How to handle VAT on gift cards under new EU regulations?

[Teoalessi]

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?

[Victor_5]

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:

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

[Teoalessi]

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?

[Victor_5]

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

[Teoalessi]

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

[Victor_5]

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

[Teoalessi]

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

[Victor_5]

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

[Teoalessi]

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

[Victor_5]

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

[Giacomo143]

Hi there,

thanks @Teoalessi for sharing this issue with the community.

We do confirm this is a mandatory request for all the EU based marchant: gift card must be vat included when sold.

Please check below the actual Shopify behaviour:

Unfortunately this actual Shopify limit turns the gift card “illegal” in EU because all merchants selling gift card without VAT could be accused of tax evasion.

IMHO having the “charge taxes” option available on gift card product as well will solve all. At the moment, trying to do this, the Shopify feedback (after flagging charge taxes and save) is the following error…

This issue is even more relevant in cases in which the merchant is selling phisical goods (I think 90% of the EU Shopify stores), because at the moment of the sale of the gift card the merchant know it will be used only on our store and only for products that are subject to 22% VAT.

@Victor_5 Could you please let us know how to proceed in order to have this feature request added in the Shopify tech roadmap asap? Otherwise potentially all the EU Shopify store selling phisical goods will be forced to stop selling gift card (loosing money expecially during the Christmas period).

Looking forward to hearing you soon

Thanks

Giacomo

[Victor_5]

Hi @Giacomo143 ,

Thank you for providing more context on this issue. I have flagged this with our technical team here and they have asked me to submit this to them for a full review. I will be doing that and they’ll take a look at this in more detail.

Kind regards,

Victor | Shopify Social Care

[theprince]

I have just setup gift cards and have the exact problem described above. Until resolved I would have to do a manual VAT report on gift cards and counter it against the VAT calculated at the actual sale

[Giacomo143]

Hi there,

yes, @theprince you are right. I’ve been in touch with a Shopify Guru asking me all the info about this new regulation.

After sharing all the info (providing detailed informations from several trusted source - uk governement for ex), unfortunately the Shopify feedback received by mail was this:

Ella Bamba (Shopify)> > Oct 25, 17:01 EDT> Hello Victor,> > This is Ella, one of the Gurus here in Shopify. I am helping Gavin with some emails today! :)> > Thank you so much for reaching us out regarding the gift card tax. I know how important it is for you. Since you have me, let’s work through it together! :)> > I can definitely understand where you’re coming from, I would absolutely feel the same if I’ll experience this. We definitely have no intention of making anyone(that includes you!) feel that we’re leaving you guys alone in the dark. We always want to make sure that everyone using our platform and/or services feel safe, comfortable, at ease, and happy! Rest assured that we are, and will always be, continuously improving and developing our platform.> > |Shopify Help Center :: Frequently asked questions about gift cards|> > Since this is something that isn’t available with our platform yet, as promised by my other co-guru, he raised this concern up already with our developer. Although there’s no guarantee of an approval and when will it be rolled out in the future updates, but I have high hopes for this! :)> > Alternatively, you may refer to this helpful document to know more on how gift card works in Shopify.> > Since this is something that isn’t available with our platform yet, as promised by my other co-guru, he raised this concern up already with our developer. Although there’s no guarantee of an approval and when will it be rolled out in the future updates, but I have high hopes for this! :)> > You can keep an eye on our Shopify News page to keep updated for the latest news about our platform.> That’s about it from me for now! Furthermore, please know that my help doesn’t end here so let me know if you have additional concerns or need further assistance and I’d be glad to lend a helping hand. :)> > If you have further questions or clarifications, please do not hesitate to let me know in this email. However, I want to inform you that I’ll be gone for my day-off, so you may not get a reply from me immediately. I will be back on Monday. If you would like to speak to us more, you may contact us on our live channels via Chat or Phone.> > Regards,> > Ella> Guru | Shopify

So, basicallty this is another example on how Shopify does not take care of European Merchants…As all of you can see this is a very standard feedback (including copy and paste error - same quote 2 times).

That said, at the moment we have to manage VAT report manually and outside Shopify. Moreover whan we sell a gift card, for Shopify this doesn’t generate sales, so the reporting is affected as well of thi general “gift issue”.

