Gift cards are a popular tactic for growing sales. However, they may only get redeemed long after they are used (possibly even in a different financial year), and in some cases may never get redeemed at all due to expiry. So when is the income generated from the sale of gift cards taxable? At the point of purchase? Or at the point of redemption or expiration? A recent Tax Court ruling provides some clarity.
In this particular case, a retailer disputed a SARS assessment that included the sale of gift cards in their taxable income irrespective of whether the gift cards had been redeemed or not. As far as SARS was concerned, the gift cards were merchandise that had been sold to customers on a cash basis. However, as intuitive as this reasoning may appear, there are complexities that have to be taken into consideration.
For starters, gift cards are not technically a sale of property. Instead, they constitute a prepayment for future purchases. However, neither the identity of the eventual gift card beneficiaries, the nature of the goods for which the cards are redeemed, nor the value of those goods will be certain at the point of sale.
Another important factor raised by the retailer is that the Consumer Protection Act prescribes a minimum expiry period of three years for gift cards. To comply with this requirement, the retailer held the cash received from the sale of gift cards in a separate bank account on the basis that the money wasn’t for their benefit but rather for the benefit of the customers who redeemed the cards in the future. They argued that the cash only formed part of their gross income (and became taxable) when the cards were redeemed or expired.
To further support this argument, the retailer pointed out that the Consumer Protection Act specifically states that any consideration paid for a gift card (or similar token) remains the property of the bearer of the card until they redeem it for goods in the future. Suppliers are explicitly prohibited from treating any prepayment as their own property.
In response, SARS pointed out that the Consumer Protection Act may specify how the retailer ought to treat money that it received from its customers, this didn’t change the fact that it received the money in the course of their normal operations. Therefore, they argued, the sale of gift cards still constituted part of the retailer’s gross income and became taxable at the point of their purchase.
However, the Tax Court was not convinced by the argument presented by SARS. If the Consumer Protection Act requires a supplier to defer its revenue, then the associated tax must be deferred as well. To conclude otherwise would mean taxing a supplier for income that they have not legally accrued. Therefore, the Tax Court ruled in favour of the retailer, effectively allowing them to defer any tax on the sale of gift cards until such time as the cards were redeemed or expired.
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