New Ruling: Gift Card Taxes

Posted By:  Rob Coon,  President of Dydacomp

The Internal Revenue Service announced last week that the sales of gift cards do not have to be counted as taxable income until they are redeemed even if they were sold through a subsidiary or franchise, or are issued as a refund for returned merchandise.

Previously the regulations regarding gift cards stated that income could be deferred as long  as the cards were redeemable with merchandise from the company that sold them. Problems arose because most retailers have subsidiaries that handle and sell gift cards; the IRS contended that the income is taxable upon the time the gift card was sold even if it was redeemed by another division in the company. The National Retail Federation argued that the income from gift cards still goes to the same company regardless of whether the cards are sold directly by the parent or through a subsidiary.

The deferral of taxable income on gift cards doesn’t affect retailers if the cards are redeemed in the same year they are purchase. However, the deferral can be a large factor in retailer’s tax liability when a card is sold in one year and no redeemed until the following year. This often happens during the holiday season. The IRS now says that gift card income can be deferred regardless of whether the cards are redeemed by the parent company, a subsidiary or a franchise.

Does this new ruling affect your business? How do you feel about this new ruling on when gift cards become taxable?

Check out further information on the National Retail Federation site.


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