You’ve most likely heard of Groupon by now?
Have you thought about how to do the accounting for it?
According to Forbes, Groupon is the fastest growing company in history.
(Here’s how to account for the Groupon transaction in QuickBooks.)
- There is a good chance you will want to be featured with Groupon if you haven’t already.
- Then you definitely want to know how to handle Groupon Sales in QuickBooks.
- The single easiest way to learn how to account for Groupon sales is to watch my video on Accounting For Groupon Sales in QuickBooks!
- Learn my trick to recording your Groupon sales based only on what you receive for the sale.
- What will not work in terms of setting up your Groupon Promotion in QuickBooks
There are 4 Key elements to recording your Groupon Sales in QuickBooks:
- Initial Sale
- The Fee
- Redemption
- Sales Tax (2 Methods for Handling Sales Tax with Groupon Redemptions in QuickBooks)
The initial sale is a non-taxable sale of a future benefit.
No tangible goods are being sold so no sales tax is collected at this point. In QuickBooks we simply record the sale of a service item based on the quantity sold at the rate we sold them for. So if the promotion is a $40 Groupon for $20 and we sold 300 of them then we record a sales receipt in QuickBooks for a quantity of 300. Total Sales proceeds of $6,000.
The Fee has to be deducted from the Sales proceeds.
To arrive at the net check we receive from Groupon, the fee needs to be deducted. We record this transaction in QuickBooks as a second line item in the initial sale.
The Groupon Redemption is part of the final sale.
It will be tempting to set this up as a payment method, but this won’t work because you will not be receiving any money for this part of the sale in QuickBooks. The trick here is to set up a “Discount” item called “Groupon Redemption”.
- This will enable you to track the redemptions to be sure there are not more redemptions compared with the total quantity sold.
- You want to get the transactions recorded correctly in QuickBooks.
- Mistakes can be costly in terms of the time to identify and correct them.
- It is important to get your Groupon Sales right in QuickBooks
Sales Tax on this can be tricky.
If you have a service business of course this is not an issue.
- But what if you collect Sales tax?
- Should you collect Sales Tax on the gross sale?
- Some people have indicated they do not want to remit sales taxes they haven’t collected.
First and foremost I have to suggest calling your state’s sales tax body (in California this is the State Board of Equalization). I have called them in the past, anonymously to give them the details of a transaction and have them explain to me what the correct Sales Tax Treatment was. They were extremely helpful.
With that said I am going to show you 2 methods for handling the Sales Tax in QuickBooks for Groupon Sales.
- Collect tax on the gross sale
- Collect tax on the net proceeds actually received on the sale.
The web cast below will show you how this all works.
If you found this helpful please post your comments here and/or on YouTube.
Want the QuickBooks file used in this screen cast so you can review the setup in greater detail?
The file is yours for $5
I’m not sure I agree with your accounting for Groupon Sales. My client sold Living Social coupons. Exactly like Groupon. Here were their issues: first, they are a franchise and pay royalties on sales, and they objected paying royalties on the coupon amount. Second was the sales tax issue you brought up. Third was the timing of the recording of the revenue and of the fee that is deducted from the initial payment.
I decided to account for these just like gift certificates, with a twist. The initial sale of the coupon was accounted for as a LS Gift Card Liability. I deducted the fee from the initial deposit which I debited to Prepaid Advertising expense. I journal entry this to Advertising Expense monthly based on the number of actual coupon redemptions.
When the coupon is redeemed, the total sale is rung up, a discount is applied, sales taxes are calculated on the net taxable sale. Reduce the sales receipt with an Other Charge item called LS gift card liability to reduce the liability balance. The customer pays the sales tax. Zero sales receipt is the result.
I think this better matches the revenue with the expense of this advertising promotion, and more appropriately accounts for the sale of the coupons as a liability.
What do you think?
