Dear Wine Industry Members:
Gift Cards – offer more benefits than you may know
As I stood waiting for a cashier at the grocery store, I was confronted with a bewildering array of gift cards. I looked and looked, but I could not find cards for my favorite Oregon wineries. Is this a missed opportunity?
We’re in a gift card society. Let’s face it, gift cards are easier and cheaper to mail than a bottle of wine. Consequently, if you offer gift cards, you’ve likely seen a large increase in purchases through your wine clubs and tasting rooms. This is great business because it means you’ve now converted one customer into two customers. The gift card purchaser is marketing your wine for you!
Are you taking full advantage of the income tax deferral opportunities for gift card sales? If not, it may not be too late for you to do so.
The general rule is that revenue from the sale of gift cards is income to you in the year you receive the funds. Since a large part of the gift card market is based on year-end holiday sales, you likely see an influx of cash from gift card sales in November and December. The use of the gift cards may not occur until the subsequent year, if ever. This may have the effect of distorting your revenues and profit margins because the revenues may be reported when the card is sold, but the cost of the wine sold may not be recorded until the gift card is actually used.
The Internal Revenue Service recognized that distortions may be occurring. In 2004, they changed their guidance to allow for a deferral of the recognition of income from the sale of gift cards. This has an added benefit to your cash flow. Not only do you receive the cash from the gift card sales, but you don’t have to pay income tax on the sale until later.
What’s the catch?
There’s always a catch. The IRS allows this deferral of income, but only if you have adequate records. Fortunately, many of the software vendors servicing the wine industry have applications that will track this information for you.
Essentially, the IRS allows a deferral of income into the second tax year for revenue from the sale of gift cards not used in the year of sale. The regulations only allow a deferral into the second tax year, even if the gift cards have no expiration date and may not be used for several years, or may never be used.
The rules for deferral are automatically allowed for accrual method taxpayers if their revenue recognition method matches the reporting method they use on an “Applicable Financial Statement”. An applicable financial statement is generally an audited financial statement or a statement provided to a government agency.
The deferral method is allowed to other accrual method taxpayers but only if the seller has enough inventory on hand to satisfy the outstanding gift cards, were they all to be redeemed.
If you haven’t been accounting for gift card sales using the deferral method, you may elect to do so by filing IRS Form 3115 to request a change in accounting method.
The Internal Revenue Service issued Revenue Procedure 2004-34 to clarify and consolidate prior rulings on amounts received for gift cards and gift certificates. Further clarification was issued in Revenue Procedure 2011-18. The specific accounting treatment is provided in IRS Regulations Section 1.451-5. We urge you to check out these sources to ensure the rules apply to your situation.
Oregon crashes the party
Gift cards have been a boon to retailers. However, in an effort to better protect the public from unused gift cards, Oregon updated their gift card law on January 1, 2012.
The new Oregon law prohibits the expiration of gift cards, unless the card was originally sold at a discount from face value, and then only if the card is printed with the expiration date using a 10 point font, and the expiration date is not less than 30 days from issuance.
Further, all Oregon gift cards are now redeemable for cash if the unused balance is less than $5 and it has been used for at least one purchase.
For those of you serving food
In March 2012, the Issue Management Resolution System of the IRS ruled that gift cards used in your restaurant should be treated the same as cash for reporting tip income of employees. You may be filing Form 8027 to allocate tips to all of your wait staff when gift cards are used to purchase food and beverages. If the gift card can also be used for paying tips directly to your servers, then the tip amount should be reported the same as if the customer used a credit card for their direct servers. (IMRS Issue 06-0000202).
We hope you find these discussions helpful. If you have additional questions or concerns, our Wine Industry Information Group would be happy to assist you with advice specifically tailored to your situation. You may contact us at any time. If you prefer to receive these messages via email, please contact Trish Jensen (firstname.lastname@example.org).