October 17, 2018
This Interim Guidance addresses a gift card issuer’s tax liability on income received from the sale of gift cards that are not redeemed.1
Under RCW 19.240.020, most gift cards purchased or used in Washington do not expire. However, under RCW 63.29.140(1) of the Uniform Unclaimed Property Act (UUPA), gift cards are presumed abandoned if unredeemed after three years.
Reporting options for unredeemed gift cards
If a business properly issues gift cards in accordance with the UUPA that later become abandoned, it is not required to report the abandoned gift cards as unclaimed property per RCW 63.29.140(3). A business should account for the unredeemed gift cards once they become abandoned as follows:
The business could, but is not required to, report the abandoned gift cards to the Department as unclaimed property. Reporting as unclaimed property means the funds received from the gift cards are turned over to the Department. There is no tax liability to the business in this case; or
The business must recognize the abandoned gift cards as revenue. This revenue is often referred to as “breakage income.”
Taxability of breakage income
“Breakage income” is the term used to describe income from unredeemed gift cards that have been deemed abandoned, and are not required to be reported as unclaimed property under the UUPA. Per RCW 82.04.070 and 82.04.080, breakage income is gross income as a value proceeding or accruing from engaging in business and is taxable under the Service & Other B&O tax classification.
This interim guidance has been issued in order to inform gift card issuers of their tax liability on the sale of gift cards that are unredeemed. The Department requests feedback from stakeholders regarding the practical application of this guidance. A stakeholder meeting will be conducted in order to solicit input on a variety of practical areas of application, including:
calculation of breakage income or breakage percentages
changes in breakage income calculations over time
timing of recognition of breakage income
any other administrative areas of issue identified by stakeholders
If you are interested in attending the stakeholder meeting you may sign up for the DOR Excise Tax Rule Action notifications. The Department will send a notification announcing the meeting date, time, and location.
If you have questions about this guidance, please contact Matt Largent at 360-534-1590.
1 This notice does not address the taxation of prepaid phone cards or prepaid debit cards, or the taxation of third party businesses selling gift cards on behalf of the issuer.