Missouri Issues Ruling on Taxability of Purchased and Stored Gift Cards
Even though the sale of gift cards to consumers is not subject to sales tax since those transactions are treated as the sale of intangible property, retailers are generally taxable on their purchase of those cards.
By: Tina M. Chunn, SALT Senior Manager
How sales tax is applied to the sale of a gift card from a retailer to a consumer is fairly common tax knowledge. A gift card represents a restricted monetary equivalent that is used as an alternative form of payment; therefore, the sale of gift cards to the consumer represents a sale of intangible property (as a cash equivalent) and is not subject to sales tax. When the consumer uses the gift card to purchase taxable items, the sales tax is applied based on the price of the item and the total cost (including sales tax) is deducted from the gift card balance.
What about the purchase and sale of the cards prior to the consumer transaction? Recently, Missouri published a ruling regarding the applicability of sales and use taxes on the purchase and storage of gift cards from a third-party vendor. Specifically, the requestor (“Taxpayer”) sought guidance regarding 1) the applicability of Missouri use tax on the purchase of gift cards; and 2) whether gift cards temporarily stored at Taxpayer’s Missouri distribution center are subject to Missouri use tax.
Taxpayer is a subsidiary of a restaurant group that owns several restaurants around the U.S. and Missouri. The restaurant group designs the gift cards and Taxpayer contracts with a third-party vendor outside Missouri to produce the cards. After the cards are produced, the vendor ships the gift cards, via common carrier, to Taxpayer’s distribution center in Kansas City, Missouri. The cards are delivered to the warehouse as “FOB Plant,” meaning that title and risk are transferred to Taxpayer at the vendor’s production facility (outside Missouri). Taxpayer arranged for the vendor to provide in-transit insurance and management of claims for loss of damages to the gift cards.
The restaurant group contracts with Taxpayer’s Missouri distribution center for gift card fulfillment and distribution to the restaurants throughout the U.S., including online purchasers, at the restaurant’s direction. These cards may be temporarily stored at Taxpayer’s Missouri distribution center before shipment to various locations. Approximately 1% of all restaurant gift card redemptions are at Missouri restaurant locations.
The Missouri Department of Revenue (DOR) ruled that Taxpayer’s purchase of the cards is subject to Missouri use tax. Note that prior to the card being sold as a “gift card” to the consumer, it is just a piece of plastic (i.e., tangible personal property) and the retailer/owner of the card is considered the end-user. Use tax applies in this case instead of sales tax because the retail sale did not occur entirely in Missouri.
As to Taxpayer’s second question, DOR explained that the temporary storage of property (for less than one year) for subsequent use outside Missouri is not subject to Missouri use tax. In order to qualify as “subsequent use outside Missouri,” the purchaser must intend to subsequently use the property outside the state at the time the property is delivered to a Missouri location. Since Taxpayer retains ownership of the cards until they are purchased by the ultimate consumer, Taxpayer should remit the use tax to Missouri on cards that are sent to Missouri locations for sale, regardless if they are first sent outside the state for distribution and ultimately returned to the state for sale. While not addressed by the ruling, cards that are distributed outside of Missouri may be subject to use tax in the destination state.
As shown in this ruling, the classification of property – tangible, intangible, or real – can change over the property’s life based on its use and the specific transaction in which it is involved. The sales and use tax rules must be applied to the classification of the property at the time of each transaction. Further, in states where there are temporary storage exemptions, the sales or use tax may not apply to the entire transaction dependent on the final location of the ultimate consumer.
Aprio’s SALT team is experienced with these sales and use tax issues. We will work with you to review the transaction and identify the proper tax treatment so that you remain in compliance with your sales and use tax obligations and do not incur unexpected liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
This article was featured in the October 2020 SALT Newsletter.
 Missouri Private Letter Ruling No. LR 8070, 11/25/2019. In some states, it can take a substantial amount of time from when a ruling is formally issued to the taxpayer to when it is made available to the general public, based on each state’s publication process.
 See 12 CSR 10-113.300.