Gift Certificates - to tax or not to tax

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cjmst3k

cjmst3k

SGF, Supreme Grumble Framer
Joined
Apr 25, 2006
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I get occasional requests for our gift certificates. Nice handwritten card ones. Still haven't figured out whether you tax it or not at time of sale of just the gift certificate. Someone just came in for a $35 one, and put down $35 in cash...

What's the best way to do it? At time of writing certificate, or at time of redemption for services?
 
Typically this represents a customer deposit, and as such would be booked against a liability account. The liability account would be relieved when the ultimate sale takes place, tax being applied at that time.
 
We backtax them. Thus a $100.00 gift certificate is really a $95.24 certificate with $4.76 tax. This is figured by dividing the gift amount by 1.05 (our state tax is 5%) When it is cashed in, the pretax amount of the purchase is voided from the gift certificate category after being rung in to the correct category.

Hope that is clearer than mud...
 
Glad to see consistency. ;)

Actually, I am glad to see that it works both ways!
 
If you have a point-of-sale system, you should be able to create an item for "gift certificates" or "gift cards" and make that item non-taxable. I know you can do that in SpecialtySoft. You should not be charging sales tax on gift certificates except at time of redemption, at least in California.
 
PaulSF said:
If you have a point-of-sale system, you should be able to create an item for "gift certificates" or "gift cards" and make that item non-taxable. I know you can do that in SpecialtySoft. You should not be charging sales tax on gift certificates except at time of redemption, at least in California.
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POS? Me?

I'm a computer wiz when it comes to photoshop, but when it comes to framing, I still use this slide to figure out footage:

p1010555ey2.jpg
 
I think it depends on your states sales tax laws. In Ohio gift certificates and gift cards are not taxed when purchased. I think of them as being a interest free loan that at least 1/2 of the time is never redeemed.

Dave
 
The customer is actually trading you cash for a piece of paper that is acknowledging the transaction. No product or item has been sold at that point, therefor, nothing taxable has changed hands, so you do not charge tax.

If you sell a custom framing job, and the customer puts down a deposit, again, nothing is taxable until the customer picks up their work.

If the customer pays the entire amount in advance, then you collect and declare the sales tax at that time, even though nothing taxable has actually changed hands. This is because by paying in advance it is assumed the money part of the transaction has been concluded.

A gift certificate does not conclude any transaction for taxable goods, ergo, no sales tax.

John
 
Ditto what Dave (Framemakers) said. When (if) the certificate is redeemed, I credit it as partial payment against the total for the job, including tax.
:cool: Rick
 
From a document on the Virginia tax website (http://www.tax.virginia.gov/web_pdfs/SalesTax_Rate_Increase_Guidelines.pdf):

"Pursuant to 23 VAC 10-210-670, the sales tax is not to be
collected on the sale of gift certificates, but is to be collected when gift certificates are redeemed for merchandise."

When you purchase a gift certificate, you're essentially just exchanging one form of currency for another.
 
taxing twice

EllenAtHowards said:
We backtax them. Thus a $100.00 gift certificate is really a $95.24 certificate with $4.76 tax. This is figured by dividing the gift amount by 1.05 (our state tax is 5%) When it is cashed in, the pretax amount of the purchase is voided from the gift certificate category after being rung in to the correct category.

Hope that is clearer than mud
...
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It would seem to me that in doing it this way you are colecting sales tax twice on the same money. Once on the certificate and again when the certificate is used. Or am I just being stupid again.
 
You don't want to charge sales tax on a gift certificate. As stated earlier, many states prohibit it. Ours doesn't address it, but it would create a bookkeeping nightmare to have to segregate the gift certificate sales from the regular ones. Really a gift certificate is no more than a pre-payment for someone's purchase. Your general ledger should reflect an account for "gift certificates payable" indicating it is a liability (you owe your customer). When the sale is made, you create a transaction to move the amount of the sale, including the tax, which offsets the liability.
 
mayos said:
You don't want to charge sales tax on a gift certificate. As stated earlier, many states prohibit it. Ours doesn't address it, but it would create a bookkeeping nightmare to have to segregate the gift certificate sales from the regular ones. Really a gift certificate is no more than a pre-payment for someone's purchase. Your general ledger should reflect an account for "gift certificates payable" indicating it is a liability (you owe your customer). When the sale is made, you create a transaction to move the amount of the sale, including the tax, which offsets the liability.
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WOW! Is that last sentence a whole lot of GREEK to me!

Our store philosophy about gift certificates and deposits is this: if it's rung into the cash register, it needs to be taxed. Because the cash register is set up to accept tax on all transactions, unless we hit the "tax exempt" button.

And we've had this conversation with the Mass DOR before. If we collect $50 for a gift certificate or deposit sale and ring it in to our register, it (the register) will ask for the sales tax. If we ring it in as "tax exempt" in order to reflect the uncollected tax, then how do we separate it from the REAL Tax Exempt sales--those artists who have registered tax numbers?

