When Is Revenue From the Sale of Gift Cards Taxed?

• DOI: http://doi.org/10.1002/jcaf.22042
• Date: 01 May 2015
• Author: Shirley Dennis‐Escoffier
• Published date: 01 May 2015

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Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22042

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Shirley Dennis-Escoffier

When Is Revenue From the Sale of Gift

Cards Taxed?

Gift cards are very popular

due to their convenience for

both gift givers and recipients.

The simple concept of a busi-

ness selling gift certificates or

gift cards for future redemption

of its own merchandise has

evolved into the current practice

of retailers selling gift cards for

entities unrelated to them. For

example, a drug store may have

a display rack of assorted gift

cards for other businesses as well

as its own.

The sale of a gift card is an

advance payment that may or

may not result in a deferral of

income for tax purposes. As gift

cards have evolved, the IRS has

also evolved in its interpreta-

tion of when income should be

recognized for tax purposes. It is

important for taxpayers engaged

in gift card transactions to keep

up with these changing posi-

tions.

GIFT CARD ARRANGEMENTS

In the typical gift card

arrangement, the business

accepts cash in exchange for a

promise to provide goods or

services at a future date, and

the purchaser is given the card

as evidence of this advance

payment. Originally, gift cards

could be redeemed only with

the seller, but many businesses

expanded into selling gift cards

that could be redeemed with

either the seller or a related

company. For example, a large

restaurant management corpo-

ration would sell gift cards that

could be redeemed at any of

the restaurants within any of its

chains.

Gift card arrangements have

recently become more com-

plex. Gift cards are now com-

monly sold by one retailer and

redeemed either by that retailer

or by others (related or unre-

lated to the selling entity) under

a gift card service agreement.

Typically, a gift card company

receives and holds the gift card

sales proceeds until a customer

uses the card for goods or ser-

vices. A participating merchant

is obligated to accept the gift

card as payment of goods or

services, and the gift card com-

pany is obligated to reimburse

the participating merchant for

the sales price of the goods or

services. Under a typical gift

card agreement, the gift card

company is primarily liable to

the customer for the value of the

gift card until the card expires or

is redeemed. The tax question is

when the revenue from the sale

of gift cards must be included in

taxable income.

INTERNAL REVENUE CODE AND

REGULATIONS

Internal Revenue Code

(IRC) Section 451(a) states that

income must be recognized

when received unless the method

of accounting allows for the

income to be recognized in a dif-

ferent period. Under the accrual

method, revenue is included in

taxable income when all events

have occurred that fix the right

to receive the income and the

amount can be determined

with reasonable accuracy. All

the events that fix the right to

receive income generally occur

on the date of the earliest of:

1. The required performance

takes place,

2. The payment is due, or

3. The payment is received.

If the taxpayer uses the

accrual method of account-

ing, the issue is whether the

income from the gift card may

be deferred for tax purposes

to a later year than the year of

receipt.

Regulations Section 1.451–5

states that advance payments

for goods can be included in

income in the year received or

deferred until the earlier of the

year the sale is reported for tax