Gift card use by businesses continues to experience tremendous growth. The Incentive Research Foundation (IRF) reports that gift cards are the most prevalent award type across all incentive and recognition audiences — employees, sales, consumers and channel partners. Businesses spent a total of $26 billion on gift cards in 2016, nearly 20 percent of the gift card industry’s total sales of $136 billion.
In a survey this fall of Sales & Marketing Management readers, respondents said they most appreciate gift cards’ flexibility, how easy it is to recognize with them, and their versatility. (See more results from this survey on page 34.)
Gift cards have been reliable reward vehicles for several decades. Like everything else in business, the incentive gift card world continues to be disrupted. Capabilities increase, new suppliers emerge and trends change. It’s important for incentive gift card users to stay on top of these changes. We checked in with some longtime leaders in the incentive gift card industry to get their perspectives on important shifts and trends that our readers should know about. Here’s what we learned:
The truth about taxes
Some corporations view the tax implication of gift cards as a barrier to entry into the space. Ashley Harris, senior director of strategic partnerships at gift card supplier NGC, and president of the Incentive Gift Card Council (IGCC), address key tax issues around incentive gift card use:
Sales Tax – A gift card purchase is viewed as exchange of cash or cash equivalent with no additional value or service rendered, hence, no sales tax due on the transaction. This is true for both purchases made by businesses in bulk and consumer purchases at retail. Some existing confusion may be the result of actions by New York state legislators, who tried to pass a law that changed the sales tax implementation from the time of usage to the time of purchase — passing the sales tax onto the gift card purchaser rather than the giftee. No vote was ever taken on this legislation. The vast majority of states still call for tax collection on gift cards at the time the recipient uses the gift card.
Income Taxes – The IRS defines “gross income” broadly and considers the value of the gift card to equal the face value stated on the card. The question of whether it is to be included in the recipient’s income tax calculation depends, in part, on who presents the gift card and to whom.
A gift card received from a family member or friend does not need to be reported as income. If an employer provides someone a gift card as recognition or an award, its value is considered a taxable fringe benefit and must be reported as income unless the IRS considers the transaction to be de minimus. A de minimus fringe benefit would be of such small value or provided so irregularly that it would be impractical for an employer to try to access the value to each employee. Examples of de minimus fringe benefits include things like free coffee on the job, flowers on an employee’s birthday, tickets to an occasional sporting event and the like.
Company gifts of rewards or thank-you points to customers — In 2014, there was a case where a tax court ruled that the value of a bank customer’s thank-you points that were redeemed to purchase an airline ticket (market value $668) was reportable income.
These examples of irregular gift card use as small tokens of appreciation, and the use of points-based programs cause the most confusion for companies, Harris says. Can they give gift cards to employees without taxes coming into play? At what point do gift card become reportable income, if at all? “The topic is such a gray area and viewed differently by different companies. The lack of an industrywide standard makes this an ongoing challenge.”
Increased flexibility
More than six in 10 respondents to our reader survey said they appreciate how easily gift cards fit into a recognition program, and another 15 percent said gift cards fit their program budget.
One of the most valuable benefits of a gift card program is the wide range in dollar value, starting as low as a dollar for some merchants, says Anne Jetter, vice president of product and new business development at Marketing Innovators International.
“This offers enormous flexibility and allows you to stretch your budget by rewarding all year long in various denominations. Unexpected or ‘on the spot’ awards can be given in smaller denominations, yet when presented in a group setting, can be a pleasant surprise that says ‘we’ve noticed your efforts,’ and carries a large impact,” Jetter says.
“For bigger accomplishments, you might acknowledge quarterly and reward more significant achievements with a higher denomination. Receiving another item with a company logo may never get used,” she adds. “Giving a gift card ensures your recipients will use it for something meaningful to them. The bottom line is you’re recognizing your team, keeping your employees engaged and enjoying their work.”
An awareness issue
The IRF reports that most U.S. businesses do not buy gift cards for awards from a single source. Both medium enterprise and large enterprise firms use an average of two sourcing channels for their gift cards. Sources include buying at retail, from online general retail, buying directly from the brand, purchasing from a gift card supplier and sourcing through a third-party incentive or promotional agency that also helps run the program.
“One of the top issues we’re talking about is the number of companies that purchase at least some of their incentive/reward gift cards from local retailers,” says Megg Withinton, managing partner at Intellective Group, a market research and strategic consulting firm. Withinton has extensive experience in the incentive gift card industry.
She estimates that at least 70 percent of companies purchase gift cards locally, even if they have established gift card partners for the bigger programs. On top of that, one-third of the market is unaware there are incentive gift card suppliers that can offer significant discounts on bulk purchases. “They don’t know there are specialized firms available to them to advise and fulfill on gift cards for their programs,” Withinton says. “It’s a problem that’s worth billions of dollars to the industry” (and to incentive gift card users as well).
Ideal for today’s remote workers
Jetter says gift cards’ flexibility and ease of administration set up nicely for the influx of remote workers. It’s important for managers to keep telecommuters engaged and feeling part of the team, not to mention appreciated. Digital gift options from Marketing Innovators and others allow companies to send a reward with a customized message and logo, then gives the recipient the ability to select their favorite gift card. “The egift card is delivered instantly, so it can be used that day for a shopping or dining surprise. They get to choose the brand and celebrate how they wish,” she says.
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