Gift Cards Distributed as part of an Award, Loyalty or Promotional Program are not subject to Ohio Sales and Use Tax
Prior to the enactment of Am. Sub. H.B. 153 last year, the Ohio Department of Taxation (Department) had taken the controversial position that the full face value of a gift card distributed to customers without additional charge, as a part of a promotional program, was included in the “price” when redeemed subject to Ohio sales tax. For example, when a vendor rewarded customers spending a certain amount with a $20 gift card for use on future purchases, the Department asserted the vendor must collect sales tax on the price before applying the promotional gift card. So when the customer returns to purchase $100 of goods, for instance, and uses the $20 promotional gift and pays $80 cash, the Department would require sales tax to be collected on $100, even though the $20 gift card was effectively a vendor discount provided to valued customers.
Now, the gift card amount is specifically excluded from the definition of “price” as long as (1) the gift card is not sold by the vendor or purchased by the consumer; (2) the card is distributed pursuant to a vendor’s award, loyalty or promotional program; and (3) the vendor does not receive reimbursement or compensation from a third part for any portion of the card’s value. R.C. 5739.01(H)(1)(c)(v). Further, “gift card” is defined broadly to include both tangible and intangible documents, cards, certificate or records, meaning that digital gift cards provided electronically are also excluded from the “price” when redeemed. R.C. 5739.01(PPP).
However, an issue still exists for online deals offered by third-parties, such as Groupon or Living Social, where customers can purchase a gift card or certificate to use at a store or restaurant for a fraction of the value. For example, when a customer purchases a $50 “gift card” to use at a store or restaurant for $25, the Department would still require the merchant to collect sales tax on the full value of the gift card upon redemption – $50 in this situation – instead of the $25 that the customer actually paid. Although strong contrary arguments exist, Ohio is not the only state to take this aggressive position, as the taxability of these social coupons is gaining more attention nationwide. (See Social Confusion: How do Sales Taxes Apply to a Groupon? (Forbes) and Groupon users paying too much in sales tax says tax man (WKYC). We expect this issue to be an area of contention in future Ohio sales tax audits.
Please contact us if you need help addressing issues regarding promotional gift cards or social coupons, as planning opportunities exist to help avoid adverse sales tax collection obligations.