Were a coupon-clearinghouse's internal fraud checks and purchased third-party investigations subject to Florida sales tax?

Plain-English summary

The Florida Department of Revenue concluded that the taxpayer's own manual and automated fraud-prevention work within its coupon-clearing service was not a taxable protective service.

Coupon processing and redemption fell under NAICS 561990, not one of the protection-service classifications listed in section 212.05(1)(i). The clearinghouse received and scanned coupons, applied payment policies, checked for irregularities, destroyed processed paper coupons, transmitted data, and managed payments for advertisers and retailers.

Separately purchased third-party investigative services were taxable when used in Florida or when their primary benefit was in Florida. The clearinghouse could not buy them tax-free for resale because the investigations supported multiple manufacturers and the cost was allocated among clients rather than directly benefiting one client.

What this means for you

Coupon processors and clearinghouses

Classify internal processing work separately from outside detective or investigative services. Similar fraud-related labels can conceal different taxable-service categories.

Businesses buying investigations

Florida looked to where the service was used or where its primary benefit occurred. Allocating one investigation among multiple customers did not satisfy the ruling's service-resale requirements.

Accountants and tax professionals

If tax was collected from customers on the nontaxable processing service, the ruling required refunds to those customers before a refund application, within the stated three-year limitation period.

Common questions

Q: Were the clearinghouse's own coupon-fraud checks taxable?
A: No.

Q: Were outside investigative services always exempt as a resale?
A: No. The taxpayer was treated as the end user on these facts.

Q: When were the purchased investigations taxable?
A: When used in Florida or when their primary benefit was in Florida.

Citations and references

• Fla. Stat. §§ 212.05(1)(i), 213.22, and 215.26(2)
• Fla. Admin. Code rr. 12A-1.0092 and 12A-1.0161(4)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 16A-019

Original ruling text

Executive Director
Leon M. Biegalski

QUESTION: ARE THE MANUAL AND/OR AUTOMATED FRAUD PREVENTION ACTIVITIES
PERFORMED AS PART OF THE TAXPAYER’S COUPON PROCESSING SERVICES TAXABLE AS
PROTECTIVE SERVICES UNDER SECTION 212.05(1)(I)1, F.S.?
ANSWER – BASED ON THE FACTS BELOW: THE “MANUAL AND/OR AUTOMATED FRAUD
PREVENTION ACTIVITIES” PERFORMED AS PART OF THE TAXPAYER’S COUPON
PROCESSING SERVICES DO NOT FALL WITH THE NAICS CLASSIFICATIONS LISTED IN S.
212.05(1)(I)1., F.S., AND, AS A RESULT, ARE NOT SUBJECT TO SALES TAX.
THE TAXPAYER’S PURCHASE OF THIRD-PARTY INVESTIGATIVE SERVICES IS SUBJECT TO
SALES TAX WHEN THE SERVICES ARE USED WITHIN FLORIDA OR WHEN THE PRIMARY
BENEFIT OF THE SERVICES IS WITHIN FLORIDA.
December 9, 2016
Re:

Technical Assistance Advisement 16A-019
Sales and Use Tax – Coupon Redemption Services
Sections 212.05 and 215.26, Florida Statutes (F.S.)
Rules 12A-1.0092 and 12A-1.0161, Florida Administrative Code (F.A.C.)
XXXX (the Taxpayer)
EIN XXXX

Dear XXXX:
This is in response to your letter dated July 21, 2016, received by this office on July 26, 2016, requesting
this Department’s issuance of a Technical Assistance Advisement (“TAA”) pursuant to section 213.22,
F.S., and Rule Chapter 12-11, F.A.C., concerning the taxability of “manual and/or automated fraud
prevention activities” provided by the Taxpayer. An examination of your letter has established you have
complied with the statutory and regulatory requirements for issuance of a TAA. Therefore, the
Department is hereby granting your request for a TAA.
Facts
Your letter dated July 21, 2016, provides that following in part:
. . . The Taxpayer provides coupon clearing services for discount coupons redeemed at retail stores
located in the state of Florida by consumers who reside in Florida. The Taxpayer’s client is the
retailer who redeems the coupons or the advertiser whose product or service is subject to the
discount offered via the coupon. The Taxpayer does not design, print, or distribute coupons.
Instead, the Taxpayer’s clients engage the Taxpayer to manage coupon information and the
monetary transactions connected with the redemption of physical and electronic coupons by
consumers.
Child Support – Ann Coffin, Director  General Tax Administration – Maria Johnson, Director
Property Tax Oversight – Dr. Maurice Gogarty, Director  Information Services – Damu Kuttikrishnan, Director

