Taxes and Gift Cards

Tax Day is close and Gift Cards are not exempt

Merchants and Recipients need to think about Gift Card taxes

There is no doubt that Gift Cards prove a very troublesome animal to merchants regarding taxes. The issue is around revenue regognition and the taxes due. Think of this situation: A local ice cream shop has decided to use Gift Cards as a way to grow sales along with brand. During the months of October, November and December they sell over $10,000 worht of gift cards but only $1,000 are redeemed that year. Where do they apply the taxes? Did they earn that "extra" $9,000 from gift cards in the year they were sold or should that profit be applied to taxes as they are used? What if they are never used? Is there a cut off date? These questions have murky answers that differ state by state and are often enough to keep merchants from using gift cards depsite their undeniable appeal.

There is a great deal of information on google and yahoo regarding this topic for merchants. The challenge is that the information often is not compatible. The best advice is to consult a local tax attorney.

For recipients of gift cards the issue is a bit clearer. If you are given a gift card from iTunes or any other merchant from your employeer it should be viewed exaclty like normal pay and will be taxed the same. There once existed a lophole that allowed companies to "pay" or reward employees tax free with gift cards. This was closed a number of years ago.