If the total sale is $100, and we take a deposit of $50, but the tax is 5%, how do we ring in the $50 remainder to include the tax total for $100? See what I mean?

Why complicate things? Oops! That's what DOR's are about, ain't it? Complicating things to the scope of being beyond most "ordinary" mortals' ken!

We say KISS: Keep It Simple, Stupid! Charge the amount of the deposit, and the tax on that deposit amount. Then charge the amount of the balance, plus the amount of the tax on that amount.

If it's a gift certificate, we handle it this way: "You wish a $100 gift certificate, so it'll be $105, for the 5% sales tax. That way, your gift recipient will receive a FULL $100 of merchandise, and the tax on it will have been paid, too!"

As I said previously, we've HAD this conversation with the Massachusetts DOR. The person at the other end of the phone had no answer to our method. And no problem with it.

Gift certificate sales as "liability?" Gift certificate sales are GREAT PROFITS, because a majority of them are rarely claimed, especially those given out by us as charitable gifts! Call me naive, but think about it! Are 100% of the gift certificates you sell/donate redeemed? NOT!!

Money in the bank, my friend.

Wendy--simplistic, but tell me where I'm wrong, and I'll make SURE I avoid THAT state! Hee, hee!
The Art Corner
Salem, MA
978-745-9524
artcornersalem@verizon.net
 
wendy lang said:
Our store philosophy about gift certificates and deposits is this: if it's rung into the cash register, it needs to be taxed. Because the cash register is set up to accept tax on all transactions, unless we hit the "tax exempt" button.
...
We say KISS: Keep It Simple, Stupid! Charge the amount of the deposit, and the tax on that deposit amount. Then charge the amount of the balance, plus the amount of the tax on that amount.

If it's a gift certificate, we handle it this way: "You wish a $100 gift certificate, so it'll be $105, for the 5% sales tax. That way, your gift recipient will receive a FULL $100 of merchandise, and the tax on it will have been paid, too!"
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So Wendy, how to do you record gift certificates when they are redeemed? Don't you go to the cash register to ring up the sale and enter the gift certificate as the payment type? And at that point isn't your customer paying sales tax... again? So that $100 gift certificate doesn't really get them $100 worth of merchandise -- it gets them about $95.23 assuming a 5% tax rate.

Oh, and "liability" is a standard bookkeeping term. A $100 gift certificate is a liability because you owe someone $100 worth of merchandise.
 
Natalya--

The amount of the gift certificate is DEDUCTED from the total, as if it is a deposit.

Example: a customer orders a framing package that totals $200. They have a gift certificate for $75. I deduct the $75 from the framing total, so they owe $125 and are taxed on THAT amount. NO "double-taxing," no ringing in of the "total amount."

I must make myself clear--we do NOT have a POS computer! We have Staples CHEEPEST cash register! Gift certificates are HAND-WRITTEN! As I said: Keep It Simple, Stupid! If the gift certificate and the order amount is equal, NOTHING gets rung into the register, because it's been paid already! If the GC doesn't equal the amount of sale, then the customer is liable for the amount due, plus the amount of tax on that due amount. If the GC is for MORE than the sale, then we WRITE on the piece of paper that the customer has a BALANCE.

As far as the liability of an unredeemed gift certificate, how does that stack up to an unredeemed framed piece? We have maybe a dozen or so pieces in the shop that we framed for customers and they never picked them up. That is a "liability" too, no? Same thing. I don't itemize. I don't have time.

Maybe the Mass state DOR would/could have umbrage with my logic, but I'm not a Bean-Counter. I'm a Framer, and a Small Business Owner. I guess that's one reason my city's Chamber of Commerce decided to call me Businesswoman of the Year. (I think that it had more to do with my helping start a Salem Arts Association, though! www.salemartsassociation.org)

Wendy
The Art Corner
Salem, Ma
978-745-9524
artcornersalem@verizon.net
 
Wendy,
If you tax the gift certificate, when the consumer makes a purchase and uses her certificate...won't your cash register tax that amount too? If you show the gift certificate as a "taxable sale" you're going to report that amount to your state DOR. Then when you redeem the certificate you're going to report that amount to you state DOR AGAIN and possibly record the sale twice in your gross sales. You really need to keep your gift certificate sales seperate (when you issue a gift certificate) and not tax the sales until they are redeemed. Also, if you record the sale of the gift certificate in with your gross sales (which you should not do, but it has been done)....you do not have any "cost of goods" to apply towards the certificate. You won't have any cost of goods for that amount until it is redeemed for merchandise.

When you think about it, you're really only exchanging money for a piece of paper that says the receipient has that many dollars worth of credit at your store. I don't think most states apply sales tax on money. You don't pay sales tax when you make a deposit at the bank which is essentially the same transaction (you give them some money and they give you that much credit in your account).

