The National Retail Federation predicts that gift card sales—a popular holiday purchase—could reach $28 billion this holiday season. “The average shopper will purchase three to four gift cards and spend $51.18 per gift card ($170.48 per person).” If you already offer gift cards or want to do so, be sure you’re doing things correctly.
Benefits of offering gift cards
There are numerous reasons why you should be offering gift cards to customers. PlasticPrinters lists 20 reasons, including:
- Customers using gift cards typically spend 20% – 50% more than the average purchase amount
- Nearly three-quarters (72%) of gift card purchasers spend more money than the value of the card while redeeming
- Gift cards an extremely popular gifts
- Gift cards engenders loyalty. One in five adults reload their gift cards
- Some or all of the value of the card may not be redeemed. According to Bankrate, 43% of adults have an unused gift card, gift voucher, or store credit. The higher the income of the consumer, the more likely it is there’s an unredeemed benefit. See below for what happens to this unredeemed amount.
Legalities
Be sure to comply with federal and, where applicable, state law.
Expiration date. Can you put an expiration date on a gift card or must you honor them indefinitely?
- Federal law. The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 imposes certain rules on merchants for the protection of consumers. Under this law, gift cards cannot expire for at least 5 years.
- State rules. Some states have rules that are stricter than those under the CARD Act. Examples:
Can cardholders cash them in? In some states, when the card balance is below a certain amount, the holder can turn them in for cash. For example, California requires the balance to be below $10, Colorado less than $5, and Rhode Island less than $1.
Who keeps unclaimed gift cards? If the cards are not redeemed and the expiration date passes, what happens to the funds? As a general rule, merchants can keep the funds from cards that are not redeemed by the time of the expiration. In some states, merchants have to turn the unclaimed funds over to the state. This becomes “unclaimed property” and if not claimed within a certain time period (called a dormancy period), it escheats to the state (the state owns the funds and can use them at that time). For example, in New York there’s a 5-year dormancy period for gift certificates. The National Association of Unclaimed Property Administrators has a state-by-state listing of the time frame for funds that escheat to a state.
Tax treatment of revenue from gift card sales
Your tax accounting method—cash or accrual—determines when you must include revenue from the sale of gift cards in income.
- If you’re on the cash basis, as most small businesses are, then payments for gift card sales are income when received.
- If you’re on the accrual method, you also recognize income in the year of receipt (“full inclusion rule”). But there’s an option to defer income for one year.
Note: From an accounting perspective, the sale of gift cards is recorded as a liability because goods and services have yet to be furnished. But it’s more complicated than that, and a CPA or other tax adviser can help to properly record gift card transactions on your books.
Final thought
If you’ve sold gift cards, take action to encourage redemptions to reap the benefits listed earlier (e.g., additional sales). Payability says to “remind shoppers of their remaining balances. One reason shoppers don’t spend their gift cards is that they don’t remember their balance, and it’s too much trouble to check the card online. For physical cards, always let customers know what their remaining balance is by either printing it on the receipt, or, better yet, by sending an email confirmation. Then use email automation to periodically remind them of their remaining balance.” Good luck!
Find other blogs on the subject of holiday planning for your business in this list here.
