With e-commerce becoming more accessible than ever, it’s tempting to skip gift ideas and go with an amazon gift card instead. However, are you paying more than you need to when you buy amazon gift cards?
Amazon gift cards do not have sales tax. In fact, all gift cards in the U.S. are considered tax-free because gift cards are considered cash equivalents. However, Amazon has illegally taxed gift cards in the past and faced a class action lawsuit over the matter.
While Amazon’s policy is not to tax gift cards, as the practice is illegal, they have erroneously taxed gift cards in the past. This article will talk more about Amazon gift cards, their tax policy, and how to ensure you don’t accidentally pay tax on your Amazon gift cards. Keep reading to find out more!
Amazon Sales and Use Taxes
*Note: This article will cover Amazon tax and purchase laws within the U.S. Residents outside the U.S. may be subject to alternative sales and tax laws.
According to Amazon, when you purchase a gift card through their site, there is no tax on that sale. However, when you use a gift card to buy an item on Amazon, the item is taxed. Further, that tax is included on the card when you purchase items with a gift card.
What Are the Taxes on Gift Cards in the U.S.?
Within the U.S., all gift cards and gift certificates do not have a sales tax. While each state determines sales and uses taxes, no states currently allow sales tax on gift cards. In all instances of gift card purchases in the U.S., the gift cards are considered a cash equivalent and cannot be taxed.
As a business, Amazon cannot directly charge sales taxes on items. Instead, Amazon is subject to U.S. federal tax laws. In practice, Amazon applies taxes to its products which the government then collects.
However, in the U.S., tax laws are determined by each state. Amazon cannot set an overall tax rate on all its items. What Amazon can do is follow each state’s tax laws to ensure the proper taxes are being collected.
Because individuals pay a sales tax when they purchase with the gift card, the gift card itself is exempt from any sales tax. However, when individuals pay a sales tax during a gift card purchase, the business recipient receives duplicate sales tax.
This extra sales tax is especially problematic because of the varying sales tax of each state government. For example, if you purchase a gift card with sales tax in Florida and spend that money in Alabama, each state would receive sales tax on the exact cash equivalent.
Sales taxes on items are reported to and collected by the state where individuals made the purchase. Businesses report sales taxes so the IRS can regulate where tax money goes. In situations where sales tax is charged on gift cards, it’s unclear where that money is going because currently, no businesses report gift card sales taxes to the IRS.
While this is likely a mistake when it does happen, individuals should report instances of gift card sales tax. In addition to saving yourself money, you also help that business by ensuring they aren’t committing fraud.
What Are the Taxes When Using a Gift Card?
In general, if you buy something with a gift card on Amazon, it has the same tax as without. However, Amazon has a variable tax rate on all purchases that can change between when you make a purchase and when you’re charged.
For example, purchases made out of state, and even purchases shipped from out of state, may have the sales tax of that state when you make a purchase. Then, after purchasing, the sales tax of the delivery state (where you reside) is applied to the order.
If you notice the tax on a sale change significantly after making a purchase, this is probably normal. However, contact Amazon customer service if you are concerned about discrepancies in the sales tax you paid vs. what was initially estimated.
Has Amazon Charged Gift Card Taxes in the Past?
While it’s Amazon’s official policy not to charge, and despite this practice being illegal in the U.S., Amazon has charged sales tax on gift cards in the past.
It’s impossible to quantify how much profit Amazon has made using this practice or how long they have been doing so. Further, it’s possible that this practice was not intentional on Amazon’s part.
However, in 2021 Debbie Chaves filed a class action lawsuit against Amazon over the illegal charges on a $10 Robux gift card she purchased. The sales tax on the card came to be .065% or 65 cents.
Amazon reports that they unknowingly charged sales tax on gift cards, and this practice is not indicative of all gift card sales. In almost all cases, Amazon gift cards do not have sales tax.
While Debbie Chaves’ sales tax is not a considerable sum on its own, it represents a possibly much more significant source of income for Amazon, depending on how many times they’ve charged sales tax on gift cards in the past.
Further, it’s not certain where that money went because Amazon didn’t file a sales tax income for any gift card sales. Because sales taxes must be reported and given to the state, it’s possible Amazon kept profits made from gift card sales tax.
The class action lawsuit is still ongoing, and it is unclear whether or not Amazon is still charging sales tax on certain gift cards. If you’re concerned about wrongfully paying sales tax on gift cards, you want to ensure it doesn’t happen in the future.
How Do I Ensure I Don’t Pay Tax on an Amazon Gift Card?
No one wants to pay unnecessary taxes on items, even if it’s just a few cents. Further, purchasing a gift card in the U.S. with an associated sales tax is a violation of the Consumer Protection Act.
However, federal oversight over gift card sales tax is limited, and it’s possible that Amazon or other retailers may wrongfully tax gift cards in the future.
Check Sales Tax Before You Check Out
The best practice is to get ahead of the purchase and ensure that there are no associated sales taxes with any of your gift card purchases. Go over your shopping cart and check for sales tax on gift certificate purchases when checking out.
This practice is beneficial for larger e-commerce sites such as Amazon. However, it’s also good practice for anywhere you’re purchasing gift cards, including Walmart, Sears, or your favorite clothing store.
Get Refunded for the Gift Card
We can’t always catch minor charges during checkout. Sometimes we make a purchase only to find out later about the gift card tax.
In these situations, the best thing to do is get a refund. Contact Amazon (or the retailer in question) and ask for the sales tax to be refunded according to their sales and use tax.
If this situation occurs and you want to avoid gift cards from Amazon altogether, ask for a full refund and take your business elsewhere.