Gift Certificates are a very good deal for the store....the Lord knows we need one occasionally.....barely over 1/2 of of them are ever redeemed. Best Buy will sell many millions of $$ of gift certificates at Christmas time. 40% of those are never redeemed. Many states say you must turn un-redeemed gift certifcates over to the state treasurer to place in their "unclaimed property" account. But in the case of Best Buy, which state do you turn them over to...the state where they were sold, the state where the receipiant resides, or the state where the corporation is headquartered. Most of the time it's not turned over to any state because there's no one to enforce the law.

Any way, your account should be able to advise you as to the regulations of your state and the correct procedure in redeeming your certificates and entering them into your daily work.

Have a terrific New Year.
 
Wendy,
Been doing a little more thinking about your situation and gift certificates. In most stores the procedure is as follows (I'm assuming you are using the accural method of accounting):
Sale of gift certificate -
1. ring up sale of gift certificate as a NON-TAXABLE sale in a seperate classification designated as "Gift Certificates Sold". Do not charge sales tax on this amount. Do not include it in your daily sales of merchandise.

In your daily work, you would record the gift certificate sale under the account of "Gift Certificates Payable" as a CREDIT amount. This shows you have received cash, but not made a sale of merchandise. Thus you create a liability (you owe someone that much merchandise) in your accounting system.

When the certificate is redeemed...
You would ring up the ENTIRE sale. So if the retail amount of the framing job was $100, you would ring up the entire $100, your cash register would apply the appropriate amount of tax.

Then, as a tender amount, you would ring up the amount of the gift certificate (say it was $75). In this instance your cash register would show the individual still owes $25 plus the tax. They would then give you either cash, check, or credit card for the balance ($25 + tax). So the state would receive their entire sales tax upon the sale.

Then when you do your bookkeeping, you're going to enter the $75 gift certificate you took, as GIFT CERTIFICATES PAYABLE, except this time, it's going to be a debit instead of a credit. This lowers your liability account to reflect the redemption of the certificate.

You need to make sure you ring this up on your cash register as a gift certificate redeemed because you're going to be short that much cash at the end of the day because you've received the cash earlier.

This procedure is clean and conforms with accounting principles.
 
Mayos--

Thanks for the heads up, but I don't treat Gift Certificates any differently than any other sale. I don't have a special "key" on my cash register for that. (It's much too primitive for that!)

Someone buys a gc, it is a sale and is rung in as a sale, and is taxed.

Someone redeems a gc, it has ALREADY been rung in, so the gc gets a big "VOID" written over it and is put in the drawer of the desk under the cash register, and the amount of the gc is deducted from the sales order sheet. Remember: we don't do a POS computer system.

We write: Order sub-total: $200
GC amount: $75
----
Amount owed: $125

Tax on $200 in Mass is 5%--$10
Tax paid on $75 gc was $3.75
Tax owed on $125 balance is $6.25
$3.75 plus $6.25 = $10

No accounting; no liability; no mess; no fuss.

Wendy
 
mayos said:
Wendy,
You need to make sure you ring this up on your cash register as a gift certificate redeemed because you're going to be short that much cash at the end of the day because you've received the cash earlier.

This procedure is clean and conforms with accounting principles.
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The Gift Certificate gets rung up ONLY at the time of purchase! At the time of redemption the GC is JUST a piece of paper that gets voided and deducted from the customer's total. It represents a sale ALREADY rung in to the register. We're not going to be short cash at the end of the day, because the amount has already been dealt with! The Gift Certificate at that point becomes a non-entity, and is voided on the spot.

See?

Wendy
 
According to the the Turbotax website, the purchase of gift cards themselves is not subject to sales tax in any US state. You're supposed to collect it when they are traded back (as cash equivalent), for the total amount of the eventual sale.

Massachusetts Gift Certificate Law Highlights:
  • "A gift certificate or a merchant credit slip (given for returned merchandise) must be redeemable for a minimum of seven years and is not subject to any fees.
  • "If the gift certificate expiration dates are not provided, the gift certificate shall be good forever.
  • "Once a gift certificate has been redeemed for 90% of its value or more, the consumer may elect to receive the balance of the remaining value in cash."
  • Dormancy fees (fees charged for not using your gift certificate in a timely manner) are not allowed in Massachusetts
  • Rights under Federal law are more limited, and may allow for dormancy fees or shorter expiration periods, so a card issued by a national bank may offer less protection than a Massachusetts gift certificate or card.
Chapter 510 of the Acts of 2002 and Chapter 18 of the Acts of 2003

I hope this is helpful
Mike
 
Mike, Interesting on the way Mass. treats a gift certificate. In Kansas we cannot put any sort of expiration date on a gift certificate. It creates a lot of extra book work because we must keep all balances on file, I guess forever. It would nice to be able to purge our listings at some point in time.

