The Washington State Department of Revenue has just issued a draft Excise Tax Advisory (“ETA”) (will be hyperlinked to the attached document) in which it concludes that unredeemed gift card receipts (e.g., breakage) which are taken into income should be reported as subject to service B&O tax.  (As a reminder, in 2004, the Washington legislature excepted most gift cards from escheat, and now, after a period of non-redemption, companies may bring such receipts into income for book and federal tax purposes.  However, such companies are still liable should the card be redeemed.)   

We looked at this issue years ago, and the only authority on the issue was the administrative rule that said that gift cards are taxable upon redemption.  The Department’s conclusion is contrary to such administrative rule.  It is unclear whether this conclusion is being applied prospectively or retroactively, and there may be other associated issues.

The Department indicates it does not intend to hold stakeholder meetings on this ETA, and has set May 11 as the deadline to submit comments.  If you have any interest in this issue, we would be happy to assist you and coordinate whether there are multiple retailers with an interest.

[View source.]