Gift Cards and new EU VAT regulations

Tourist
5 0 1

HI all,

 

We want to add gift cards to our EU based e-commerce website.

According to the new EU VAT regulation our gift cards would fall in the Single Purpose Voucher (because at the moment of the sale we know it will be used only on our website and only for products that are subject to 22% VAT) and would therefore need to be taxed for VAT at the moment in which the card is sold.

In order to avoid paying taxes twice, when the card is sold and then again when the product is sold, we would have to find a way to deduct the value of the card from the taxable amount of the product purchase (as if it was a voucher) rather than consider it a method of payment.

Has anybody else had the same issue? How did you deal with it? Ideas/Suggestions?

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Shopify Staff
Shopify Staff
194 23 42

 

 

Hi @Teoalessi,

 

Thank you for reaching out today, and this is a great question!

 

If I am understanding correctly, this EU legislation means a customer cannot be required to pay VAT when purchasing a gift card (or "Single Purchase Voucher"), and then charged VAT again when purchasing goods and services with that gift card?

 

Also, are the gift cards you are selling digital or physical gift cards? I ask as I believe in the European Union, electronically-supplied gift cards are not defined as a digital good:

 

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This screenshot is taken from our Help Centre article on this topic.

 

If my understanding is correct, this means that electronically-supplied gift cards would not be classed as a digital good and as a result, no VAT would be applied. If this is the case, then the directive you have mentioned would not apply as no VAT was charged during the initial purchase of the gift card.

 

If you are selling physical gift cards, or if you believe my understanding here to be incorrect, please let me know and I can look into this further. If you are unsure, I would suggest consulting a tax professional to learn more about what your obligations are in this scenario.

 

Kind regards,

 

Victor | Shopify Social Care

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Tourist
5 0 1

Dear Victor,

 

Thanks for your reply.

What I meant, though, is that based on the new legislation we must pay VAT on the sale of a giftcard.

If, for example, we sell a giftcard with a face value of 100€ the end consumer will pay 100€ and we will have to pay about 18€ vat tax (22% on 100€/1,22).

When the customer comes back to the website and uses the giftcard we run the risk of paying VAT again on the same 100€ (thus ending up paying it twice) because at the moment a Gift Card is treated by Shopify as a payment method.

If there a solution to used the gift card as if it was a voucher, and therefore reduce the taxable amount in the cart, and not as a payment method?

 

The consumer experience is not what worries me because by selling products with a VAT included price list they wouldn't notice anything, it's us, the venor, that would end up paying VAT twice on those, for example, 100€...

 

I guess the solution is either find a way to treat a gift card like a voucher when they are used on find a solution to sell vouchers as if they where products.

Any suggestion?

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Shopify Staff
Shopify Staff
194 23 42

 

Hi @Teoalessi,

 

That makes some more sense so I appreciate you explaining that. Customers will be charged VAT when redeeming a gift card to pay for products, as they're paying the VAT on the products and the gift card is just a method of payment. However, no sales tax is charged when a gift card is purchased.

 

Can you just confirm the outcome you're looking for here? Would it be for the customer to pay VAT on both the gift card and then the goods they are redeeming with the gift card, as it seems you will now be required to pay sales tax on both? Or would it be for gift cards to still no longer include VAT charges on the customers end, and for the amount they pay when redeeming the card to increase so you're covered for the dual VAT charges you'll be required to pay?

 

It's a complex issue to get my head around, so I appreciate you detailing the situation.

 

Kind regards,

 

Victor | Shopify Social Care

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Tourist
5 0 1

Hi Victor

 


. However, no sales tax is charged when a gift card is purchased.

 

This is the exact issue, at the moment, based on the new EU regulation, we were told by the accountant of the company that a sales tax will indeed be charged when the card is purchased.

And since this seems unavoidable, based on what we've been told and what I read regarding the regulation, I need to find a way to avoid paying it also when the card is used, otherwise I'd be paying it twice.

 

Let me try to clarify with an example here below:

A consumer buys a gift card for 100€

I, the seller, have to pay the VAT on that sale (based on the new regulation and the fact we fall in the "single purpose voucher" definition)

The consumer uses the card on the website as a method of payment to buy a product for 100€ (VAT included)

I, the seller, have to pay VAT again on the same 100€

I end up paying VAT twice (all fine for the consumer)

 

What I am trying to achieve, given the fact it seems I can't avoid paying VAT the for the sale of the gift card, is finding a way to avoid paying VAT when the card is used.

