What is a gift card? How store gift cards work, rules and accounting

A gift card is prepaid stored value, issued as a code or a physical card, that a customer buys now and later redeems, in full or in parts, toward purchases at the issuing store. In US regulation, a store gift card is one issued on a prepaid basis in a specified amount and redeemable at a single merchant or an affiliated group of merchants.

How it works

  1. A customer buys a card for a set amount, often as a present.
  2. The store issues a unique code and records the balance.
  3. At checkout, the recipient enters the code; the order total is reduced by up to the remaining balance, and any shortfall is paid another way.
  4. What is left stays on the card for next time.

Worked example (hypothetical): a $50 gift card is used on a $35 order, leaving $15. On a later $40 order the shopper applies the $15 and pays the other $25 by card.

Why it matters for an online store

  • Cash up front. The store is paid when the card is sold, before any goods ship.
  • New customers. Recipients who have never shopped with you arrive with money to spend.
  • A last-minute gift option. Digital cards can be sent instantly, with no shipping.

Rules to know

United States: expiration and fees

Under Regulation E (12 CFR 1005.20), the funds on a store gift card may not expire earlier than five years after the card was issued or funds were last loaded. Dormancy, inactivity or service fees are allowed only after a year with no activity, at most one per calendar month, and must be disclosed clearly on the card. Loyalty, award and promotional cards are excluded but need their own disclosures.

European Union: VAT on vouchers

Since 1 January 2019, EU VAT law distinguishes two kinds of voucher. A single-purpose voucher is one where the place of supply and the VAT due are known when it is issued, so VAT is charged when the voucher is sold. Everything else is a multi-purpose voucher, where VAT is due only when goods or services are actually supplied in exchange for it. A card that can be spent on goods taxed at different rates falls in the second group, because the VAT due is not known when it is sold.

Accounting: breakage

A sold gift card is a liability, not revenue, until it is redeemed. The share customers are expected never to use is called breakage. Under IFRS 15 (paragraphs B44 to B47), if the store expects to keep it, breakage is recognized as revenue in proportion to the pattern of redemptions; otherwise, only once redemption becomes remote.

Common mistakes

  • Treating gift card sales as revenue. This overstates sales until the card is used.
  • Applying discounts to gift card purchases. Percentage-off codes can let shoppers buy store credit below face value.
  • Guessable codes. Short or sequential codes invite brute-force attempts.

On CIQRA, gift cards are included from Shop Advanced.

Related terms

Sources