Coupons and Trading Stamps
Merchants that issue trading stamps or premium coupons (redeemable in merchandise or cash) in connection with a sale of merchandise, may take a deduction for the merchandise or cash in the year the stamps or coupons are issued, rather than waiting until the year of redemption. This deduction is not available for coupons that provide a discount from the sales price of specified products.
An accrual-basis taxpayer engaged in the business of selling trading stamps or premium coupons may also establish a redemption reserve and subtract from gross receipts the expenses relating to the stamps or coupons, including an amount that represents the net addition to the reserve. This amount is determined at the end of the year by multiplying estimated future redemptions by the average cost of redeeming each stamp or coupon. Coupons that are distributed without charge to promote a manufacturer's products cannot use this special reserve treatment.
Gift Certificates and Gift Cards
Payments received for gift certificates are taxable upon receipt as advance payments for goods. The amount received can be deferred to the year the sale is reported for financial accounting purposes, and to the second year after receipt, if earlier. This treatment also applies to payments for gift card sales. A taxpayer that issues a gift card in exchange for returned merchandise may apply a safe harbor by treating the gift card as the payment of a cash refund accompanied by the sale of the gift card.
Inventory Accounting
Taxpayers must use inventories at the beginning and end of the tax year to compute income when the purchase or sale of merchandise is an income-producing factor. The Tax Code does not define merchandise; courts have applied various accounting definitions of the term. An item must be held for sale to be considered merchandise and to be includable in inventory. When a taxpayer takes title to tangible property for resale at the taxpayer’s risk, and the resale is a significant source of revenue, the taxpayer must use inventories.
