Does Missouri sales tax apply to gift card purchases, and does a coffee stand owe use tax on ingredients used for free drinks given to customers, employees, or loyalty-program members?

Subject

Taxability of Gift Cards and Loyalty Programs

Plain-English summary

The Missouri Department of Revenue addressed three separate questions from an out-of-state company that operates drive-thru coffee stands and offers gift cards, a stamp-card loyalty program, and free drinks to customers and employees.

First, the Department ruled that selling a gift card or gift certificate is not itself subject to Missouri state and local sales tax. Under Section 144.020, RSMo, sales tax is imposed on sellers of tangible personal property or an enumerated taxable service -- and a gift card or gift certificate is neither. However, this doesn't make the underlying purchase tax-free: when the customer later redeems the gift card to buy actual products, that sale of goods is subject to sales tax.

Second, the Department ruled that Applicant must accrue and remit Missouri use tax on the ingredients it uses to make free drinks given to customers (for example, on a birthday or when a customer forgets their wallet) and to employees. Applicant buys its drink ingredients tax-free under a resale exemption (12 CSR 10-103.220(3)(A)), intending to resell the finished drinks at retail. But when a drink is given away for free, with no consideration paid by the customer or employee, that's not a sale at retail (Section 144.010.1(13), RSMo). Because Applicant is then the one actually using and consuming those resale-purchased ingredients, it owes use tax on them.

Third, the Department ruled the opposite result for the loyalty program: Applicant does not need to accrue and remit use tax on ingredients used for free drinks redeemed through its stamp-card program. The key distinction is that loyalty-program customers already paid valuable consideration -- through their earlier purchases that earned the stamps -- for the free drink they eventually redeem. Since Applicant isn't simply giving that drink away for nothing, no additional use tax is triggered.

What this means for you

Coffee stands, restaurants, and retailers selling gift cards

If your business sells gift cards or gift certificates, this ruling confirms you generally should not charge sales tax on the sale of the card itself, since a gift card is not tangible personal property or a taxable service under Section 144.020, RSMo. Sales tax instead applies when the card is later redeemed for actual merchandise.

Businesses that give away free products to customers or employees

If you give away free food, drinks, or other products you purchased tax-free for resale -- to employees, or to customers as a goodwill gesture (birthdays, service recovery, etc.) -- and the recipient pays no consideration, this ruling indicates you become the end user of those ingredients/materials and must accrue and remit Missouri use tax on them, per 12 CSR 10-103.220(3)(A) and Section 144.010.1(13), RSMo.

Businesses running loyalty/rewards programs

If your loyalty program lets customers redeem points or stamps earned from paid purchases for a free item, this ruling suggests those redemptions are treated differently from pure giveaways: because the customer already paid consideration (through the purchases that earned the reward), no additional use tax applies to the ingredients used for the redeemed item. The key fact here was that Applicant's stamp card rewarded a free coffee only after the customer had already purchased and paid for a set number of coffees.

Common questions

Q: Is selling a gift card or gift certificate subject to Missouri sales tax?
A: No. A gift card or gift certificate is not tangible personal property or an enumerated taxable service under Section 144.020, RSMo, so its sale is not subject to Missouri state and local sales tax.

Q: Is the purchase later made with that gift card taxable?
A: Yes. While selling the gift card itself isn't taxed, Applicant's sales of goods in exchange for the gift card or gift certificate are subject to sales tax.

Q: Does Applicant owe use tax on ingredients for free drinks given to customers and employees?
A: Yes. Because Applicant buys its ingredients tax-free for resale but then gives some drinks away for free with no consideration paid, Applicant becomes the end user of those ingredients and must accrue and remit Missouri use tax on them.

Q: Does Applicant owe use tax on ingredients for drinks redeemed through the loyalty (stamp card) program?
A: No. Because loyalty-program customers already paid valuable consideration through the purchases that earned their stamps, Applicant is not giving those drinks away for free in the same sense, so no use tax is owed on those ingredients.

Q: What's the practical difference between the employee/birthday drinks and the loyalty program drinks?
A: The difference is consideration. For birthday, forgotten-wallet, and employee drinks, no consideration is ever paid, so Applicant is the ultimate consumer of the ingredients. For loyalty-program drinks, the customer already paid consideration in earlier purchases that earned the reward, so the transaction isn't treated as a pure giveaway.