I spoke with another gentleman who takes your point of view. My thinking on it is that someone may never redeem a Groupon and I would have that liability on my books forever. A Groupon is a coupon. If I put a coupon out in the local newspaper I do not accrue a liability for it. I also do not receive any payment in advance for it. So My thinking is recognize the revenue for the sale of the Groupons. Then if and only if someone redeems it I am treating it as a discount. I guess it will come down to a state by state thing and if/as the state sales tax bodies audit these things decisions will have to be made about the proper accounting treatment. Both methods work as far as I can tell so it’s just a matter of determining which one really better represents the substance of the transaction.
Also your method results in higher accounting cost to the client because there is more to track. My method really simplifies this.
Your method will result in paying sales taxes on the gross amount of the sale – you would not apply a discount because you have the liability account which now needs to be offset against the sale (Debit Liability, Credit Accounts Receivable (or amount due on sale). So your sale will show up for the gross amount with part of the payment coming from a reduction in the liability account = more sales tax and more income tax at the end of the day.
What about those of us who use Quickbooks Pro for the accounting side, and QuickBooks POS for sales?
Also you said you suggest collecting tax for the whole amount… however, in POS, if the sale is $40 and the “coupon” is for $40, resulting in a $40 discount, POS will say there is no tax due!
I suppose the question is a legal one… is the Groupon a “gift card”, or is it a coupon for a certain amount off your order…. I think the precedent is set that its a coupon… when you sell something at “20% off” you don’t collect tax on the whole amount, you collect tax on the 80% that you charged them!
I think of it as a coupon that they’ve paid for. That’s why I suggest NOT accruing a liability (because I wouldn’t do that for a coupon) and treating the original sale as a service – a sale of a future benefit. Then to your question it is all in how you set up the transaction. I believe you are supposed to collect sales tax on the whole sale and the sales taxes should be included. The groupon they use is really a means of payment. Why should the state get less money on account of the fact that the merchant decided to do a promotion? At least I am thinking that this is how the state will see it.
I think Groupon differs from a coupon because there was a payment received on it. The seller has a liability until redemption or expiration date, just as with a gift card. However, it is like a coupon in some ways. The difference between the face value of the Groupon and the amount paid is a discount. If, however, that discount is not applied on the purchase receipt, then the customer would be paying full sales tax on any item(s) purchased with a voucher.
I am not sure the best way to allocate the fees held back by Groupon or other organization that is handling the exchange. I tend to think of that as a marketing cost, but others have suggested it as a sales discount, as well.
You are right, QuickBooks we simply record the sale of a service item based on the quantity sold at the rate we sold them for. So if the promotion is a $40 Groupon for $20 and we sold 300 of them then we record a sales receipt in QuickBooks for a quantity of 300. Total Sales proceeds of $6,000.
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“I believe you are supposed to collect sales tax on the whole sale and the sales taxes should be included. The groupon they use is really a means of payment. Why should the state get less money on account of the fact that the merchant decided to do a promotion? At least I am thinking that this is how the state will see it.”
I am confused. When one of my clients decides to discount the price of a product or sales taxable service, they only pay sales tax on discounted amount.
Am I missing something?
There is no question that at the time of the sale, sales taxes should be collected on the entire amount of the sale. The question, however is what IS the amount of the sale? Some merchants feel they should only collect and pay sales taxes on a cash basis (ie for the amount of consideration actually received.
As far as “accounting treatment goes there are 2 ways to look at this. One way is to call the groupon redemption a means of payment. Seen this way then you would collect the sales tax based on the entire sale. The other way to look at it is to see it as a discount. When I put my products on sale I am actually selling the items for less money and the sales tax is calculated based on the sale amount, which is less.
The other issue is in terms of what to do with the fees that are collected from selling the Groupon promotion itself. When you sell the “Groupons” the consumers pay (eg) $20 for $40 off. Then you get about 1/2 of that $20. Some say that $10 should be booked as income, others say a liability. One thing is for sure though – no sales tax should be collected on that money. The problem that I see with the “Liability” treatment is that I receive $10 for what is essentially a $40 Liability. I like the income treatment because it is simpler in many respects.
