According to Kentucky law, the sale of a gift card is “the offer of an intangible right and not in essence the sale of tangible personal property.” Therefore, the gift card is not subject to sales and use tax. However, sales tax is due when the buyer redeems the gift card, and the tax applies to full price of the purchase. The same is true of Groupons, with one exception: upon redemption, the sales tax only apples to the discounted price of the Groupon (even if the seller has knowledge of the original price).
Kentucky is not the only state trying to parse out how sales tax law should be applied to social coupons. And some states have decided to go a different route. For instance, New York state tax administrators concluded that retailers should collect sales tax on the full value of the items purchased with a social coupon, but only if the coupon is for a specific dollar amount. If the coupon is for a service–like a manicure–then the merchant is only obliged to collect sales tax on the discounted price of the coupon. Massachusetts has a “working draft” of a law that would also require merchants to collect sales tax on the full price, but the law does not treat specific services differently.
As each state comes up with their own version of how sales tax applies to social coupons, sales tax challenges for businesses only increase.