I wonder if Kmart may not have a corporate policy, but allows their stores to use their discretion about accepting coupons. If some stores are having issues with fraud due to this coupon, then they may decide not to accept it at this time.
Is this the birthday club coupon?
Also, if I am reading things correctly, it does look like there has been fraudulent use of this coupon. If this is the same coupon I am reading about, it comes in an email from signing up on their website. However, people have been posting the coupon online and others have been printing them off. If this is the case, they I believe Kmart has a right to deny any coupons that are being used by those who did not receive them by email.
If it is the birthday club coupon, did you sign up for it yourself? If so, print out the email they sent you as well as the coupon to prove it.