So the final question is whether or not the “Groupon” is a method of payment or a discount. I have yet to see or read about a case where there was a dispute between a merchant and a state department of Revenue to see how they would ultimately rule about this. I am sure it will happen eventually and it may already have. Once I find out the outcome of such a case I will be sure to post about it.
I’ve just written an article about this topic and posted it on my blog: http://canadianrestaurateur.wordpress.com. Here are the key points:
There is no income generated from the sale of a gift certificate, including Groupon certificates!
In Canada, we charge HST (sales tax) on most things, but not on gift certificates. These are treated “like money”.
When someone buys a Groupon certificate, let’s say for $50, entitling them to $100 of meals, sales taxes are payable on $50 – the amount the customer paid (to Groupon) for the certificate. The restaurant has to give the customer credit for $100 of meals/drinks – after tax (just like cash, Visa, etc…).
Most consider the amount kept by Groupon to be a promotional expense, which is set up at the time the certificates are issued. The full value of the certificates MUST be set up as a liability (not revenue), because the restaurant owes that amount to customers who redeem the certificates in the future.
The difference between the face value and the promotional value (paid by the consumer) is a deferred discount (or deferred promotion expense) – set this up as an asset at the time the certificates are issued.
As each certificate is redeemed, deduct the face value from the liability for outstanding certificates and record the sale at full menu prices. Deduct one certificate’s worth of deferred promotion expense and record this as a promotion expense. Collect sales tax on the net amount of the sale (=amount customer paid) and deposit the receipt in the bank. (Note that your sales tax laws may be different)
When the coupon expiry date occurs, eliminate any remaining balances in the deferred promotion account and the liability for outstanding certificates. The net credit should be to promotion expense – it is a recovery of the deferred promotion expense that did not have to be given to customers.
POS systems need at least two keys to handle these transactions:
A Discount key(s) for the dollar amount of the discount OR so that you can enter the dollar amount manually on each sale (if a customer didn’t spend the full amount of the coupon value). If a customer had a coupon for $40 (paid $20), and went to the restaurant and only spent $30, the discount to be applied would be $10, reducing the pre-tax bill to $20 (amount paid by customer). Taxes are calculated on the $20 amount.
A Payment key set up for the Groupon promotional value (amount customer paid to Groupon). Customer gets the $20 Groupon payment applied, leaving a balance equal to the taxes on $20.
Then, the customer leaves his $1.50 tip! Hopefully, I’m kidding!
Thanks Paul! I have seen many different points of view on this, the bottom line at this point is that Groupon is not working. It’s great for the consumer, terrible for the merchants. They should have sold to Google when they had the chance.
I believe the question is when is a sale a sale? If you have not provided the service in exchange for the $ received, then the transaction is incomplete–you have received a $ amount for future service set by the parameters of the contract with LivingSocial/Groupon. The other end of the money received is not income, it is a liability until the service has been rendered or the voucher expires (depending upon local law).
The previous poster mentioned expiration of the voucher. Unfortunately, while the “deal” portion of a Groupon does expire, the money you pay doesn’t. For instance: I recently bought a groupon for $15 to get $30 of food at a local restaurant. Three times I went to the restaurant and it was completely packed, with people sitting outside. (July and August in Phoenix. Nobody sits outside.)
So, the deal expired. Per Groupon’s policy, though, I can still get $15 worth of food at that restaurant… Just not $30. I’ve basically prepaid, and that prepayment never expires. Should the company hold that as a liability for all eternity? Only if it’s material… And chances are that it’s probably not.
I really don’t want my clients trying to do anything more complex than they have to. If they follow Nerd’s method, I can do a little math on the back-end and record a liability for financials, if one is required. Everybody’s happy that way.
Hello, I very rarely post comments to articles, but I caught your post on my timeline on twitter (@SylviaDionCPA, your post was retweeted by someone I follow). I’m a tax consultant that has written extensively on how states treat sales tax on redemptions of Groupon vouchers. Here’s a link to one of my many articles on the topic: http://www.thestateandlocaltaxbuzz.com/2012/09/massachusetts-issues-final-directive-on.html
At the bottom of that post, you’ll see my various posts and articles on Groupons and sales tax.