Q: Can another business rely on this ruling for its own gift card or loyalty program?
A: Not automatically. This is a Missouri letter ruling, binding on the Department only with respect to the requesting Applicant, only for three years from its date, and only so long as the facts and underlying law remain unchanged. A different business should confirm its own facts match and consult a tax professional before relying on this result.

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8202

Original ruling text

Dear Applicant:

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your letter dated June 1, 2022.

The facts as presented in your letter ruling request and in a conversation with Senior Counsel Thomas A. Houdek are summarized as follows:

Applicant is an out of state limited liability company that operates drive-thru coffee stands.  As part of its business, Applicant offers customers the ability to purchase gift cards and gift certificates from Applicant.  Customers may use the gift cards and gift certificates to purchase products from Applicant until the value of the gift card or the gift certificate is reduced to zero.

Applicant also offers its customers a loyalty program (stamp cards) where customers may accumulate points based upon their purchases.  When the customer reaches a certain amount of stamps, customers can redeem the stamps for free products (primarily free drinks).  Applicant also offers free products to its customers on the customer's birthday or if the customer forgets their wallet.  Applicant also offers free drinks to its employees.  Neither the customer nor the employee provides consideration for the free drinks they receive from Applicant.

ISSUE 1 :

Are customers' purchases of gift cards or gift certificates from Applicant subject to Missouri state and local sales tax?

RESPONSE 1 :

No. Customers' purchases of gift cards or gift certificates from Applicant are not subject to Missouri state and local sales tax.

Section 144.020, RSMo, imposes a sales tax "upon all sellers for the privilege of engaging in the business of selling tangible personal property or rendering taxable service at retail in this state." Applicant sells gift cards and gift certificates, which are not tangible personal property or an enumerated taxable service.

Therefore, Applicant's sales of the gift cards and gift certificates are not subject to Missouri state and local sales tax. Applicant's sales of goods in exchange for the gift cards and gift certificates are subject to sales tax.

ISSUE 2 :

Should Applicant accrue and remit Missouri use tax on the ingredients Applicant uses to provide free products to its customers and employees?

RESPONSE 2 :

Yes. Applicant should accrue and remit Missouri use tax on the ingredients Applicant uses to provide free products to its customers and employees.

Section 144.020.1, RSMo, provides "[a] tax is hereby levied and imposed. .  . upon all sellers for the privilege of engaging in the business of selling tangible personal property or rendering taxable service at retail in this state.  Section 144.010.1(13), RSMo, defines "Sale at Retail" as "any transfer made by any person engaged in business as defined herein of the ownership of, or title to, tangible personal property to the purchaser, for use or consumption and not for resale in any form as tangible personal property, for a valuable consideration."

Missouri Code of State Regulations 12 CSR 10-103.220(3)(A) provides "[a] taxpayer may purchase tangible personal property or taxable services for resale if the purchase is for subsequent sale at retail."

Applicant purchases ingredients for resale that Applicant uses to prepare various drinks to sell at retail to its customers.  Applicant offers its customers and employees complimentary drinks for various reasons.  When Applicant gives the customer or employee a free drink, no consideration is paid by the customer or employee for the free drink.  The free drinks Applicant provides its employees and customers are not sales at retail.

Because Applicant purchases its drink ingredients for resale, Applicant is the end user of the ingredients used to provide free drinks to customers and employees.  Therefore, Applicant must accrue and remit Missouri use tax on the ingredients used to provide free drinks to its employees and customers.

ISSUE 3 :

Should Applicant accrue and remit Missouri use tax on the ingredients Applicant uses to provide free products to its loyalty program customers?

RESPONSE 3 :

No. Applicant should not accrue and remit Missouri use tax on the ingredients Applicant uses to provide free products to its loyalty program customers.

Applicant's loyalty program rewards customers with a stamp, recorded on a card, for each cup of coffee purchased.  Once a customer has enough stamps on their card, they are entitled to a free cup of coffee.  Unlike Response 2 , the customer has paid valuable consideration for the cups of coffee that entitled them to a free cup of coffee.  As Applicant is not giving the cup of coffee away, Applicant does not need to accrue and remit use tax.

This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals.  If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change.  For this reason, the interpretation set forth above should be reviewed on a regular basis.  Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Senior Counsel Thomas A. Houdek, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961.

Sincerely,

Wayne Wallingford