 

If I understand correctly Vouchers work in a different way, the value of a voucher is used to reduce the taxable amount of the products sold (as if it was a discount) so I thought this could be a potential solution... Is it?

 

So, just to summarise again:

1) The seller has to pay sales tax on a single use gift card 

2) The seller wants to avoid paying it again when the card is used

3) what can the seller do to achieve this?

 

I hope it is clearer now

 

Thanks

Matteo

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Shopify Staff
Shopify Staff
194 23 42

 

Hi @Teoalessi,

 

Yes, that does clarify things. Thank you for detailing the situation for me.

 

The difficulty I'm facing here is that part of this equation is you paying VAT to the relevant tax authorities, which is something outside of our support scope. Excuse me if I being ignorant here, but please let me know if this scenario works or not:

 

  • The customer purchases a $100 gift card. They pay no sales tax on the order, but you are required to pay VAT to the relevant tax authorities irrespective of this.
  • The customer returns to the store and places an order worth over $100 and uses the the gift card as the method of payment. They pay VAT on this order.
  • As you, the merchant, have already paid VAT for the sale of the gift card, you do not pay any VAT for this order.

This scenario would balance things out - the merchant pays the VAT when the gift card is sold, the customer pays the VAT when the gift card is redeemed. This should not leave you out of pocket.

 

I'm no expert on the merchant-facing side of paying VAT, or EU legislation, but it seems unusual that a law would be brought in that requires the merchant to pay VAT both when the gift card is purchased and when the gift card is redeemed. This leaves you in a position of either having to absorb the cost of the VAT due when the gift card is sold, or somehow adding VAT to gift card purchases for the customer - which also seems strange. I can't see anyone spending more on a gift card than what the gift card can actually be redeemed for.

 

In short, I would hope you could pay the VAT when the gift card is sold, if that's what this new EU law requires, and not pay it when the customer redeems the gift card and they pay sales tax on the order.

 

If I'm missing something here, let me know.

 

Kind regards,

 

Victor | Shopify Social Care

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Tourist
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Hi Victor,

 

Thanks for the effort.

Let me try a different approach

Is there a way I could use the value of a giftcard to reduce the taxable amount (as if it were a discount) instead of a method of payment?

Or, since vouchers already do exactly that, is there a way I can sell vouchers?

 

Thanks

Matteo

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Shopify Staff
Shopify Staff
194 23 42

 

Hi @Teoalessi,

 

The main issue here is that discounts and gift cards are treated differently within Shopify, with discounts reducing the amount due in the cart and gift cards just acting as a payment method.

 

If, for example, a customer bought a $50 gift card, you could provide them with a $50 discount instead. The problem is though is the discount would be a one-time use only discount, whereas with a gift card the customer could use it multiple times to pay for cheaper orders. There's no fully effective way you could offer a discount in lieu of a gift card due to the differences in how they work in the Shopify system.

 

Are you sure that you are required to pay sales tax on both the sale of the gift and the order where the gift card is redeemed, even though the customer is paying only once? Has your accountant confirmed this? Apologies for repeating this question but on the face of it, it seems very illogical and harsh on merchants if this is the case.

 

In terms of selling vouchers, the answer is maybe - I'll need to look into this some more, but my initial thought is that it would prove difficult and would not be a like-for-like replacement for gift cards.

 

Kind regards,

 

Victor | Shopify Social Care

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Tourist
5 0 1

Hi Victor

 

Thanks again for your answer.

I understand the difference between the two instruments, I was just hoping there was a solution.

 

I checked with the accountant and what he said it's not that we have to pay it twice, we could avoid paying it the second time if we were able to treat the giftcard not as a payment method.

So, basically, what he says is that we have to collect tax form consumer and pay it to the State when we sell the giftcard, we are not requested to do it when the card is used but I would need to find a workaround in the system to avoid doing it automatically. That's why I was thinking about using vouchers.

 

No problems, I'll think of something else and check with the accountant

 

Matteo


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Shopify Staff
Shopify Staff
194 23 42

 

Hi @Teoalessi,

 

Thanks again for your clarification. I can see your logic here, but unfortunately the aforementioned differences between gift cards and discounts would make it difficult to find a suitable workaround.

 

Please feel free to come back to me here if you have any further questions down the line.

 

Kind regards,

 

Victor | Shopify Social Care

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 - Was your question answered? Mark it as an Accepted Solution
 - To learn more visit the Shopify Help Center or the Shopify Blog

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