Is Gift Card Money Deducted Before or After Sales Tax?

Tax is generally not charged when purchasing a gift card, but most likely will be charged on a purchase in which the gift card is used as a payment method. In general, tax will be added to a sale transaction before applying the credit of a gift card at purchase. Pay attention to your receipt or online checkout screen to verify specific terms when buying gift cards. You might want to keep the original receipt with each gift card purchased, as rules vary per state and per card issuer.

Tax Treatment of Gift Cards

Gift cards and gift certificates are to be treated as cash, according to the Federal Trade Commission. No tax should be charged for the purchase of gift cards, but tax should be added to a sale transaction before applying the credit of a gift card at purchase. However, the Federal Trade Commission does give state legislatures some license through statutes on how each state might define what is a gift card or gift certificate, whether it will be redeemable for cash and other detailed items.

Gift Cards and State Regulations

As of March 2013, the online retailer used gift cards issued by a company in Washington State dictating that Amazon’s gift card terms be governed by that state. On January 17, 2012, Bob Reilly, a New York assemblymen, suggested a bill that would charge sales tax when a gift card was purchased in New York State rather than when it was redeemed, to keep New York from losing taxes when these cards were used outside the state.

Rules for Online Purchases

Many companies who sell items online do not charge sales tax unless you live in a state where they have a physical retail location, and in this situation, sales tax would not be charged with a gift card purchase. Other companies charge the sales tax for your state and city based on your billing address. Most online retail companies have a gift card section on their website to describe their specific rules.

Gift Cards From Employers

According to the Internal Revenue Service, if you have received your gift card as payment from your employer, then it has most likely been taxed when your employer purchased the card. When you redeem your gift card, the amount should also be entered as income on your federal income tax return and can only be deferred for one year. You should consult a tax attorney if you suspect this would not apply to your situation.