www.floridarevenue.com
Florida Department of Revenue
Tallahassee, Florida 32399-0100

Technical Assistance Advisement
Page 2 of 8

. . . The Taxpayer is a coupon clearinghouse that facilitates the flow of data and funds for its
clients. Each of the Taxpayer’s clients must enter into a written coupon clearing services
agreement that explicitly establishes a formal agency relationship between the Taxpayer and the
client. This agency relationship is disclosed to all retailers and advertisers with whom the
Taxpayer interacts on behalf of the client. Further, standard industry practice ensures that all
parties interacting with the Taxpayer recognize that the Taxpayer is a formal agent on behalf of its
client.
. . . The Taxpayer’s services as provided to advertisers typically consist of:
1.
2.
3.
4.
5.

Receipt and separation of coupons
Manual scanning of coupons into the Taxpayer’s production system
Manual review of coupons for fraud prevention
Automated analysis of coupons by the Taxpayer’s system to support fraud prevention
Automated application of advertiser payment policies (regarding coupon expiration dates
and redemption exceptions)

6. Destruction of the physical coupons after processing
7. Transmission of coupon data to the Taxpayer’s servers for storage
8. Tabulation of payments owed by advertisers to retailers, transmission of the required funds
   to retailers, and management of an advertiser’s on-going funding requirements
   The Taxpayer’s services for retailers contemplate coupon verification, but they do not contain the
   fraud prevention activities specifically required by advertisers. The Taxpayer’s base coupon
   clearing service fee is a bundled charge that contains three components - one of which is “payment
   processing.” The payment processing component of the Taxpayer’s fee covers the fraud
   prevention aspects of the Taxpayer’s coupon clearing activities.
   In performing its services, the Taxpayer populates databases within its production systems with the
   offer and coupon data obtained from scanning and validating the coupons submitted by the
   retailers. All scanning activities occur outside Florida; the servers on which the data is stored are
   located outside the state of Florida; and the maintenance of the servers occurs outside the state of
   Florida.
   The Taxpayer has no facilities, employees, or inventory in Florida. However, the Taxpayer’s
   employees visit clients and solicit new business within Florida. . . .

On September 8, 2016, you e-mailed electronic copies of the Taxpayer’s “two contract templates,” and
provided that the “‘Manufacturer’ template applies to the ‘advertiser’ clients I reference in our ruling. The
‘Retailer’ template applies to our ‘retailer’ clients.”
The Agreement for Manufacturer Services provides the following in part:
[The Taxpayer] and . . . (“Client”) hereby agree that [the Taxpayer] will provide Client coupon
redemption services on the following terms:

Technical Assistance Advisement
Page 3 of 8

1. Client designates [the Taxpayer] as its exclusive agent to redeem and process all merchandise
   coupons in any form including, but not limited to, paper, electronic, mobile, digital and any other
   forms, issued or authorized by Client.
2. [The Taxpayer] shall perform the following services for Client:
   a) Provide redemption services for both paper and electronically distributed offers . . . .
   b) Secure and assign Client a redemption address to which all coupon submissions will be sent.
   c) Maintain the [Taxpayer] Retailer Master File and verify the existence of each submitter. If a
   submitter is not in the [Taxpayer] Retailer Master File, [the Taxpayer] will initiate verification
   procedures to be completed at the earliest possible date. Should the [the Taxpayer] verification
   procedures determine that a submitter is not a valid retailer, [the Taxpayer] shall suspend
   payments.
   d) Determine the appropriate count and value for all retailer coupon submissions and pay said
   submissions in accordance with Client’s Redemption Policy, written payment policies, and any
   other written instructions (“Written Instructions”) provided to [the Taxpayer] . . . .
   e) Promptly destroy all redeemed coupons and provide a yearly affidavit of such destruction, upon
   request. . . .
   f) For twelve (12) months, maintain invoice and store tag documentation, as well as coupons that
   [the Taxpayer] has identified as potentially physically misredeemed. . . .
   g) Provide Client via the internet with one current transaction register of all coupon submissions
   and current monthly offer redemption reports in up to two different formats. . . .
   h) As an adjunct to [the Taxpayer] service, [the Taxpayer] will provide Client with a URL and
   passwords that will allow designated users to access the [Taxpayer’s] software [product] via an
   internet browser to aid in the administration and management of Client’s coupon programs. . . .
   i) Accumulate and maintain the most current twelve (12) rolling months of Client’s transaction
   history for Client’s reference. . . .
   j) Provide general information and assistance on common retailer and retailer clearinghouse
   inquiries . . . .
3. Client shall:
   a) Pay the greater of (i) [the Taxpayer] service fees . . . or (ii) a minimum fee of $___ per month
   for [the Taxpayer] to administer and execute Client’s redemption policies and the systems
   necessary to provide services outlined in Section 2 of this Agreement. . . .

Technical Assistance Advisement
Page 4 of 8

c) Pay a per invoice record and store tag record transaction fee of $___ (“Transaction Records
Fee”) for [the Taxpayer] to maintain a record of all submitting entities for purposes of audit
support and analysis.
d) Reimburse [the Taxpayer] for expenses incurred in relationship to:
...
 Retailer site audit, verification and fraud detection expenses incurred by [the Taxpayer],
which will be invoiced three (3) times per year for the prior four (4) month period.

6) [The Taxpayer] will employ reasonable and diligent precautions against errors in receiving,
handling and accounting for Client’s coupons and for the analysis and reporting of information
hereunder, but shall not be liable for any errors or the redemption of forged or improperly acquired
coupons. . . .

The Agreement for Retailer Services provides the following in part:
[The Taxpayer] and (“Client”) hereby agree that [the Taxpayer] will provide Client a consolidated
coupon settlement service program (“Services”) on the following terms:

1. Client designates [the Taxpayer] as its exclusive agent to invoice and submit coupons to coupon
   issuers for redemption on its behalf and request such issuers to reimburse [the Taxpayer] as
   Client’s authorized agent.
2. [The Taxpayer] shall perform the following Services for Client:
   a) For coupons which [the Taxpayer] is responsible for arranging shipping from Client’s
   locations . . . .
   b) Receive coupons which Client submits and based on the scanning of coupons and a
   reasonable visual review, will sort, audit, and determine the count and value.
   c) Invoice and submit coupons or electronic data to the coupon issuer. . . .
   d) Use reasonable commercial efforts to collect the payments for invoices submitted to
   coupon issuers . . . .
   e) Pay for the coupon face value plus handling allowance less [Taxpayer’s] service fees and
   any adjustments . . . .
   f) As an adjunct to [the Taxpayer’s] service, [the Taxpayer] will provide you with a URL
   and passwords that will allow designated users to access the [Taxpayer] software via an
   internet browser to aid in the administration and management of Client’s coupon programs.
   ...

Technical Assistance Advisement
Page 5 of 8

3. Client shall:
   a) Pay the [Taxpayer] service fees for Services, as described in Exhibit 1. The [Taxpayer] service
   fees set forth on Exhibit 1 . . . .
   b) Pay [the Taxpayer] for any additional services provided by [the Taxpayer] ….

5. In view of the nature of the Services to be performed, it is agreed that [the Taxpayer] shall not
   be liable for any loss, injury or damage of any kind caused in whole or in part by contingencies
   beyond the control of [the Taxpayer] . . . .