Wendy might be ahead of all of us in keeping things R - E - A - L simple. I have a friend who runs a men's clothing store in Concordia, KS. he keeps no record of last year's sales, doesn't keep a perpetual inventory, doesn't compare month to month to see how things are progressing. He's been in business over 35 years, so I guess it hasn't hurt him any. He tells me that if he ends the month and there's money in the bank, he feels good, otherwise he just works a little harder next month.

I guess maybe I'm a bit too much of a control freak to not know where I'm at or how I'm doing.
 
wendy lang said:
As far as the liability of an unredeemed gift certificate, how does that stack up to an unredeemed framed piece? We have maybe a dozen or so pieces in the shop that we framed for customers and they never picked them up. That is a "liability" too, no? Same thing. I don't itemize. I don't have time.
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No, the dozen or so pieces, assuming that they were not paid for in full, would be a receivable.

When you (your business) owe money to someone else, that is a liability.

Definitely not the same thing.

AND, it doesn't matter how cheap your cash register is, you shouldn't be collecting sales tax on a gift certificate.
 
Maryann said:
AND, it doesn't matter how cheap your cash register is, you shouldn't be collecting sales tax on a gift certificate.
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Why not? A SALE is a SALE!

Look--I'm not trying to rip anybody off! I'm not trying to "double-tax" anybody. I'm just making an honest sale. If the recipient of that sale isn't willing to hold up their end, then why am I liable? I sold them something (a Gift Certificate.) If THEY don't want to use it, who's fault is that?

Either way, I sold them something and I am responsible for paying the sales tax on that sale.

Wendy
 
Wendy,

Does your CPA know you are selling gift certificates this way and if so does he/she agree with your policy?

If your CPA does agree I would say you probably need to talk to a couple other CPAs about this and see what they say. I would guess that your second and third opinions will not agree with what you are doing.

I am all for Keeping it Simple but, accounting isn't always that simple. Sure, more than likely nobody will ever know the difference but if a consumer does complain, are you ready for your finances to be audited?

Also, looking at it from the consumer standpoint, if I am buying a 100 gift certificate, I want to pay 100 for it. If you tell me it will cost me 105 or whatever yor tax rate is, I would tell you to go fly a kite and buy a certificate from your competitor who will charge me 100, what I said I wanted.
 
GAAP (Generally Accepted Accounting Principles)

No sales tax is due when a gift certificate is sold to a customer. A gift certificate represents an intangible right to a future purchase. Sales tax is due when the gift certificate is used to buy taxable merchandise. State and local sales tax is due on the total sales price of the taxable item being sold, regardless of whether the customer pays for it using cash, check, credit card or a gift card.

Telephone prepaid calling cards are somewhat different than gift cards because prepaid calling cards are taxed as sales of tangible personal property when sold by a retailer to customers. State and local sales tax is due at the time of sale of prepaid calling cards.

Tim said it much better than I did. Check with your accountant. Keep yourself out of trouble. And I DON'T think that you're trying to rip anyone off. I understand what you're doing but it could only take one complaint for DOR to trigger an audit.

I'm all for keeping it as simple as possible too but I would do everything I could to avoid an audit - not because I'm hiding anything but who has the time????

My high tech solution for tracking gift certificates is a sheet of paper in the folder with the gift certificates. When one is sold I just list the name and amount, cross it off when it's redeemed.

On expirations - It's my understanding that in my state (Pennsylvania) that you can put an expiration date on a gift certificate if it's for a raffle/auction and you have donated it but if you have actually received cash for it, it can't expire. I think some of the big boys have gotten around that by using gift cards and putting the service fees on them after a certain period. Then they don't have it on their books forever because fees chip away at the balance until it is zero.
 
DTWDSM said:
Wendy,
Also, looking at it from the consumer standpoint, if I am buying a 100 gift certificate, I want to pay 100 for it. If you tell me it will cost me 105 or whatever yor tax rate is, I would tell you to go fly a kite and buy a certificate from your competitor who will charge me 100, what I said I wanted.
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Why would you, or anyone else for that matter, be so hostile to paying the "required" state sales tax on
a purchase, unless you have an alternate agenda? Again, I say that any purchase is due it's sales tax, no matter what form of purchase! And I don't worry about an audit, because the state is getting it's fair share; the customer is being charged his/her fair share, and none is the worst for the wear!

That being said, I shall consult my accountant about this issue and let you all know what he says. Whether he supports me or I should consult a couple of others for a second opinion is moot.

No one is being "ripped off" so if I am not "exactly" following mandated protocol is also moot.

In my opinion, state and federal mandates are put in place for reasons that hurt someone in the past and were litigated against. Our store policy about gift certificates and deposits were set in place by the former owner to deal with that and he rebuffed the State at times about that policy, for the logic of it.

When I bought the store 2 1/2 years ago, I vowed to not "fix" what ain't "broke." It worked for him for 27 1/2 years, so I carry on...

I also explain very carefully, very thoughtfully, to each gift certificate-buying customer about charging sales tax on a gift certificate. That it is an "added" bonus to the recipient, that THEY--the recipient--are not responsible for the tax! An extra gift!

