How to account for sales from social buying sites like TeamBuy
Update: an earlier mailing referenced this post but the post was not available due to a technical error. It has since been rectified. We apologize for the confusion
If you’re a small business owner or a consumer, you’ve probably heard of social group buying websites like TeamBuy, Groupon, LivingSocial or the like. They can potentially be a great source of marketing as it’s a way to reach a broad audience of people. However, people have also questioned whether there is much brand loyalty beyond the discounted purchase.
Regardless of your opinion of its effectiveness, there are some interesting accounting challenges in using it. Namely, when do you record the revenue and how to handle the HST which have implications on the taxes you owe.
When do I recognize the sale?
When you make a deal with a social group buying website, there are a number of different stages. If you recognize the sale too early, you may end up paying income tax on sales that aren’t actually supposed to be paid. Here are the stages for social buying purchases.
The initial stage is when your deal goes on the website and starts getting purchased. There is nothing to record here right now.
Once the deal has started and people are buying, the social buying site will pay you. Once that happens, you need to record something. You have received money, but the money is in fact a deposit which doesn’t count as a sale until it’s redeemed by the customer. However, you also need to record the commission that the social buying site has charged, as well as the deposit on the discount cost off the normal pricing.
When customers redeem their coupons, now you can record the sale. Instead of recording the sale against either cash or receivables, you’re recording against the customer deposits account you setup in step 2. You’re also recording the discount expense.
In many cases up to 10% of people who buy from Social buying sites don’t actually redeem their purchase. Once it’s determined it won’t be redeemed, or the expiry date has passed, the customer deposit must be cleared along with the promotion expense deposit you setup initially.
What about the HST?
There are a couple of implications relating to this affecting HST as well. This is especially noteworthy since the delay could be several months between when the sale initially occurs and when the coupon gets redeemed.
- Social buying sites usually charge a commission to companies for their services. This service has HST. It must be recorded when the money is received, or in step 2 above. It’s important to record this because it lowers how much HST you must remit to the CRA.
- Social buying sites don’t collect the HST from customers for you. You must do it when customers redeem your purchase. This is also when you record the HST collection and must remit it to the government. The amount of HST they must pay is determined by the amount paid, not the total sale value.
Social buying sites… clear as mud
Accounting for these purchases isn’t entirely easy, and we’ve had clients who have not correctly recorded the HST. This can lead to problems of paying taxes earlier than you should. Depending on how close it is to your yearend, it can also lead to additional income that shouldn’t be recorded until perhaps the following period.
This may not cover all situations and we stress that the solution isn’t exactly easy to explain. If you have questions, contact your own accountant or please don’t hesitate to contact us today at (416) 495-1098 or info@apbs.ca!
