On Gift Cards and Sales Tax

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It's worth a quick post to mention that you will never have to pay sales tax on gift cards, regardless of where or from which retailer they're purchased. (And if you have in the past, be sure to make a complaint, though keep in mind that there are some highly unusual exceptions that usually involve movie theaters.)

The logic behind this is that you're essentially exchanging money for credit to a specific retailer. I've always thought that for this reason alone, gift cards should come at a discount, even if it's a marginal one (and on occasion, they are, specifically iTunes). You're entering a contract in which the retailer has the distinct advantage of making the sale in advance and said sale is that of future business. Moreover, people on average spend above and beyond what's been put on the gift card. It's pretty hard to hit $50 on the button at your local Best Buy, but people psychologically hate to throw away money, even if it's a gift card with $3 left on it.

That brings us to the second point: when you buy gift cards, you're passing the sales tax to the cardholder. Sales tax is charged against gift card redeemers wherever the tax is charged (for example Best Buy: almost everywhere. Amazon: only KS, KY, ND, NY, and WA).

Here's a clever gift idea for the coming holiday season. If you're a regular gift card buyer and have kids, nieces, nephews, and the like that play video games, figure out your local tax ahead of time and add it to the card in advance. New XBox 360 games are regularly either $49.99 or $59.99, new PlayStation 3 games are regularly $59.99, and new Nintendo Wii games are regularly $39.99 (older titles vary in price). If you don't want to crunch the numbers, just take a game up to the checkout with you, ask them to scan it, check the price after tax, then (on second thought) decide against it.

Furthermore, unless you're buying something that is taxed additionally (alcohol, tobacco, firearms, Hummers), you can do this to almost any card: instead of buying a $50 gift card to Macy's, buy a $49.99 card plus the applicable sales tax in your state of residence or the state to where it's headed. You'll be able to add the perfect amount to your card and display how clever you are to your loved ones. You don't even need to give us credit (no pun intended).

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