Can You Buy a Gift Card With a Gift Card?

It is a common question whether one gift card can be used to purchase another. This query arises when individuals receive gift cards for retailers they do not typically frequent, leading them to consider exchanging the value for a different store’s offering. The perceived simplicity often belies complex policies and financial principles governing how gift cards are treated by businesses. Understanding these intricacies clarifies why such transactions are not universally permitted.

Understanding the General Rule

Generally, purchasing a new gift card with an existing gift card is not permitted by most retailers. This policy stems from the fundamental nature of a gift card as a form of stored value or a payment instrument, distinct from cash. When a gift card is sold, it is recorded as a liability, representing a prepayment for future goods or services. This means the retailer owes the cardholder merchandise or services, not cash.

Gift cards are designed to facilitate the purchase of specific goods and services from the issuing merchant, rather than to serve as a convertible financial instrument. Unlike traditional money, a gift card is a promise to exchange goods or services. Using one gift card to acquire another would essentially exchange one liability for another, complicating a retailer’s financial tracking. The primary purpose of a gift card is to drive sales of a retailer’s own inventory, not to enable internal currency circulation or transactions that do not directly involve their products.

Distinguishing Similar Payment Methods

While traditional gift cards cannot purchase other gift cards, certain similar payment methods, such as store credit or merchandise credit, may operate under different rules. Store credit is often issued by retailers as an alternative to a cash refund, particularly for returns made without a receipt or after a specific return window. This credit represents a direct financial obligation from the retailer to the customer, originating from a prior transaction rather than a direct purchase.

The key difference lies in their origin and regulatory treatment. Gift cards are prepaid instruments purchased as gifts, considered a payment method subject to state regulations. Store credit is issued directly by the business, often as a refund or loyalty reward, and may have different terms regarding usage, including expiration dates or product limitations.

Some retailers may still prohibit the use of store credit for gift card purchases, citing similar fraud concerns. Others might allow it because it represents a distinct internal credit from the business, rather than a purchased financial instrument. Specific terms vary significantly by retailer, so understanding the store’s individual policy is necessary to determine if merchandise credit can be applied towards a gift card purchase.

Reasons Behind Retailer Policies

Retailers enforce policies prohibiting the purchase of gift cards with other gift cards for several reasons, primarily fraud prevention, maintaining financial integrity, and upholding program integrity. A concern is the mitigation of fraud, particularly money laundering. Criminals may use stolen credit cards to purchase gift cards and then convert these into other gift cards, including general-purpose prepaid cards, to obscure the origin of illicit funds. This layering of transactions makes it harder to trace the money’s source, acting as a “washing” mechanism for illegally obtained funds. To combat this, retailers often limit gift card purchases and implement stricter activation rules.

From an accounting perspective, these policies simplify financial tracking and revenue recognition. The sale of a gift card is not recognized as immediate revenue; instead, it is recorded as a deferred revenue liability. Revenue is only recognized when the gift card is redeemed for goods or services. Allowing one gift card to purchase another would create complex accounting entries, involving exchanging one liability for another without a direct sale of merchandise, potentially distorting financial statements.

These restrictions help maintain the integrity of the gift card program. Gift cards are a marketing tool designed to encourage customers to purchase products or services directly from the issuing brand, increasing sales and customer loyalty. Allowing them to be used to buy other gift cards could enable arbitrage or create a secondary market, diverting potential sales away from the retailer’s core offerings. The policy ensures that gift cards function as intended: a mechanism to facilitate direct transactions for goods and services.