In an e-mail dated September 21, 2016, you provided the following regarding the Client’s responsibility to
reimburse the Taxpayer for items identified in Section 3)d), of the Agreement for Manufacturer Services:
1. Advertiser Contract Provision - The clause identified from paragraph 3(d) refers to our thirdparty costs for verifying the existence of a retail store location and the nature of the business
conducted at that retail store location.
a. . . . If [the Taxpayer] is suspicious about the validity of a submission received from a particular
store, [the Taxpayer’s] personnel will perform certain investigative services via the internet, etc. to
try to confirm that the store is real and that it sells the type of products for which the store is
submitting coupons. . . . If [the Taxpayer’s] personnel cannot successfully verify the store, [the
Taxpayer] sends a third-party into the field to perform the investigation. This contract clause
refers to the client’s obligation to compensate [the Taxpayer] for the third-party’s services.
b. . . . [The Taxpayer] is continuously sending this third party into the field to verify store
existence and product mix to support the requirements of multiple manufacturers. . . . As such,
[the Taxpayer] accumulates the fees billed by the third party over the course of a quarter, allocates
the sum between clients, and separately bills each client an allocated portion of the third party’s
fees. [The Taxpayer] has a separate billing item that covers this fee.
2. Services When Fraud Detected - [the Taxpayer] essentially has three prongs to its fraud
detection services as performed for advertisers. (These services do not apply to retailers.) First,
[the Taxpayer’s] fees include certain retailer verification services. The scope of these services is
described under 1a above. When the services are performed by [the Taxpayer’s] personnel, the
service is covered by [the Taxpayer’s] base coupon clearing fee. When the service is performed by
a third party, [the Taxpayer] uses a unique billing item to charge the client. Second, [the
Taxpayer’s] services include certain automated analytical retailer comparison services. The
[Taxpayer’s] system contains algorithms that compare similarly situated retailers to each other to
verify comparable coupon volumes and coupon types. When a retailer’s submissions fall outside
the accepted parameters, the system flags the submission as potentially fraudulent. These services
are included in [the Taxpayer’s] base coupon clearing fee. Third, [the Taxpayer’s] plant personnel

Technical Assistance Advisement
Page 6 of 8

perform a physical review of a sample from each shipment received that contains between 5 to
2,000 coupons in order to try to visually identify fraud. Examples of observable fraud include
coupons that are gang-cut, mass-torn, in mint condition, or purposely washed and wrinkled. This
physical review service is covered by [the Taxpayer’s] base coupon clearing fee. Assuming [the
Taxpayer] believes a submission is fraudulent (based on any of these three techniques), [the
Taxpayer] advises the manufacturer that a submission is potentially fraudulent and recommends an
amount that should not be paid to the submitting retailer. [The Taxpayer’s] services stop there. If
the client wants further information or wants to take any kind of specific action, the obligation to
pursue further action resides with the advertiser.

Requested Advisement
The Taxpayer requests advisements with respect to the following:

1. Are the manual and/or automated fraud prevention activities performed as part of the
   Taxpayer’s coupon processing services taxable as protective services under Fla. Stat.
   §212.05(1)(i)1[.]?
2. If certain of the Taxpayer’s services are taxable protective services, what is the sourcing
   methodology applicable to the Taxpayer’s taxable services?
   Applicable Authority and Discussion
   Section 212.05(l)(i)3., F.S., imposes sales and use tax on only certain specifically identified services. The
   laws governing sales and use tax on services mandates that the Department rely upon the North American
   Industry Classification System (NAICS) for guidance in determining whether a service is subject to sales
   and use tax.1 The services subject to tax include “detective, burglar protection, and other protection
   services,” which are any of the services enumerated in NAICS National Numbers 561611, 561612,
   561613, and 561621 of the North American Industry Classification System, as published in 2007 by the
   Office of Management and Budget, Executive Office of the President.
   Rule 12A-1.0092(2)(a), F.A.C., clarifies that “detective, burglar protection, and other protection services
   are those services which are rendered to minimize or prevent loss or damage to life, limb, or property and
   are of a kind typically performed by security or alarm system companies, or are those investigative
   services which are rendered to obtain evidence or other information for legal, business, employment, or
   personal purposes of a kind typically performed by detective or investigative agencies.” According to s.
   212.05(1)0)4., F.S., and Rule 12A-1.0092(3)(a), F.A.C., where any sale of a service involves both the sale
   or use of a service which is taxable and the sale or use of a service which is not taxable, the charges for the
   taxable portion of the transaction must be separately stated from the charges for the nontaxable portion or
   the entire transaction will be presumed taxable.

