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To: Fishtalk
For isn’t this money now essentially a contribution?

No. Actually, in most cases, it a a prepayment for a retail sale to be completed by the recipient of the gift card. It is kind of like any other prepaid expense as when someone pays in advance for a product or service. The gift is between the "giftor" and the "giftee". The merchant sees the transaction as a prepayment toward a future sale and should count the prepayment as a liability.

The rub comes when the sale is not completed. If the card expires, it is no longer a liability. Also, the card would also loose its characterization as a liability once the merchant determines that it is unlikely to be redeemed regardless of whether it has a stated expiration date.

In the case of prepaid expenses that exceed the amount of the actual expense, merchants generally refund the prepaid balance to the customer. In the case of a gift card, refunding the amount of the unused prepayment makes sense theoretically but it may not be practical.

It is clear that the merchant cannot properly keep the money. If he keeps it, it clearly is taxable income. Perhaps he could dispose of it as a charitable donation. I hate the idea that the state gets it by default just because of the passage of time.

75 posted on 11/08/2007 1:03:49 PM PST by foxfield
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To: foxfield
"It is clear that the merchant cannot properly keep the money."

It's not clear to me. When the card expires, the liability is written off and a revenue is recorded, and the revenue is taxable. So the business keeps only the after-tax portion.
78 posted on 11/08/2007 1:10:15 PM PST by Steve_Seattle ("Above all, shake your bum at Burton.")
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