, and myriad similar sites. Groupon calls its approach the "more stringent" interpretation of applicable law, but we can't agree; to the contrary, applicable law seems to require more -- honoring the full face value, not just the customer's prepayment.
For Groupon and merchants, an extended validity reduces one source of profit anticipated by Groupon's current pricing model. As Stat Spotting points out , the nonredemption of discount vouchers offers a potential benefit to merchants participating in Groupon, for merchants can retain consumers' prepayment but need not provide much or any service. Outside the United States, the benefit of unredeemed vouchers currently flows to Groupon: Groupon's S-1 p. If vouchers have a longer validity period than Groupon and merchants anticipated, redemptions will increase -- to consumers' benefit but with a corresponding reduction in windfall profit to Groupon and merchants.
At least twelve lawsuits have already challenged Groupon's expiration practices: Arliss v. These cases were recently consolidated in the Southern District of California, but to date there have been no substantive rulings in any of the cases. Restrictions on Disposition of Abandoned Property.
If a consumer fails to redeem a discount voucher, many states treat the amount of the non-redemption as unclaimed property subject to escheat to the state. A historic Groupon merchant agreement reveals Groupon specifically requiring merchants to comply with any applicable laws as to unclaimed property.
Groupon's current Merchant Terms and Conditions contain no such provision but do require merchants to "comply with all Laws" 6. Is that sufficient to absolve Groupon of liability when merchants predictably fail to remit funds to the state? We have our doubts, as we discuss below. A Consumer's Right to Cash Back. In many states, a consumer prepayment by gift certificate or similar offers a right to a cash refund after a consumer redeems a specified portion of the prepaid value.
Because this provision applies to "cash value," the best interpretation is that a customer may receive cash back only from the amount the consumer paid, not from the amount of the discount. In contrast, online discount vouchers often indicate that cash-back is not permitted.
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By suggesting otherwise, Groupon leads its consumers to mistakenly conclude they may not claim cash back. Instead, we suggest Groupon should remove the "Not valid for cash back" statement from vouchers in states that allow cash back. Better yet, Groupon could adjust its vouchers to include a correct statement of applicable law in the corresponding state. Sales Tax on the Amount of the Discount. Massachusetts has offered clear guidance on taxation of discount vouchers as applied to food. Massachusetts Department of Revenue Letter Ruling states that a discount on food is non-taxable when a restaurant receives no reimbursement for the value of the coupon.
Of course discount vouchers do yield a payment from the voucher vendor to the restaurant. That letter specifically confirms that an online discount voucher is "the equivalent of a cash discount by the restaurant" since the restaurant itself funds the totality of the discount.
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Thus, the letter indicates, Massachusetts sales tax should be calculated based on the amount the consumer actually pays, even if ordinary menu prices are higher. Texas regulators reached the same conclusion. But in all three cases, such an instruction is inconsistent with the corresponding state laws and regulations. For example, Illinois rules indicate that the amount of the discount should be nontaxable. Florida law reaches the same result.
The cost of the coupon is, however counted in gross receipts when "the customer has previously given compensation to the retailer for the coupon. Following up on Edelman's letter to the Massachusetts Department of Revenue, we recently wrote to tax regulators in eight additional states. We have not yet received their replies. We will update this page if they offer views on correct taxation of discount vouchers. In spring , Edelman wrote to Groupon customer support to direct Groupon's attention to the Massachusetts rules and the letter referenced above. Groupon's Joe Harrow replied that "on the advice of our accountants, who looked into this issue for some time, we now typically advise the merchants we worked with to tax on the full promotional amount.
BuyWithMe's Tali replied to say BuyWithMe was "in the process of looking into this matter" but offered no substantive reply. Edelman sent multiple follow-up inquiries but received no reply.
This method is incorrect in light of the instructions provided by Massachusetts and Texas regulators, but we have failed in our efforts to alert Massachusetts merchants to the proper approach under applicable law. We are struck by the crudeness of prevailing redemption processes.
Many merchants simply write down a voucher number or cross of a line on a preprinted list of valid vouchers. These approaches invite errors both accidental and malevolent. For example, what if a merchant accidentally writes down or crosses off the wrong number -- transposing two numbers, or jumping to an adjacent line?
Could a sophisticated attacker find a way to generate seemingly-valid voucher numbers? In either case, an affected consumer would find a voucher dishonored through no fault of the consumer. In our experience, such problems are awkward and difficult to resolve, especially because merchant staff seem to have received little or no training on consumers' rights or how to proceed.
In contrast, most other payment systems have established methods to check and reconcile transactions. Consumers' rights in credit card disputes are well-established through cardholder agreements, card network dispute processes, and federal law. Even stored value cards keep records of who bought what when. For many transactions, signatures provide a basic, if imperfect, method of verification. With modern IT and no constraints from legacy systems, discount vouchers have the potential to offer increased security and reliability, but instead current systems have been remarkably simplistic and ripe for abuse.
At the very least, discount vouchers should clarify processes in case of error or other dispute. Merchants can fall short of their obligations under a discount voucher in myriad ways. For example, a merchant might subject vouchers to undisclosed capacity constraints , disallow redemptions on "specials" e.
Anticipating these many possible disputes, voucher services typically seek to cast themselves as mere marketing vendors that are not responsible for the conduct of the corresponding merchants. But a voucher service is the merchant of record for the charge to the customer's credit card. As the entity officially responsible for charging the consumer, the voucher service thus faces increased responsibility to see that the consumer receives what was promised.
In this context, a consumer naturally looks to a voucher service for assistance if a merchant fails to perform. We think it is probably an unfair and deceptive practice, under the FTC Act and state equivalents, for voucher vendors to attempt to disclaim liability in such circumstances. More generally, we are struck by Groupon's attempts to push all responsibility to merchants.
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On every relevant question -- discounting alcohol, honoring expiration dates, providing cashback -- Groupon's historic contract and current Merchant Terms of Service claim merchants are responsible. In our view, this approach invites confusion and non-compliance. Voucher services are far better positioned than merchants to determine what the legal system requires: Voucher services can research regulations centrally, once for each state in which they operate, then notify affiliated merchants of applicable requirements.
In contrast, Groupon's current approach asks each individual merchant to conduct its own research. If merchants actually conducted such research, it would be duplicative and potentially wasteful -- thousands of small businesses re-researching the same questions. But in fact merchants typically ignore the questions, rationally concluding that these questions are too difficult for them to address on their own. Thus, by pushing merchants do to the work individually, voucher services virtually assure that the work is not done at all. Importantly, the legal and regulatory questions flagged in this article are questions that arise distinctively in the context of discount vouchers: a merchant would never confront such questions were it not for discount vouchers.
Having created the transactions giving rise to this regulatory complexity, we think discount voucher services should be expected to achieve compliance. Finally, while voucher services attempt to push responsibility and liability to merchants, we see multiple areas in which voucher services are directly liable for their own activities, separate and apart from merchants' actions.
As to alcohol discounting, we pointed out that Massachusetts and California law specifically restrict the activities of marketing agents. Voucher services do indeed "sell" the offers: voucher services present the terms, solicit purchases, and charge consumers' credit cards. Healthy Living.
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