DEAR JILL: Two weeks ago, I found a skincare product worth about $40 on clearance for $13. To make the deal sweeter, I had a $3 off manufacturer Deal Today. Score, right? Well, yes and no. This was the only item I was purchasing, so my total with 7 percent sales tax should have been $10.70. However, my total was $10.91. I was a little irritated to find I'd been taxed on the pre-coupon total! While it was only 21 cents additional (and I got a smoking deal on the skincare) it made me wonder if this is happening all over the place and I just have not noticed it before. With all the coupons I use on a regular basis, it would really add up.
With regard to taxing on a pre-manufacturer-coupon total, could the government really be requiring stores to collect tax on something that isn't included in a purchase? Essentially, I paid tax on money I didn't even spend. Please share your thoughts on this, if possible. - Bonnie Z.
DEAR BONNIE: Figuring sales tax with coupon use is a tricky issue. In most states, sales tax is charged on your pre-coupon total, which is what happened to you. The state collects sales tax on the item's sale price. And, guess what - the state doesn't care whether you used a $1 bill or a $1 coupon to pay for your purchases. While we would look at an item and say "I only paid $2 for that," from the state's perspective, it's more like, "This item cost $3, regardless of how you paid for it." A manufacturer coupon is considered a form of payment or currency. The coupon doesn't reduce the selling price of the item - it's just a form of payment.
However, in five states (Connecticut, Massachusetts, Missouri, Pennsylvania and Texas,) things are a bit different. These states require the item's final purchase price to be taxed, not the pre-coupon price.
Some states do have exceptions to this - Illinois, where I'm from, is a pre-coupon tax state. However, our tax laws make a tax exception for free product coupons. When you use a coupon for an entirely free product, the law prevents stores from charging tax on something that the manufacturer intends to be free. (This does not apply to situations where a $1 coupon makes an item on sale for $1 free though, only to free-product coupons.)
Now, store coupons? They're a different story. If you're in one of the 45 pre-coupon-total states and use a store coupon, you may notice another interesting thing happen - in most cases, store coupons will reduce your item's selling price, and the post-store-coupon price is what you'll pay tax on. So, for example, let's say I buy a $5 item with a $2 store coupon. The store coupon functions differently than a manufacturer coupon, and it actually reduces the store's selling price of the item. The new "sale" price, post-store-coupon, is $3. So, $3 is the amount on which my sales tax is computed. The next time you shop with a store coupon, pay attention to the cash register as your coupons are scanned, and you just might see this in action. It will show up on your receipt, too.
If you're unhappy about being in a pre-coupon-price tax state, there's really not much you can do - aside from moving to another state, which is more than most people would do to save a few cents on sales tax here or there. But it is interesting to understand how it all works, isn't it?
Smart Living Tip: Some states don't charge sales tax at all - Alaska, Delaware, Montana, New Hampshire and Oregon. Others charge a reduced sales tax rate on food, or don't tax food purchases at all - certainly a benefit when you're trying to save with coupons.
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