As Shopify partner, this issue is generating a lot of issue to all my clients. IMHO it’s absurd that Shopify offers QR code, Apple wallet integration and so on for gift card, but they do not take care of the most important point: to be compliant with the legislation of the country in witch they sell the Shopify platform.

I think all the EU merchants are able to list all the missing features we are still waiting for, this forum is full of requests that are still pending , some of them since 2 years

Naming a few of them: codice fiscale request at checkout (mandatory in Italy), invoice request fields (available only for Plus merchant forced to customize by themself the checkout and working around using metafiled, order notes, etc), recovery cart mail that does not check the stock availability before send the mail (very very disappointing), etc.

I think Shopify should fix at least all the mandatory features before spending a lot of time and effort promoting their product in the EU area, simply because the product is still not 100% compliant to the legislation.

I’m still believing Shopify is one of the best product in the market today, but honestly I’m loosing hope of having some of this features. We do need to help each other sharing workaround waiting for them to help us in order to have what we are paying for.

Please keep sharing the knowloedge waiting for Shopify.

GA

[HMUK]

Just bumping this, as I have just added gift cards as an option on my store in the UK.

Has anyone made any headway on this or had any advce on how to deal with the double VAT issue in the EU?

Thanks

[Stefan_VR]

Hi Victor,

What is the update on this please, at some point this is going to be a rod for your own backs, does it really need to come to that before we see a change here?

[Victor_5]

Hi @Stefan_VR ,

Thank you for getting in touch. This is something our internal team have been made aware of and have investigated as a number of merchants based in the EU have contacted us in recent months with concerns about this issue. However, having reviewed this new legislation, we believe gift cards sold and redeemed via Shopify are deemed multi-purpose vouchers and as such VAT does not need to be charged at the point of purchase.

Gift cards sold by merchants on Shopify can be used for any item on a merchant’s store, as they are simply a payment method, and can therefore be deemed multi-purpose vouchers. A single-purpose voucher would be a gift card/ voucher where the place of supply of the goods or services to which the voucher relates, and the VAT due on those goods or services, are known at the time of the issue of the voucher.

Any merchant that is selling gift cards online will not be able to determine the tax rate that should be charged at the time the gift card is purchased because:

• it can be used to purchase any product/service
• the final shipping address could be different than the original billing address

Gift cards sold via the Shopify platform are not designed to be redeemed for a single product/service, so even if the merchant is retail only, there wouldn’t be a way to identify that particular gift card is for that particular product/service.

Kind regards,

Victor | Shopify Social Care

[Stefan_VR]

Hi Victor,

I’m afraid you are mistaken.

I’ll simplify this, if your store sells the voucher, and the voucher can only be used at your store (The store that sold the voucher) and your rate of tax is known on the products you sell as is the case for 99% of merchants (In the UK it’s 20%), then you are selling a single use voucher.

There should be no confusion with the fact that it is called single use, this refers more to the single location / single tax rate than buying multiple products with one voucher. Confusing AF I know. Regardless, HMRC here in the UK has made it quite clear that we now need to pay the VAT on vouchers sold, please see below.

“From 2019, a voucher will be regarded as a Single Purpose voucher where the place of supply of the ultimate goods or services is known (That’s your store) at the time the voucher is issued and where the voucher can only be used for goods/services (More than one type of goods can be purchased and still be single use) at a single rate of VAT (All our products are VAT rated at 20%).”

[Giacomo143]

Hi @Victor_5 ,

yes, you are wrong.

It seems your are interpreting the regulation in “your way”, but it’s not the real one.

If all the EU merchants start selling gift cards (because your feedback confirms the Shopify gift card are OK for the EU law), will Shopify take care of any kind of fine we are potentially going to receive? I honestly don’t think so…

So, please fix this gift card issue or ask a good lawyer to double-check the law, your feedback is totally wrong.

[Victor_5]

Hi @Giacomo143 & @Stefan_VR ,

Thank you to both of you for providing your feedback on this issue and for the detail you’ve given. I have gone ahead and communicated your comments onto the relevant internal teams for their consideration. I will be sure to update this thread in future once I hear more.

Kind regards,

Victor | Shopify Social Care