Groupon Runs Into Messy Tax Laws: Competitors Should Worry

Groupon Runs Into Messy Tax Laws: Competitors Should Worry

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Daily deal sites like Groupon (GRPN) have been the target of several class action lawsuits that are making headline and bringing unwanted attention to the grey areas in federal and state tax laws related to unclaimed property. As the SEC and governments work to correct these errors, the very earnings of Groupon, and indeed all coupon competitors, are put at jeopardy.

Robert Peters, a managing director with Duff & Phelps, explains via Forbes that Groupon had to recently restate their December quarterly results, prompting a formal SEC investigation into the company's accounting practices.

The main concerns are these: When deals go unclaimed (about 20% of Groupons fall into this category) and are past expiration, how is the profit to be taxed, and to/by who? Are the quick expiration dates of deals in violation of previously instated laws on gift cards? And are merchants legally entitled to keep their cut of customers payment?

CARD Act Compliance

The daily deals business has grown with surprising speed and numbers – there may be upwards of 500 competitors in the market. But with these federal and state mandates still open for debate, Peters says they should act cautiously. He writes:

Many observers believe the short expiration dates on the Groupon and other Daily Deal programs run counter to the Federal CARD Act, which was enacted in 2009 to eliminate perceived consumer protection abuses in the gift card industry. Specifically, under the CARD Act, gift and stored value card issuers, which are broadly defined to include electronic daily deal offerings, prohibit expiration periods of less than 5 years, as well as inactivity fees or other service charges. Penalties are steep, with fines between $500 and $5,000 per each instance of non-compliance. With a subscriber base of over 33 million as of March 31, the application of these penalties to Groupon could have a substantial impact on earnings going forward.

Taxes

"With at least 42 states facing budget shortfalls, many are looking for new and expanded definitions of unclaimed property to close these gaps." Unclaimed gift cards and coupon values are prime targets.

Peters says New Jersey was one of the first states to attempt to claim money from unused cards – rather than allow issuers to collect it as easy profit – and to insist that merchants collect zip code information about the buyers. As a result, American Express, InComm and Blackhawk Networks announced an end to sales of gift cards in New Jersey.

New Jersey's laws also transfer the unused money to the state after two years of inactivity, rather than five. Forbes reports a growing number of states are following suit by passing laws "laying claim to those funds, including Nebraska, Illinois, Connecticut and Massachusetts."

Business Section: Investing Ideas

Groupon has been in quite a bit of trouble since February. And given that it still trades with a market cap at 3X revenue, some suspect it has more downside to price in. What do you think?

Compare market caps of GRPN with industry competitors:

 

Compare GRPN's performance against the S&P 500 index:

 

Compare GRPN's average analyst recommendation against industry competitors:

 

 

Written by Rebecca Lipman

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