LR 8070

Taxability of Purchased and Stored Restaurant Gift Cards in Missouri

November 25, 2019

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 September 25, 2019.

The facts as presented in your letter ruling request are summarized as follows:

Applicant is a subsidiary of (Restaurant), who owns various restaurants around the United States and Missouri. Applicant contracts with a third-party vendor (Vendor) to design and produce gift cards for Restaurant. Restaurant's marketing team designs the gift cards and Vendor arranges for the creation of the gift cards at locations outside Missouri. This process occurs twice a year.

Once the gift cards are produced, Vendor arranges for shipment of the gift cards, via common carrier, to Applicant's distribution center in Kansas City, Missouri. The gift cards are stored at the distribution center until the gift cards are shipped to Restaurant's locations throughout the United States. Per the contract between Applicant and Vendor, the gift cards are shipped to the Missouri distribution center "FOB Plant" and the invoice provided to Applicant documents the cards are shipped "FOB Plant." Title and risk are transferred to Applicant outside Missouri at Vendor's production facility. Applicant retains ownership of the gift cards until the gift cards are purchased by the ultimate customer. Though Applicant bears risk of loss on the shipment of gift cards to the Missouri distribution center, Applicant negotiated with Vendor so that Vendor provides in-transit insurance and management of claims for loss or damage to the gift cards.

The cards are stored at the Missouri distribution center temporarily before shipment by the various distributors. Gift cards are replenished approximately twice a year and a small portion may ultimately be shipped back to a retail location in Missouri.

Restaurant contracts with the Missouri distribution center for gift card fulfillment and distribution of the gift cards to Restaurant's locations throughout the United States, including to online purchasers. Cards are distributed at Restaurant's direction. The Missouri distribution center then contracts with Secondary Distributors, which use the Missouri distribution center to conduct gift card related distribution and inventory management services. Most of the cards are distributed to locations outside Missouri.

Applicant and Restaurant also contract with third-party retailers for the display, marketing, sale, and activation of the gift cards at the Missouri distribution center. The third-party distributors remit the proceeds from gift card sales to Applicant and Restaurant less a commission percentage to cover marketing and program management fees.

Gift card redemption at Restaurant's Missouri locations represented 1% of all of Restaurant's gift card redemptions. Currently, Vendor collects Missouri sales tax from Applicant on the purchase price of all gift cards shipped to the Missouri distribution center.

ISSUE 1:

Would Applicant's purchase of the gift cards from Vendor be subject to either Missouri sales or use tax?

RESPONSE 1:

Yes. Applicant's purchase of the gift cards from Vendor is subject to Missouri use tax.

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 144.610.1, RSMo, provides:

A tax is imposed for the privilege of storing, using or consuming within this state any article of tangible personal property. This tax does not apply with respect to the storage, use or consumption of any article of tangible personal property purchased, produced or manufactured outside this state until the transportation of the article has finally come to rest within this state or until the article has become commingled with the general mass of property of this state.

Applicant's purchase of the gift cards does not occur within the state of Missouri because the transaction is entered into outside Missouri. Therefore, the transaction is not subject to Missouri state and local sales tax. However, Applicant purchases the gift cards that are ultimately brought to Missouri for storage, use, or consumption. Applicant takes possession of the gift cards outside Missouri and bears risk of loss of the gift cards even though Applicant contracted with Vendor for Vendor to carry insurance on the shipment. Therefore, Applicant's purchase of the gift cards is subject to Missouri use tax and Applicant should remit the Missouri use tax to the Director once the gift cards come to rest in Missouri.

ISSUE 2:

Are the gift cards that are temporarily stored at the Applicant's Missouri distribution center subject to Missouri use tax?

RESPONSE 2:

No. The gift cards that are temporarily stored at the Applicant's Missouri distribution center are not subject to Missouri use tax.

The Missouri Code of State Regulations 12 CSR 10-113.300(3)(A) provides:

The purchase of tangible personal property from an out-of-state vendor that is temporarily kept or retained in this state for subsequent use outside the state is not subject to use tax. Any use of the property involving the exercise of any right, dominion, control or power over the tangible personal property, other than temporarily keeping or retaining the property in this state for subsequent use outside the state, constitutes a taxable use.

12 CSR 10-113.300(2)(A) defines "Storage" as"

Any keeping or retention in this state of tangible personal property purchased from an out-of-state vendor, except property for sale or property that is temporarily kept or retained in this state for subsequent use outside the state. To be "for subsequent use outside the state" the purchaser must intend at the time the property is delivered to a Missouri location to subsequently use the property outside the state.

12 CSR 10-113.300(2)(B) defines "Temporary" as "[g]enerally, property kept or retained for less than a year may be considered temporary."

Applicant purchases gift cards from Vendor outside Missouri and contracts with Vendor to ship the gift cards for storage at a Missouri distribution center. The gift cards would be subject to Missouri use tax at the time the gift cards come to rest at the Missouri distribution center. However, these gift cards are considered to be temporarily kept or retained in this state for subsequent use outside the state. Applicant contracts with the Missouri distribution center and Secondary Distributors for distribution and use outside the state. Provided the gift cards are not stored at the Missouri distribution center for more than a year, the gift cards temporarily stored within the state of Missouri are exempt from Missouri Use tax.

However, any gift cards that are sent outside Missouri and ultimately returned to Missouri for sale are subject to Missouri use tax. Applicant retains ownership of the gift cards until the gift cards are purchased by the ultimate customer. Therefore, the gift cards that are brought into Missouri for sale in Missouri are subject to Missouri use tax. Applicant should remit Missouri use tax on the gift cards sent out of Missouri for distribution and then return to Missouri for sale.

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), or me.

Sincerely,

Ken Zellers