Do Stores Charge Tax on Gift Cards?

Gift cards are not considered taxable goods or services at the time of purchase. They function as a form of stored value or a prepayment for future transactions.

Sales Tax When Purchasing a Gift Card

Sales tax is not charged when a gift card is purchased. This is because buying a gift card is an exchange of one form of money for another, rather than the sale of a tangible product or a taxable service. The transaction represents a prepayment for goods or services that may be acquired later. Most states view the gift card as a cash equivalent until it is redeemed.

Sales Tax When Redeeming a Gift Card

Sales tax applies when a gift card is used to purchase taxable goods or services. The gift card acts as a method of payment, similar to cash or a credit card. The tax is levied on the underlying transaction, meaning the sale of the actual item or service, not on the gift card itself.

For instance, if a customer uses a gift card to buy clothing or electronics, sales tax will be calculated on the price of those items, provided they are subject to sales tax in that jurisdiction. The specific method of payment, whether it is a gift card, cash, or credit, does not alter the taxability of the purchased item. If the gift card is used for items exempt from sales tax, such as certain groceries in some areas, no sales tax would apply to that portion of the transaction.

Important Nuances

Promotional gift cards, often given as free rewards or incentives, also follow the same sales tax principles. No sales tax is applied when these cards are issued, as they are not purchased by the recipient. When the recipient uses the promotional gift card to acquire taxable goods or services, sales tax will be collected on that transaction, just as with any other gift card.

For gift cards designated for services, such as a massage or a car wash, sales tax applies when the service is rendered, if that type of service is taxable in the relevant jurisdiction. The initial purchase of the service-specific gift card is not taxed. While sales tax laws can vary among states and localities, the fundamental rule remains consistent: sales tax is imposed on the underlying goods or services at the time of redemption, not on the gift card itself. If an item purchased with a gift card is returned, any sales tax originally paid on that item is refunded in accordance with standard return policies.