What is WRONG with that?

State legislators may find umbrage, because it's sort of their job, but they could serve in much better capacities if they look beyond the minutiae. The state DORs could find better usage of their time, but since they are "bean-counters," they have nothing better to do, really. Crossing those "Ts" and dotting those "Is."

If I were in a Criminal case where someone was murdered or mutilated, I'd worry about those tiny minutiae. Since any litigation about such mundane things as whether a gift certificate is taxed directly or not is a waste of a Grand Jury's time or ANY civil action case or even the DOR's, unless they have an agenda against someone personally, I don't worry.

BUT! I'll ask my accountant what HE thinks, as soon as the last of the year end holidays are OVER!

Pheww! Can't WAIT!

Happy New Year! (Who cares?)

Wendy
The Art Corner
Salem, MA
 
Wendy,

First off, take a deep breath, think of a nice calm place,and let it out....Repeat multiple times. This really isn't that big of a deal, it's lasted longer than it should have.

I think that the point that many, including myself, are trying to make is that what you are doing, collecting tax on a GC, is not in line with Generally Accepted Accounting Priciples. The sales tax that you say is required, is not because it is not considered a purchase. You go to any national big box and you will not pay sales tax on a GC purchase. The consumer is not purchasing a tangible item from your inventory, they are making a deposit on a future purchase, trading currency.

It's kinda like when you run out of pennies in your cash register, you go to the bank and buy a roll of pennies for $.50. You actually are buying something that you can hold in your hand but if the bank told you the roll of pennies was .$55, (you did purchase an item from them correct?), you wouldn't be happy with the bank.

Talk to your CPA, if he says that you should be collecting tax and that the GAAPs don't matter, you may want to look at some of the other "keep it simple" accounting practices that you are currently doing before somebody else does.
 
SO, I talked to my accountant today and he asked a couple of pertinant questions. Mostly, HOW many Gift Certificates do we sell in a year? A hundred? No. Fifty? Maybe. Would the state DOR, or the IRS see any Red Flags with our Gift Certificate sales to warrant an audit? No. They are getting their money. The customers are NOT getting "ripped off," so who cares?

I actually counted the number of Gift Certificates we sold over 2007, using the carbon copies in the GC booklets we use. 24. That's it. At an average of $75 each sale. Do I worry about those sales and how they'll stack up to our almost half a mil sales for 2007?

NOT!!

"Watch out for your pennies, and the dollars will take care of themselves," I've heard as sound business advice, but in this case, it's a bit nit-picky.

TAX the Gift Certificate! It's a sale when BOUGHT; NOT when redeemed!

(If you use gift CARDS, that's an entirely DIFFERENT scenario!)

Wendy
 
DTWDSM said:
Wendy,

First off, take a deep breath, think of a nice calm place,and let it out....Repeat multiple times. This really isn't that big of a deal, it's lasted longer than it should have.

I think that the point that many, including myself, are trying to make is that what you are doing, collecting tax on a GC, is not in line with Generally Accepted Accounting Priciples. The sales tax that you say is required, is not because it is not considered a purchase. You go to any national big box and you will not pay sales tax on a GC purchase. The consumer is not purchasing a tangible item from your inventory, they are making a deposit on a future purchase, trading currency.

It's kinda like when you run out of pennies in your cash register, you go to the bank and buy a roll of pennies for $.50. You actually are buying something that you can hold in your hand but if the bank told you the roll of pennies was .$55, (you did purchase an item from them correct?), you wouldn't be happy with the bank.

Talk to your CPA, if he says that you should be collecting tax and that the GAAPs don't matter, you may want to look at some of the other "keep it simple" accounting practices that you are currently doing before somebody else does.
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Hi, DTWDSM. My calm place is always IN place! And this matter is NOT resolved, therefore has NOT "lasted longer than it should have."

Your points about the BIG BOXs not charging tax on deposits or GCs has nothing to do with the Rest of the World, but with Corporations and their slippery policies.

And I disagree with your analogy about going to the bank and trading one form of currency with another. When I go to the bank for coins, I am NOT "purchasing" something from them, but "trading," equal for equal.

When a sale is made at my store, whether "at the time," or "prior to," it is still a sale and the State mandates that a tax be collected.

Ain't Big Brother great? We've managed to forstall it by twenty-plus years, but Big Brother is still out there, lurking on the horizon!

Wendy
 
wendy lang said:
(If you use gift CARDS, that's an entirely DIFFERENT scenario!)

Wendy
Click to expand...

Ok, I thought I was done with this conversation but now I have just got to ask. Why would a gift certificate on plastic be different than a gift certificate on paper? That does not make sense, if I did my gift certificates burned into wood, would those be treated different than both the paper and plastic?
 
wendy lang said:
And I disagree with your analogy about going to the bank and trading one form of currency with another. When I go to the bank for coins, I am NOT "purchasing" something from them, but "trading," equal for equal.
Wendy
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Exactly what someone does when they buy a gift certificate, both paper and plastic.
 
