Texas restaurant gift cards: sales tax and the federal five-year rule

A Texas restaurant does not charge sales tax when it sells a gift card. The Comptroller says tax is collected when the card is redeemed for a meal. The federal gift card rule, 12 CFR 1005.20, sets the expiry and fee limits for the card itself: funds must last at least five years, and an inactivity fee is allowed only after a year with no activity and with clear disclosure.

When is sales tax due on a gift card?

The Comptroller's publication on restaurants and food service says gift cards are not taxed when sold, and that tax is collected when the gift card is redeemed for a meal. In practice, the sale of a $100 card is a liability on your books, not taxable revenue. When a guest pays a $100 check with the card, the tax on the meal is collected on that check as usual, even though no cash changes hands at the table.

What does the federal rule require?

Regulation E's gift card provisions at 12 CFR 1005.20 cover gift certificates, store gift cards and general-use prepaid cards bought primarily for personal, family or household use. An issuer may set an expiration date only if it gives consumers a reasonable chance to buy a card with at least five years left. The funds underlying the card must last at least five years from issuance or the last load, or until the card's own expiration date if that is later.

What fees are allowed?

Dormancy, inactivity or service fees are allowed only if the card has had no activity in the prior one-year period. The card must clearly state the fee amount, how often it can be charged and that it may be charged for inactivity. No more than one such fee may be charged per calendar month. Most independent restaurants charge none, and for a card that guests give as a present, no fee is the better policy.

What must the card say?

The card must state the funds' expiration date, or that the funds do not expire, along with a toll-free number or website for getting a replacement. Fee and expiration terms must be disclosed before purchase and cannot change afterward, and the required disclosures must appear on the card itself. Packaging, stickers or separate terms documents do not count. If you print a card with the wrong text, reprint it rather than adding a sticker.

Which cards are outside the rule?

The regulation excludes some cards, including certain reloadable cards not marketed as gift cards, paper-only cards, cards not marketed to the general public and cards for venue or event admission. Loyalty, award or promotional cards are excluded from the gift card definitions but must still carry labeling about expiration and fees. A dessert card handed out as a reward is the usual example of a promotional card. Keep promotional and paid cards in separate series.

A worked example of a holiday card promotion

You sell $100 cards in December and give a $20 bonus card for January with each one. The $100 card follows the five-year rule and carries no expiry. The $20 bonus card is promotional, so the text on its face must say when it expires and any limits. Your tax is collected as the guests use each card for meals. If a guest uses only $60 of the $100 card, the balance stays on the card, and you keep a record of it.

What about Texas unclaimed property?

Unredeemed balances can raise unclaimed property questions under state law. Ask your accountant how Texas treats long-unused gift card balances before you write any off.

What should you do now?

1. Check the text printed on your cards against the federal list.
2. Remove any fee you do not intend to charge.
3. Record sales as a liability and redemptions as revenue.
4. Keep paid and promotional cards separate.
5. Train servers to apply a card as payment after the tax is calculated.

How should you sell cards online?

If you sell cards through your website or a third party, the same card rules apply to a digital card. Show the terms before the guest pays, include the expiration statement or the statement that funds do not expire, and send a confirmation that repeats them. Keep a record of each card sold, its value and its balance. If a platform sells cards for you, read the agreement for its fees, how fast it pays you and who holds the money, since a card sold in December may not be paid out to you until January.

What should staff know at the register?

Staff should know how to check a balance, how to apply a card after the tax is calculated, what to do when the balance is less than the check and what to do if a card is lost. Decide your policy for lost cards and write it down. A card sold for cash is like cash, and a guest who lost one expects help, so many owners replace a card when the guest has the receipt or the card number.

More guides for your business:

• Texas comped meals, coupons and takeout: how sales tax works
• Texas credit card surcharge rules for restaurants
• Texas sales tax permit and filing for new restaurants

More in the US guides for food businesses.