Retail Gift Card Rules

Print Retail advisory firm, Grant Thornton LLP, has announced the release of its new white paper, Gift Cards: Opportunity and Issues for Retailers. The paper examines the gift card industry and looks at the tax and accounting implications of recent legislation on retailers. “Gift cards have become an area of both opportunity and risk for retailers,” says Giles Sutton, the main author of the paper, and Grant Thornton’s state and local tax partner and national retail tax practice leader. “They have come to provide a critical source of earnings, yet at the same time, the regulatory environment, including tax and financial reporting for gift cards, has become increasingly complex. The bottom line is that financial executives within the retail industry cannot afford to be blindsided by tax, regulatory and financial reporting changes in this area,” Sutton adds. Key issues discussed in the white paper, include:

State Tax Nexus Issues for Retailers. For gift card issuers to be subject to state taxation, the issuer must have nexus, a physical or economic presence sufficient to establish jurisdiction to tax in that state. It is important for companies to understand what establishes nexus in the various states in which their gift cards are sold, since each state’s rules differ.

State Unclaimed Property Rules. The increasing popularity of gift cards also makes the management of unclaimed property, or escheat liabilities an important issue. All U.S. states and the District of Columbia, as well as Puerto Rico, Guam, the U.S. Virgin Islands and certain other foreign jurisdictions, have explicit unclaimed property reporting requirements. Unclaimed property liability is not a tax, but rather a liability under state succession laws relating to property rights.

Breakage and Generally Accepted Accounting Principles. Retailers routinely sell gift cards to individuals, with the expectation that a certain portion of these cards will never be used, called breakage, which mostly results from lost cards. If the card does not fall under specific state escheat rules, the question arises as to when companies can recognize income from breakage for financial statement purposes under GAAP.

In addition, the white paper also looks at recent IRS directives on gift cards, both favorable and unfavorable to retailers, and how the IRS plans to focus on revenue recognition in connection with gift card sales. “The sales and use of gift cards continues to increase. Therefore, retailers will continue to focus on maximizing revenue and earnings from gift card sales,” says Sutton. “Maximizing earnings is dependent on minimizing breakage, subject to state escheat laws, managing state income tax consequences of issuing and distributing gift cards, and achieving the ability to defer revenue from the sale of gift cards for federal income tax purposes. These will be ongoing issues for retailers for the foreseeable future.” To download a copy of the report, visit