Gift Certificate Sales Tax

Hello

This is my first post in the Grumble. I am just starting a Picture Framing Shop and found this topic interesting. While researching the subject, I have found that in PA you do not have to charge this tax until the certificate is actually used. Under current PA law, businesses are required to report unredeemed gift certificates and gift cards to the Treasury Department two years after their expiration date, or five years after their purchase date if they don’t expire.

In regards to Massachusetts the regulations state the following:
Massachusetts General Laws Chapter 64H, Section 2 imposes an excise upon "sales at retail of tangible personal property." Section 1(13) of Chapter 64H defines "sale at retail" as "a sale of tangible personal property for any purpose other than resale in the regular course of business," and Section 1(15) provides that "tangible personal property" is

“personal property of any nature consisting of any produce, goods, wares, merchandise and commodities whatsoever,...but shall not include rights and credits, insurance policies, bills of exchange, stocks and bonds and similar evidences of indebtedness or ownership."

Hope this helps! In my life before framing, I was a caseworker for the welfare department (retired 2 years ago after 25 years). Researching rules and regulations became a daily event.

Nice to be hear by the way. I am learning tons of stuff from all of you and appreciate all of the knowledge found in this forum. I would be lost without you.

Thank You
 
If I had an accountant that picked and chose which Generally Accepted Accounting Principles that they would use and which ones they wouldn't, I'd be looking for a new accountant.

Tax laws are really not something that you get to abide by if you like them and ignore them if you don't. Big brother or no big brother.

My last word......
 
I vowed to myself that I would not say anything more about this subject, but I just can't resist.

The sale of a gift certificate is NOT a sale until it is redeemed no more than if MR. X came into your store and told you that Miss Y was going to come in to have some framing done and Mr. X would come in a pay for it when it was done. A gift certificate is nothing different except that you've given them a piece of paper or plastic saying that Mr. X has already paid for all or a portion of the job. A gift certificate is NOT a sale until it's redeemed in exchange for all or part of the cost of a product.
 
DTWDSM said:
Ok, I thought I was done with this conversation but now I have just got to ask. Why would a gift certificate on plastic be different than a gift certificate on paper? That does not make sense, if I did my gift certificates burned into wood, would those be treated different than both the paper and plastic?
Click to expand...

Because on plastic the "gift" has been run through a computer, which does all the complicated stuff. In the KISS veiw of life, COMPLICATED is avoided at ALL costs!

If our Gift Certificate sales were more than the--I don't know!--point 03%- (just guessing!) of our yearly sales--I'd be worried.

I guess I'm talking apples and you're worried about the current orange crop, because of the freezing temps in Florida.

I reiterate--Keep It Simple, Stupid! (Or Stoo-pit!)

Because Mr. X has ALREADY PAID FOR THE JOB! The KEY is that Mr. X has given you $$$ for the product! It DOESN'T matter that Miss Y doesn't redeem that $$$--Mr. X has already paid hard cash, or used his credit! Therefore, Mr. X is the one responsible for his Good Faith payment. He is NOT paying for OUR involvement in the Gift Certificate, but that Miss Y will REDEEM that GC! WE are the Middle Men in the transaction, and are ultimately liable to the state DOR and IRS for the taxes collected.

Wendy
 
mayos said:
I vowed to myself that I would not say anything more about this subject, but I just can't resist.

The sale of a gift certificate is NOT a sale until it is redeemed no more than if MR. X came into your store and told you that Miss Y was going to come in to have some framing done and Mr. X would come in a pay for it when it was done. A gift certificate is nothing different except that you've given them a piece of paper or plastic saying that Mr. X has already paid for all or a portion of the job. A gift certificate is NOT a sale until it's redeemed in exchange for all or part of the cost of a product.
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To further reiterate on this subject, Mayos, I must point out your own verbiage--that "Mr. X has ALREADY paid for all or a portion of the job." I HOPE that when Mr. X came in to "purchase" a gift certificate, he handed over a credit card, check, or cash. You had to ring in the credit card, check, or cash, didn't you? You, therefore, recorded the SALE at that time! This was NO "prommisory note." Mr. X made a PURCHASE!

Therefore, TAX had to be collected at that time. I'm only using logic that your state DOR prolly uses. BeCAUSE it IS "logical."

You can "bitch and moan." but the practices I and my accountant use are NOT "flag-raising" to the state DORs or the IRS. We pay the proper taxes. We are not doing anything wrong.

Someone PAID for the job, whether it be "at the time of sale" or prior to that.

Wendy
 
Maryann said:
If I had an accountant that picked and chose which Generally Accepted Accounting Principles that they would use and which ones they wouldn't, I'd be looking for a new accountant.

Tax laws are really not something that you get to abide by if you like them and ignore them if you don't. Big brother or no big brother.

