Gift certificates are generally not taxed when you receive them, but tax applies when you use them to buy something
When someone gives you a gift certificate, you do not owe income tax on the certificate itself. The IRS treats the certificate as a gift, not as income. However, when you redeem that certificate to purchase goods or services, you pay sales tax on the purchase just as you would if you paid cash. The tax depends on what you are buying and the sales tax rate in your state or locality.
The situation is different if you are a business owner who issues gift certificates. You may owe income tax on the revenue when customers buy the certificates, depending on how your accounting system records the sale. This is a critical distinction: receiving a gift certificate costs you nothing tax-wise, but selling them as a business does have tax implications.
Key Takeaways
- Gift certificates you receive are not taxable income to you, whether from an employer, family member, or friend.
- Sales tax applies when you redeem the certificate to buy something, based on the item and your location's tax rate.
- If you own a business and sell gift certificates, you may owe income tax on that revenue in the year you receive payment, not when the certificate is redeemed.
- Employer gift certificates may have different rules if they exceed certain dollar amounts or are given as a bonus rather than a gift.
How sales tax works when you use a gift certificate
When you walk into a store and hand over a gift certificate, the cashier rings up your purchase and calculates sales tax on the item or service, just as if you had paid with a credit card or cash. The gift certificate is straightforward the payment method—it does not change what tax you owe. If you buy a $50 item in a state with 7% sales tax, you owe $3.50 in tax whether you use a gift certificate or your own money.
Some people mistakenly think that using a gift certificate means they avoid sales tax. That is not true. The only exception is if the item itself is tax-exempt in your state—for example, groceries in many states, or prescription medications. In those cases, you would not pay tax whether you used a gift certificate or cash.
If the gift certificate does not cover the full purchase price, you pay sales tax on the total amount you owe, including the portion you pay out of pocket. For example, if a $100 gift certificate is applied to a $150 purchase, you pay sales tax on the full $150, not just the $50 you are paying with your own money.
Gift certificates from employers and tax withholding
A gift certificate from your employer is treated differently depending on the circumstances. If your employer gives you a gift certificate as a holiday bonus or recognition gift with no strings attached, it is generally not taxable income to you. However, if the certificate is worth more than a certain amount or is given as a substitute for wages, your employer may need to report it as taxable compensation and withhold income tax.
The IRS has specific rules about de minimis fringe benefits—small gifts that do not count as taxable income. A gift certificate can fall into this category if it is inexpensive and given occasionally. However, the exact dollar threshold varies and depends on the type of benefit. If you receive a large gift certificate from your employer, ask your HR or payroll department whether they have reported it as income on your W-2 form. If they have, you will owe tax on it as part of your regular income tax return.
If your employer gives you a gift card to a specific store as a holiday gift, that is typically not taxable. If they give you a cash bonus disguised as a gift certificate, or if the certificate is part of your compensation package, it will be taxed as wages.
Business owners and gift certificate tax liability
If you own a business and sell gift certificates, you must report the revenue as income in the year you receive payment. This is true even if the customer does not redeem the certificate until the following year. For example, if you sell a $100 gift certificate in December, you owe income tax on that $100 in December, not when the customer uses it in March.
This rule applies whether you sell the certificate in person, online, or through a third-party platform. The IRS views the sale of a gift certificate as a sale of goods or services, and you must recognize the revenue when ready. You cannot defer the income until the certificate is redeemed.
You should also set aside funds to cover the cost of goods or services you will provide when the certificate is redeemed. If you sell a $100 gift certificate for a haircut, you will eventually provide a $100 haircut, which will cost you in labor and supplies. Keep records of all gift certificates sold and redeemed so you can account for them accurately on your tax return and in your accounting system.
State and local sales tax rules for gift certificates
Sales tax rates vary widely by state and even by county or city. Some states have no sales tax at all, while others charge rates ranging from 4% to over 10%. When you use a gift certificate, you pay the sales tax rate that applies in the location where you make the purchase, not where you received the certificate.
A few states have specific rules about whether sales tax applies to the sale of the gift certificate itself. In most places, you do not pay tax when you buy a gift certificate—you only pay tax when you redeem it. However, some states may tax the sale of the certificate as a separate transaction. If you are buying a gift certificate as a gift, contact the store or check your state's tax authority website to understand the rules in your area.
If you buy a gift certificate online from a seller in another state, the tax rules can be complicated. Generally, you pay sales tax based on the location where you will use the certificate or where the seller is located, depending on your state's rules. When in doubt, ask the seller whether sales tax is included in the certificate price.
What happens if a gift certificate expires
If a gift certificate expires before you use it, you do not get a tax deduction or refund. The certificate straightforward becomes worthless. From a tax perspective, an expired gift certificate has no value, so there is nothing to report on your tax return. The person or business that gave you the certificate may have tax implications if they set aside funds to cover future redemptions, but that does not affect you.
Many states have laws that prevent gift certificates from expiring or that require businesses to honor them for a certain period. If you have an expired certificate, check your state's consumer protection laws—you may be able to request a refund or extension. However, this is a consumer protection issue, not a tax issue.
Frequently Asked Questions
Do I have to pay income tax on a gift certificate I received?
No. A gift certificate you receive is not taxable income. You only pay sales tax when you redeem it to buy something. The exception is if your employer gives you a large gift certificate as part of your compensation package, in which case they may report it as taxable wages on your W-2.
What if I buy a gift certificate for someone else—do I pay tax?
In most states, you do not pay sales tax when you purchase a gift certificate. You only pay sales tax when the certificate is redeemed to buy an item. However, a few states may tax the sale of the certificate itself, so check with the retailer or your state tax authority if you are unsure.
Can I deduct a gift certificate as a business expense?
If you buy a gift certificate to give to a client or employee as a business gift, you may be able to deduct it as a business expense, subject to IRS limits on gifts. However, this is a business accounting question, not a sales tax question. Consult a tax professional or accountant about whether your specific situation qualifies for a deduction.
If I use a gift certificate and pay the rest in cash, how is sales tax calculated?
Sales tax is calculated on the total purchase price, not just the amount you pay out of pocket. If you buy a $100 item and use a $60 gift certificate, you pay sales tax on the full $100, then explore the $60 certificate to reduce what you owe in cash.
Do I owe tax on a gift certificate if I never use it?
No. An unused gift certificate is not taxable income. You only owe tax when you redeem it and purchase something. If the certificate expires unused, there is no tax consequence for you.