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Exploring Sales Tax Implications of Gift Cards and Gift Certificates

Barkin Doganay · February 13th, 2024 · 2 min read

Exploring Sales Tax Implications of Gift Cards and Gift Certificates
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Did you know that in 2012, New York attempted to introduce a law to apply sales tax at the moment a gift card was purchased, rather than when it was used? This potential twist in sales tax law aimed to change how tax liabilities are handled for gift cards, highlighting the complexities of sales tax management and the importance of staying informed on ever-evolving regulations. Imagine the accounting nightmare that would have created for businesses across the United States!

Wondering if you should be tacking on sales tax to those gift cards or gift certificates you're selling? It's a valid concern and definitely something worth diving into, especially when considering the nuances of sales tax compliance and automated sales tax calculation.

Here's the deal: a gift card isn't really seen as a physical item that's being sold. It's more like a promise of money that someone can spend later on. Because of this, you usually don't need to worry about adding sales tax when someone buys a gift card or certificate. But, as with anything tax-related, there are a few twists and turns to be aware of, especially when it comes to nexus in sales tax and e-commerce sales tax.

Normally, sales tax comes into play when someone actually buys something with the gift card. So, if someone buys a gift card in a place with sales tax but spends it somewhere without such taxes, no sales tax is involved in that purchase. However, it's not always that simple. Take 2012, for example, when New York tried to make a move to charge sales tax right when the gift card was bought, not when it was spent. That law didn't get off the ground, but it shows how things can get complicated quickly, highlighting the importance of sales tax management.

To keep your business on the straight and narrow, it's super important to keep up with the ever-changing sales tax regulations in every state you're active in. You'll also want to get familiar with escheatment laws, which Kintsugi wrote about in early 2024. These laws kick in when a gift card isn't used after a certain amount of time, and they can lead to the state wanting a piece of the pie through sales tax on the unused value, affecting your sales tax liability.

Feeling a bit lost in all this? The National Conference of State Legislators (NCSL) has your back. They've got this great tool that lets you look up the nitty-gritty on gift card laws by state, including stuff like expiration rules, fees, escheatment laws, and what happens with the leftover value. Just remember, it's more of a starting point for understanding what's out there rather than the final word on legal matters, but it's an invaluable resource for sales tax consulting.

Gift cards and certificates are still a hit with shoppers, so definitely make them a big part of your offering, especially when special days roll around. Keep those holiday promos coming, and consider leveraging sales tax automation software to ensure you're always compliant with local sales tax and multi-state sales tax requirements.
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