Sales Tax Slice: GameStop’s Gift Card Practices Allowed to Play on in Louisiana

Retailers may preserve the tax benefit of Louisiana’s trade-in deduction by adding customer trade-in credits to store gift cards, an appellate court ruled last week for GameStop.

Like most states, Louisiana permits retailers to deduct the amount they credit customers for merchandise traded in from the taxable price of merchandise purchased. Most frequently, retailers claim this deduction when a customer trades in one item and simultaneously purchases a new one. Breaking from this model, GameStop does not require a customer to purchase a new item at the time of trade-in. Instead, customers may opt to have GameStop credit the trade-in value of an item to a store gift card, which the customer may use for future purchases.

States typically tax gift card purchases the same as cash purchases. However, after finding that Louisiana’s trade-in deduction does not require that a trade-in occur at the time new property is purchased, the Louisiana Court of Appeal ruled that the deduction is appropriately applied to future purchases made with GameStop’s gift cards. In doing so, the court appears to have approved a new use of gift cards: to preserve a state’s trade-in deduction. 

Washington recently denied the application of its trade-in deduction to GameStop’s transaction model. Importantly, this decision did not turn on the timing of the trade-in, but instead on the fact that video game cartridges could be traded in for game controllers and consoles, items that Washington found not to be of a “like kind” to the traded in cartridges.

It is not clear whether or how GameStop would account for such unlike-kind transactions under the model approved in Louisiana. A further possible accounting dilemma may present itself if cash and trade-in credits are loaded onto and commingled in a single gift card. For now, these issues remain to be addressed in future rulings.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Has the Court of Appeal opened a Pandora’s Box by ruling in favor of GameStop’s trade-in model? Are the tax savings of this model worth the potential compliance headaches?  

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by Ernst Hunter