The holiday season is here, which means spending time with good friends, eating good food, and of course… presents! Although shopping for friends and family can be challenging at times, giving a gift card to a favorite restaurant, museum or theater can be sure to please the pickiest of people.
As easy as it is for the consumer to buy the gift card, the seller should be aware of the related tax and legal considerations so as not to create any unintended exposure.
In 2004, the Washington Legislature substantially overhauled the state’s general rules related to gift cards and gift certificates. The changes included better protection for consumers by prohibiting most expiration dates, service fees, and dormancy/inactivity charges. Additionally, vendors holding unredeemed gift cards/certificates are no longer required to report these amounts as unclaimed property1.
However, not-for-profit organizations were granted certain exceptions from the new expiration date prohibition. In general, the state allows expiration dates on gift cards and gift certificates issued by nonprofit artistic and cultural organizations, provided the following conditions are met:
- The gift card or certificate is redeemable solely for goods or services provided in the State of Washington by the organization;
- The expiration date is clearly and legibly printed on the front or face of the gift card or certificate, or printed on the back in at least ten-point font;
- The expiration date is at least three years from the date the gift card or certificate is issued; and
- Any unused value of the gift certificate at the time of expiration accrues solely to the benefit of the issuing organization.
Additionally, a gift card or gift certificate donated to a charitable organization and used by the organization solely to provide charitable services may have an expiration date so long as no cash or other thing of value is provided in exchange for the donation2.
Lastly, expiration dates are allowed when a gift card or gift certificate is donated to a charitable organization and is used for fund-raising activities (for example, to be included in a fund-raising auction held by the organization). The only requirements are:
- Nothing of value may be provided to the donor in exchange for the gift card or gift certificate;
- The expiration date must be clearly and legibly printed on the front or face of the gift card/certificate, or printed on the back in at least ten-point font; and
- The expiration date must be at least one year from the date of issuance3.
For both Washington retail sales tax and business and occupation (B&O) tax purposes, the initial sale of a gift card or gift certificate is a nontaxable transaction. The vendor is subject to B&O tax when the gift card is actually redeemed by the customer for merchandise or services. The measure of the tax is the total selling price of the merchandise or services at the time of redemption.
Because the gift card/certificate is not a discount from the gross selling price, the vendor may not deduct gift card/certificate redemptions from gross income on the Washington State excise tax returns. The sales tax treatment of the redemption transaction will be the same as if the merchandise or services were purchased with cash, credit card or other means. The B&O tax and sales tax, if applicable, must be reported to the state on the organization’s Washington excise tax return for the period in which the redemption transaction occurs.
Not-for-profit organizations are not required to report any gross income for B&O tax purposes when they receive donations of gift cards or gift certificates, provided the donor receives no significant goods, services or benefits in return for making the gift. A use tax exemption is also provided to nonprofit organizations who receive donated property, including gift certificates and gift cards.
With these facts in hand, vendors and consumers as well as donors and organizations can be well prepared for the gift-giving season.
1 Washington State Department of Revenue Special Notice, Gift Certificates and Gift Cards – Changes for Businesses/Holders, June 10, 2004.
2 RCW 19.240.030
© Clark Nuber PS, 2013. All Rights Reserved