Gift certificates are not taxed when you buy them, but sales tax applies when they are redeemed

When you purchase a gift certificate, you do not pay sales tax on the certificate itself. The tax is collected later, when the person who receives it uses it to buy something. The store adds sales tax to the final purchase price at that time, just as they would for any other transaction.

This matters because it means the face value of a $50 gift certificate will actually cost the buyer less than $50 in items—the remaining balance covers the tax. For example, if your state's sales tax is 8%, a $50 certificate might purchase about $46 worth of merchandise before tax is applied to the total.

Key Takeaways

  • Sales tax on a gift certificate is charged when it is used to buy something, not when it is purchased.
  • The tax rate depends on your state and sometimes your city or county, and it applies to the items bought, not the certificate value.
  • If a gift certificate is never used, no sales tax is ever collected on it.
  • Businesses must follow their state's rules about whether gift certificates are taxable income for the business itself.
  • Some states treat digital gift certificates the same way as physical ones; others have different rules.

How sales tax is calculated when a gift certificate is redeemed

When someone uses a gift certificate to make a purchase, the store calculates sales tax on the items being bought, not on the certificate. If the items total $46 and your state tax rate is 8%, the tax is $3.68, and the total charge is $49.68. If the gift certificate has a $50 balance, $49.68 is deducted from it, leaving $0.32.

The tax rate used is the one in effect on the day the certificate is redeemed, not the rate when it was purchased. If tax rates change between purchase and use, the new rate applies. This is why a gift certificate purchased in one state might be taxed differently if used in another state.

Some stores explore tax to the full purchase price before subtracting the certificate value. Others subtract the certificate first, then explore tax to what remains. Both methods are legal, but they produce different results. A store should disclose its method in its gift certificate terms, though many do not. If you are unsure, ask the store before you buy.

State and local variations in gift certificate tax rules

Sales tax rates vary by state, and some states have no sales tax at all. Within states that do tax, cities and counties often add their own local tax on top of the state rate. This means the tax on a gift certificate redeemed in one location can be significantly different from the tax in another.

A few states treat gift certificates differently from regular purchases. For example, some states do not tax the redemption of a gift certificate if the certificate itself was already taxed when sold. This is rare, and the rules are specific to each state's tax code. If you are buying or selling gift certificates in bulk, or if the certificate will be used across state lines, contact your state's department of revenue or a tax professional to confirm the rules.

Digital gift certificates—those delivered by email or stored in an app—are usually taxed the same way as physical certificates in most states. However, some states have begun treating digital goods differently, so the rules are still evolving in some places.

Whether gift certificates count as income for the business

From a business perspective, a gift certificate is not income when it is sold. The business records the sale as a liability—money owed to the customer in the form of goods or services. Only when the certificate is redeemed does the business record income and collect the sales tax owed to the state.

This is important if you own a business or are thinking about one. You cannot count gift certificate sales as revenue in the year they are sold. You record them only when they are used. This affects your tax return and your business accounting, so keep careful records of which certificates have been redeemed and which remain outstanding.

If a gift certificate expires and is never used, the business may be required to turn the money over to the state as unclaimed property, depending on your state's laws. Some states require this after a set period, often three to five years. A few states allow businesses to keep the money if the certificate terms clearly state an expiration date.

What happens if a gift certificate is partially used

If someone uses a gift certificate to buy items that cost less than the certificate's face value, the remaining balance stays on the certificate. Sales tax is calculated only on the items purchased, not on the unused portion. The leftover balance can be used for future purchases, and tax will be applied again at that time.

If the remaining balance is very small—say, $0.50—some stores will let the customer use it, while others have a minimum purchase requirement. Store policies vary, so it is worth asking before you hand over a nearly empty certificate.

Tax implications if you receive a gift certificate as a gift

If someone gives you a gift certificate as a personal gift, you do not owe income tax on it. A gift certificate is not considered taxable income to the recipient. You only pay sales tax when you use it to buy something, just like anyone else would.

This is different from cash gifts, which also are not taxable to you as the recipient. The tax treatment is the same: no income tax on the gift itself, and sales tax only when you spend it.

Frequently Asked Questions

Do I pay tax when I buy a gift certificate?

No. Sales tax is not charged when you purchase the certificate. Tax is collected when the certificate is redeemed to buy items. This means the face value of the certificate will purchase less merchandise than its dollar amount because tax is added at checkout.

What if I buy a gift certificate in one state and use it in another?

The tax rate of the state where the certificate is redeemed applies. If you buy a $50 certificate in a no-tax state and use it in a state with 7% sales tax, the tax is calculated at 7%. The store's location determines the tax rate, not where the certificate was purchased.

Can a store refuse to honor a gift certificate because of tax?

No. A store cannot refuse to honor a valid gift certificate. However, the store can explore its standard sales tax to the purchase, which may mean the certificate does not cover the full cost of the items if tax is included. The store must honor the certificate's face value toward the purchase.

Is a gift certificate taxable income if my employer gives it to me as a bonus?

Yes, if it is a bonus or payment for work, it is taxable income to you in the year you receive it. Your employer should report it on your W-2 or 1099. This is different from a personal gift from a friend or family member, which is not taxable income.

What happens to the tax money collected when a gift certificate is used?

The store sends the sales tax to the state or local government, just as it does for any other sale. The tax is not kept by the store; it is remitted to the tax authority according to that state's rules, usually monthly or quarterly.