The Tennessee Department of Revenue issued a letter ruling discussing the application of Tennessee sales and use tax to a taxpayer’s purchase and distribution of gift cards both in and outside of the state. The taxpayer facilitates the acquisition and distribution of gift cards for its parent company’s restaurants and affiliated restaurants.
The taxpayer purchases the gift cards from an out-of-state third-party vendor. The vendor then ships the gift cards to an unrelated third-party distribution facility in Tennessee, where they are stored until they are shipped to affiliated restaurants or third-party retailers throughout the U.S. Under the terms of the contract between the taxpayer and vendor, taxpayer retains title to the gift cards until they are purchased by the ultimate consumer.
The DOR ruled in this specific case that the taxpayer is not liable for Tennessee sales and use tax on the gift cards that are temporarily stored in a third-party distribution facility and later distributed to out-of-state locations. Under Tennessee code, tangible personal property that is “used, consumed, distributed, or stored for use or consumption” in Tennessee is taxable. However, tangible personal property that is imported into the state for the purposes of being exported is not taxable.
The DOR also ruled that the taxpayer’s purchases of temporarily stored gift cards do not qualify as sales for resale. The sales do not qualify because the taxpayer uses the gift cards “as a means to transfer an intangible right to the ultimate consumer.” The sales do not qualify because the “true object” of the taxpayer’s sale of gift cards is not he physical card itself, but the intangible value the gift card holds. The taxpayer uses the gift cards “as a means to transfer an intangible right to the ultimate consumer.” In Tennessee, the sale of an intangible right, even if embodied in tangible personal property (such as a gift card) is generally not subject to sales and use tax.
An interesting statistic by one gift card manufacturer, “According to a survey completed at the end of the holiday season 2017, gift cards remain the most popular items on wish lists for the eleventh year in a row. Out of all those surveyed, 61% requested gift cards first and foremost with clothing and accessories coming in second at 55%.” (Letter Ruling 18-08, Tennessee Department of Revenue, October 25, 2018).