Question on sales and income tax on gift cards

[mikesclub]

We plan to sell our own paper gift cards. But I don’t understand how to record the sales for both sales tax and income tax purposes. 

I know that I don’t collect sales tax when a customer buys a gift card. But I do collect the money at that point (for example: I receive $25 for a $25 gift card). I issue a receipt for that purchase. 

first question: Since Square records that sale, am I correct to assume that the sales tax comes out of the price the buyer paid?

now, when a gift card holder uses the gift card for merchandise in my store, I deduct the amount of their purchase, plus sales tax, from the remaining balance on their GC. 

second question: how do I record the GC holder’s purchase? More importantly, how do I issue them a receipt (for example, if the item they purchased has a return policy)? 

the sales tax part seems to be easy, but I also have to report my income to the IRS. If I record the sale both times (when someone bought the gift card, and when someone redeemed the gift card) it seems like I am recording $50 in sales when I actually only collected $25. 

[perkits]

All good questions. In your case when you sale a gift card you receive cash or CC.

When the record an actual sale and Tender as Other (Paper Gift Card) I don't believe it records as cash or CC sales, but breaks out the sales tax for reporting purposes. It will show up in sales report as "Other". We did this years ago and it's very difficult to keep up with. Of course the easiest way is to use the Square Gift Card System which solves all the problems you're asking about.

Maybe someone for Square can verify this.

[ryanwanner]

Hello @mikesclub !

As @perkits said, paper gift cards can get a little tricky to manage. Before I switched over to Square's cards, here's what I did:

• Set up a Gift Certificate item. Configure the item as tax free so the system does not collect taxes on that product.
• Sell the Gift Certificate as usual.
• On Quickbooks (or whatever accounting software you use), set up a Gift Certificate liability line item. Whenever you sell a GC, subtract that sale from your daily sales and place the GC dollar amount in that liability line item. (Example: $100 in total sales, you sold a $25 GC. Your total sales for the day is actually $75. The $25 shows up as a liability in QB.
• When the GC returns, ring up the sale as usual, taxes and all.
• Close the ticket to the "Other Gift Card or Certificate" tender type. (You may need to enable it on your POS)
• I got in the habit of automatically printing a receipt with every GC redemption. I'd also write the new balance directly on the GC plus my initials. That way everyone knew what the active balance was.
• On QB, set up a GC Redeemed item in your sales report. Have that link to the GC liability line item as a negative entry. (an accountant or bookkeeper can help you with this step if you need it) This way, when you enter the redemption it automatically takes the amount out of the liability.

The redemption of the GC is considered the sale. Since you've removed that initial purchase from the sales, you aren't doubling your sales. I hope this makes sense.

The biggest takeaway to remember is that a purchase of a gift certificate (or actual gift card, for that matter) is NOT considered a sale. In essence, your customer is giving you a loan towards future purchases. You have to track that accordingly in your accounting software: it is considered a liability on your books until your customer comes in to cash in that loan in the form of purchasing a product. 

If you're in a financial position to do so, I recommend also having a special bank account set up to move all the GC sales into. As the GC is redeemed, move that dollar amount into your operating account. If the unthinkable happens and you close your business, technically your customers are owed the money that is on the card and you'll need to reimburse them. If that money is in its own account, it'll be easier to distribute. Of course, if you know a small business owner that's able to consistently do this, I'd love to meet them. 🙂

Hope this helps!