My last word......
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I am HAPPY to have an accountant who "picks and chooses" the accounting laws, as he's on the eight ball. This country was built on picking and choosing. Nothing is written in stone. You shouldn't be so slavish to the Laws. This is why we have elections. Always "Question Authority."

"Death and Taxes," is the quote. I say, pick one. I'd rather have Death, and let the cards fall where they may. Historically, how many have had Taxes cause Death? I'm talking REAL death, not financial ruin. Not many, IF any!

Less Worry; More HAPPY!

Wendy
 
wendy lang said:
"Death and Taxes," is the quote. I say, pick one. I'd rather have Death, and let the cards fall where they may. Historically, how many have had Taxes cause Death? I'm talking REAL death, not financial ruin. Not many, IF any!

Wendy
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If you choose death before taxes why are you paying the state the taxes on what even your state would consider a future sale?

Also, the difference between paper and computer gift certificates is that the computer are easier to track and there is always a record of them. You implied that collecting tax on them was different because they were plastic and not paper, still do not see the difference.

Answer if you want but I am done here, this has been time in my life that I will never be able to get back.
 
I couldn't help myself.

wendy lang said:
I reiterate--Keep It Simple, Stupid! (Or Stoo-pit!)
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Wendy

There really isn't anything more simple than issuing a gift certificate, accepting any form of payment and NOT charging sales tax untill the certificate is redeemed.

The fact that you charge sales tax on the certificate,.... then subtract the certificate and tax from the final sale,.... then subtract the first amount of sales tax paid on the original transaction,..... then charge a portion of the final sales tax on the final portion of the sale...and if the customer elects to make several payments on the sale...divide that by the number of sub payments made and then add them all together at the end of the month to determine how much sales tax to send in to state...thats assuming this all happened within the same month. .......wow, now I'm confused!

Now I see why accountants make the big bucks.


Sorry, Wendy, if you look at all the responses to this thread, it looks like you're the lone ranger on this one, accountant or not. And three threads in a row, looks like you my be trying to convince yourself.
 
hangupsgallery said:
Wendy

There really isn't anything more simple than issuing a gift certificate, accepting any form of payment and NOT charging sales tax untill the certificate is redeemed.

The fact that you charge sales tax on the certificate,.... then subtract the certificate and tax from the final sale,.... then subtract the first amount of sales tax paid on the original transaction,..... then charge a portion of the final sales tax on the final portion of the sale...and if the customer elects to make several payments on the sale...divide that by the number of sub payments made and then add them all together at the end of the month to determine how much sales tax to send in to state...thats assuming this all happened within the same month. .......wow, now I'm confused!

Now I see why accountants make the big bucks.


Sorry, Wendy, if you look at all the responses to this thread, it looks like you're the lone ranger on this one, accountant or not. And three threads in a row, looks like you my be trying to convince yourself.
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Sorry, Steve, but you--and everyone else, for that matter, seem to put TOO much "spin" "complication" etc, on this.

I shall give a very simple example.

Customer #1 buys a $100 Gift Certificate. She pays $105, thus paying the Mass 5% sales tax on the $100.

Customer #2 comes in with the GC and a painting to be framed. The framing sub-total is $200, plus the Mass 5% sales tax, which equals $210 grand total. She hands over the GC marked for $100. I deduct the $100 GC from the $200 SUB-total, and then she owes $100, plus the Mass sales tax on that amount--which is $5

How much more simple can it be? WHY "over-complicate" things? :bdh:

WHY would anyone find fault with that? Believe me, I'm NOT trying to "over-compensate" for anything, but trying desperately to MAKE A POINT that seems everyone else seems to want to ignore, in favor of a complicated mess about something VERY simple.

'Nuff said.
Wendy
 
I hope you don't mind one more opinion. I'm seeing folks trying to give you some good advice here.

It sounds as if you are illegally taxing customer 1 for a non taxable transaction, and then not charging the tax due upon delivery of an order to a different customer - who should rightfully be taxed.

Yes, the govt is receiving their tax - but it's an injustice to the two different customers. One person is being overtaxed, and one isn't paying what they owe. If the same person who bought the GC was redeeming it, things may be different. If customer one complained, you would perhaps be subject to an audit and penalties.

No matter how you slice it, it sounds far too over complicated. It's probably much easier to do this lawfully, by taxing only the sale of merchandise. The cash register should be able to handle this, and a professional POS system would do an even better job of tracking GC's, deposits, and related tax.

My concern is that someone will read this thread in the future, and interpret it as a GAAP.

You have explained and justified it to death, and I respectfully suggest that it's time for all parties to just let it go. :)
:bdh:

Mike
Moderator
 
Mike Labbe @ GTP said:
I respectfully suggest that it's time for all parties to just let it go.
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Amen!

Perhaps one final comment ... The thing that blows my mind is that there have been over 40 posts on this subject, some both lengthy and strident, and yet for the vast majority of frame shops the number of GC transactions processed in a given year are at the most a mere handful. It hardly warrants this much energetic debate!