1

The NAICS provides business establishment classifications for use by Federal agencies when describing various statistical
analyses of the U.S. economy.

Technical Assistance Advisement
Page 7 of 8

A review of NAICS codes reveals that “coupon processing services” and “coupon redemption services”
are listed under NAICS code #561990, “All Other Support Services.” Accordingly, given this is not a
taxable NAICS code as identified under s. 212.05(l)(i), F.S., the Taxpayer’s coupon redemption services,
as described in the Agreement for Manufacturer Services and the Agreement for Retailer Services, are not
subject to tax.
However, the investigative services referenced in paragraph 3(d) of the Agreement for Manufacturer
Services are provided to the Taxpayer in order to “minimize or prevent loss . . . [and are] of a kind
typically performed by detective or investigative agencies.” These investigative services are akin to the
type of activity that is included in the Industry Group #561611.2 Section 212.05(l)(i)3., F.S., and Rule
12A-1.0092(2)(f), F.A.C., provide that charges for investigative services are subject to Florida sales tax
when performed within or outside Florida and used within Florida by the purchaser or when the
purchaser’s primary benefit of the service is within Florida. If the taxable service is performed within
Florida but used outside this state by the purchaser or when the purchaser’s primary benefit of the service
is located outside Florida, then the service is not subject to tax.
Rule 12A-1.0161(4), F.A.C., provides that in order for a purchase of taxable services to be considered
exempt from sales tax when the service is later resold, there are four conditions that must be met. The
first requirement is that the purchase must provide direct and identifiable benefit to a single client or
customer. You have provided that the investigative services performed by the third party on behalf of the
Taxpayer “support the requirements of multiple manufacturers.” The Taxpayer “allocates the sum
between clients, and separately bills each client an allocated portion of the third party’s fees.” Because of
this, the Taxpayer cannot purchase the investigative services exempt from sales tax. The Taxpayer is
considered to be the end user, or consumer, of the third party investigative services.
Conclusions
The “manual and/or automated fraud prevention activities” performed as part of the Taxpayer’s coupon
processing services do not fall with the NAICS classifications listed in s. 212.05(1)(i)1., F.S., and, as a
result, are not subject to sales tax.
The Taxpayer’s purchase of the third-party investigative services described in your e-mail dated
September 21, 2016, is subject to sales tax when the services are used within Florida or when the primary
benefit of the services is within Florida.
In the event the Taxpayer has collected sales tax from its customer on nontaxable services, the Taxpayer
must first refund its customers and then file an Application for Refund - Sales and Use Tax Form DR-26S,
within the 3-year statute of limitations. See s. 215.26(2), F.S.

2

561611 Investigation Services: This U.S. industry comprises establishments primarily engaged in providing investigation and
detective services. http://www.census.gov/cgi-bin/sssd/naics/naicsrch

Technical Assistance Advisement
Page 8 of 8

This response constitutes a Technical Assistance Advisement under section 213.22, F.S., which is binding
on the Department only under the facts and circumstances described in the request for this advice as
specified in section 213.22, F.S. Our response is predicated on those facts and the specific situation
summarized above. You are advised that subsequent statutory or administrative rule changes, or judicial
interpretations of the statutes or rules, upon which this advice is based, may subject similar future
transactions to a different treatment than that expressed in this response.
You are further advised that this response, your request and related backup documents are public records
under Chapter 119, F.S., and are subject to disclosure to the public under the conditions of section 213.22,
F.S. Confidential information must be deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an edited copy of your request for Technical
Assistance Advisement, the backup material, and this response, deleting names, addresses, and any other
details which might lead to identification of the taxpayer.

Your response should be received by the Department within 15 days of the date of this letter.
Sincerely,

Brinton Hevey
Tax Law Specialist
Technical Assistance and Dispute Resolution
850/717-6839
Record ID: 211513