Taxability of Gift Certificates

The IRS has recently issued an opinion that gift certificates, gift cards, gift coupons which have a face value on them are considered cash equivalents and therefore are subject to employment taxes without regard to their value. This includes gift certificates which cannot be converted to cash. It also includes theater tickets and tickets to sporting events. Gift certificates or gift cards to the Bookie, Home Depot, Nordstrom, etc., which are given to employees for any reason and for any amount are taxable to the employee.

Payroll Services will tax employees using the earnings type “Fair Market Value” (FMV) or FMS for students. Accounts Payable will provide payment information to Payroll Services. Departments should identify recipient’s name, WSU Id number, account coding and amount received on invoices, department order comments, or purchasing card notes when processing orders.

Background

Employer-provided holiday gift coupons redeemable at local grocery stores are not excludable from gross income and wages as a de minimis fringe benefit, according to a recently published technical advice memorandum from the Internal Revenue Service.

The memorandum explained that in the past, an employer provided employees with a ham, turkey or gift basket as an annual holiday gift. However, the employer switched to giving employees a gift coupon instead, because some employees with certain religious convictions or dietary limitations had requested it. The gift coupon program also reduced the costs of obtaining and delivering holiday gifts.

The gift coupons had a face value of $35, the approximate value to the annual holiday gifts provided in the past.

The gift coupon had the employer’s name and address printed on the front. The face value and the words “gift coupon” were prominently displayed. The coupon listed food stores where the coupon was redeemable and had certain restrictions.

The employer did not withhold or pay any employment taxes for any portion of the $35 gift coupon provided to employees during the first two tax years that the program was in place.

Three Fringe-Benefit Factors

IRS said applying the statutory definition of a de minimis fringe benefit requires addressing three factors: value, frequency and administrative impracticability. Because cash and cash equivalent fringe benefits, like gift certificates, have a readily ascertainable value, they do not constitute de minimis fringe benefits because accounting for these items is not unreasonable or administratively impracticable.

IRS said that the gift coupon operates the same way as a cash equivalent fringe benefit such as a gift certificate. Accordingly, its value must be included in the employee’s gross income it said (Technical Advice Memorandum 200437030).

Gift certificates may be awarded to employees in recognition of outstanding achievements, safety performance, longevity, outstanding public service or service as employee suggestion evaluators and implementers. The award amount is limited to $200. (RCW 41.60.150)

Gift cards and prizes purchased for employee recognition awards must be in accordance with BPPM 55.56.

University personnel are to use cash equivalents in only the circumstances outlined in the Allowable Uses of Cash Equivalents Table.

Contact Payroll Services with any questions at (509) 335-9575 or payroll@wsu.edu.

Effective Dec 2005