For archival reference purposes post #2 in this thread gave a succinct description that applies to the vast majority of scenarios. It deliberately starts with the word 'typically' because there can be more complex scenarios such as breakage revenue recognition when there are time limits or penalties built into a GC program. But these more complex scenarios are unlikely to apply to frame shops issuing one, two, or a handful of GCs per annum! Finally if you believe you have a more complex or unique situation, as so many have already said, talk with your CPA!
 
I went through a state tax audit in Indiana a few years back and was told by the auditor that the way we handled gift certificates was the proper procedure.

When we sold a gift certificate we set up a charge account for the recipient with a $ 0.00 credit limit and a charge credit (Received on Account) for the amount of the certificate.

When the recipient purchased product it was charged against their account and the balance was rung up against their credit as a charge sale. If they exceeded the amount of the credit they paid the difference and it was rung up as a received on account to zero their balance.

Sales taxes were applied at the time of the sale of the merchandise. The credit balances were properly accounted for on the balance sheet as a contra asset account (Accounts Receivables).

Gift certificates are a liability and should not be considered a sale. No different than an IOU.

The procedure might sound complicated but it really is KISS. It was important to do properly because we sold about 30K a year average in gift certificates.

Incidentally, about 24% of the gift certificates were never used. After five years we would make an accounting entry to eliminate the liability. Sales tax was not due on the amounts as no merchandise changed hands.
 
I consideer the Certificate a deposit when cash is received. In Canada there was reduction in the Sales Tax. If the Sales Tax where factored in this could create a problem. I also give Gift Certificates for Promotional Donations which can not be exchanged for cash. These I do not need to keep any record of.
 
Accent Images-fotosource said:
... These I do not need to keep any record of.
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Donated gift certificates should still be on your books as a liability until used or expired no matter how you handle the accounting entries.
 
Many donated "Gift Certificates" are not really GCs ... in many instances they are really dollar discount coupons with specific terms limiting their redeemability, such as "may not be combined with any other offer" and/or "good only for custom framing".
 
LAST word on this!

I spoke to the fellow from whom I bought the store two and a half years ago about this thread. He said when he first opened the store, he went to the MASS DOR office and ASKED THEM how to handle Gift Certificate sales! They told him exactly as I've stated here. CHARGE tax! It's a SALE! (AccountantSpeak be DAMNED! I can hear the GRUMBLE now! OY!)

YES! This has gone on TOO LONG for the majority, but it's an ISSUE! And it HASN'T been resolved! EACH state is DIFFERENT in the handling of this. And most of the states' laws can be INTERPRETED!

But I still say simple is best...

The rest sounds like a Happy Place for accountants who have too much time on their hands...all this "recieved on account" stuff.

I'm impressed that some of us on this board have this much Gift Certificate sales to warrant this much discussion on this subject.

I don't. We sell less than 50 Gift Certificates in a YEAR. The state DOR is NOT going to come looking for us about our tax practices. ESPECIALLY because they are not a problem or Red Flag to the state DOR!

THEY get their tax $$! WE get our sales!

Anyone? Anyone? Buehler? Buehler?

Wendy
The Art Corner
Salem, MA
978-745-9524
artcornersalem@verizon.net
 
Tim Hayes. said:
accountant
state tax department


enough !
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Tim and everyone!--WHY do you say this? "enough?" I thought this was the "Grumble?" I'm Grumbling about this topic and I don't LIKE being "shut down" by anyone here.

I'm Grumbling and I'm not happy about the thread, which I just re-read the ENTIRE thing--and I think that the topic is WAY too dissected!

I'm getting all this accountant stuff from you guys and I'm an artist and my way of doing things is far different from accountant stuff, but still reaches the same ends, so why all the negative/pressure?

The method we use at the store, set by the prior owner, guided by the Mass DOR in the 70's, has never been challenged, because it makes logical sense. Tax a sale, when the sale is made.

We don't have a "key" on our cash register to distinguish cash, credit card, check, or gift certificate sales from each other. They are all sales.

I say that I'm an artist; I think outside the box. But I arrive at the same goal line you all do.

I charge a customer who buys something--no matter what that is--the appropriate state sales tax. The state gets its tax; I pay the tax; the customer pays ME what I need to give the state.

The idea is--the customer paying for the gift certificate is payng the tax, so the gift is even more giving! The receipient is getting even MORE!

WHY is this wrong? If there are laws against this--WHY?

Can we not question laws? Can we not look beyond their scope and think about why the laws were first put in place?

Give me that!

(Sorry if I've overTAXED this subject, but it needs more addressing, because we've NOT resolved this issue. You guys can all quote tax laws, but you need to give me LOGIC to quell this!)

You've never encountered this much debate on a subject in this forum before? Welcome!

Wendy
The Art Corner
Salem, Ma
978-745-9524
artcornersalem@verizon.net
 
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