Gift certificates and tax?

GerryDavid · Nov 14, 2012

Im going to talk to an accountant eventually but I was just wondering if anyone here has experience with this.

If I were to give out a $200 gift certificate to someone to my studio, and they ended up not purchasing anything extra, do they pay tax on the $200? Or does the tax come out of my pocket since it was a gift certificate and it implies they dont have to spend anything extra? Or are they viewed more as a gift card?

bratkinson · Nov 14, 2012

First, I am NOT an accountant, CPA, or even a bookkeeper. However, I do have 'my own business' experience.

As for the taxes on giving out a gift card, you could 'write it off' as advertising expense...not only the $200, but if they were commercially printed, the cost of the printing, as well. That would lower your business taxes. You may or may not 'carry' the card as a liability on your business books. But, it really is. If it gets redeemed, then the liability gets wiped out by the corresponding 'sale'. Should you decide to 'eat the tax' on the sale, thereby making the gift card actually worth the full $200, Then you'd need to figure out how to write-off the sales tax...probably as additional cost of delivery, or, as a discount.

Should the person claim receiving a gift to the IRS on their personal tax return? That's up to them and how honest they may be or not be.

As for redeeming the card, you would charge sales tax (in sales tax states) as appropriate. That would be part of the $200. So, in essence, they'd have a $190 certificate, tax included.

In short,

GerryDavid · Nov 14, 2012

I guess I should put a disclaimer on the gift certificates that tax is not covered so there is no surprise.

I was thinking about this and in terms of a gift card and in that case tax is not included for sure, although if you purchase something less than the gift card total then tax would be covered. But I am giving the gift certificates in the amount of my lowest package. I'll just put a disclaimer on it that they would have to pay tax.

KmH · Nov 14, 2012

Such considerations are going to vary widely by which state's tax laws apply. State law would likely determine if you would or wouldn't be required to collect and forward sale taxes on any gift cards you issue.

As far as federal tax law, IRS gift tax laws would apply.

GerryDavid · Nov 14, 2012

prob best to do to much than not enough. I cant think of her name but shes a big photographer I think over in NC and she got some bad advice when she talked to the tax people and didnt charge tax on out of state weddings, and after 5 or so years they made her pay it back out fo her own pocket.

I think id rather collect the tax from the customer and pay it even if Im not required to so there wont be problems down the road due to a misunderstanding.

MLeeK · Nov 14, 2012

Gift certificates will vary by state and location-as to whether or not your charge the sales tax on the GC itself. Usually not.
Here's the general rule of thumb you can follow:
IF you go into wal mart with a gift card and you buy something taxable-the gift card pays the tax.

jwbryson1 · Nov 14, 2012

KmH said:
Such considerations are going to vary widely by which state's tax laws apply. State law would likely determine if you would or wouldn't be required to collect and forward sale taxes on any gift cards you issue.

This is correct.