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  • The taxation of gift cards in Pennsylvania is a fairly simple answer, but, as with most things in taxation, there are many little nuances that you have to watch out for. There are many situations where gift cards are in fact taxable in Pennsylvania and knowing how to properly apply the law will help you stay compliant in your business. So, let us look at some situations where gift cards are taxable in Pennsylvania.

    To get this out of the way, the sale of gift cards and gift certificates in PA is not a taxable event if you are just purchasing a general gift card, which means the customer can use the gift card to purchase anything they want. When the gift card or certificate is used, that is when tax is charged. If a product is consumed, tax is collected at that time if the product was taxable. Think of the purchase of a gift card as if you gave someone cash. Tax wouldn’t be collected at that time. That is the same with a gift card.

    Now that we know that gift cards are not taxable in Pennsylvania in most situations, we should talk about how gift cards are taxable in PA. For the gift card to be taxable in Pennsylvania, the gift card or certificate would have to be purchased for a specific service or product that is taxable. And to be clear, it has to be for a named, specific service in order for the gift card to be taxable on the front end. For example, if you bought a gift card for someone to redeem for a specific refrigerator, then you would pay tax on that gift card. Sure, you are essentially purchasing the product and then the other person is taking delivery of the product, but this does happen.

    Here is a better, real-life example that has come up recently. Microsoft sells two separate gift cards for their XBox gaming system: a general one and one for a premium service called XBox Gold. The premium service is billed at a monthly rate and allows users to access certain features. Now, the general gift card is not taxed, but when the user uses the gift card on the Microsoft store, tax is deducted from the balance of the gift card. However, if you purchase a gift card for the XBox Gold service, you will pay sales tax when you purchase that gift card. That is because you bought a specific service that is taxable.

    If you sell gift cards, most of the time, you will need to collect sales tax. These situations are rare where you do have to collect sales tax on the sale of a gift card. However, there are situations, so you need to be certain that you applying the sales tax law properly. Being compliant is important, so if you have any questions or would like a review of your current sales tax practice, please contact us to schedule a time.