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New York Bill Would Collect Gift Card Taxes Up Front

February 6, 2012
Prepaid
Ben Jackson
Mercator Advisory Group
New York wants to apply sales tax to gift cards at the time that they are purchased, instead of when they are redeemed. New York Assemblyman Bob Reilly put the bill (number is A09035) forward on January 17. He said in an interview with the Daily Gazette of Schenectady, N.Y., that the state loses tax money because a large number of gift cards go unredeemed.

The proposed bill also would change the New York tax code. Sales paid for with a gift card or gift certificate would not be subject to sales tax. This would prevent card holders from paying sales tax twice. The protection would only occur if the card was bought and redeemed in New York State.

States are looking for any source of new funds that they can find, but this bill would cause more problems than it solves. First, New York would collect sales tax on cards that are given to people outside of the state. This means every time someone wanted to send a gift card to a friend or relative outside of New York, the state would collect sales tax on a purchase made in another state. Meanwhile, the state in which the card is redeemed will collect sales tax on the purchase made with the card. So, each card would be taxed twice, once each by two different states.

Second, this will raise the cost of gift cards for New Yorkers. Both shoppers and store employees would need to learn a whole new system for buying and using gift cards, which would be different than other states.

Third, the law makes no mention of split-tender transactions. How would stores account for the part of a purchase that is not paid with a gift card? What sorts of changes will they need to make to their cash registers, accounting systems, and employee training? While adjusting for this is technically feasible, that does not mean it will be easy or inexpensive.

What may happen is that retailers stop selling gift cards in New York State. If the business becomes too complicated and costly, then the retailers will look for other alternatives, including no longer selling cards.

The story is at: http://www.dailygazette.com/weblogs/capital-region-scene/2012/jan/27/0127_giftcaard/

The text of the bill is available at: http://assembly.state.ny.us/leg/?default_fld=&bn=A09035&term=&Summary=Y&Text=Y

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