Can a retailer buy bulk gift-card stock tax-free as a sale for resale, and is a transaction-tracking service bundled with the cards taxable?

Plain-English summary

A supplier sells bulk gift-card stock (the physical plastic cards) to retailers, and bundles a transaction-tracking service with the cards. It asked two things: (1) can the retailer buy the card stock tax-free as a sale for resale, and (2) is the bundled tracking service taxable?

1. The card stock is not a sale for resale — so it's taxable. To buy tax-free for resale, a retailer must show it actually resells the item to customers (§ 39-26-102(9), § 39-26-104(1)(a)). But on the typical facts, the retailer doesn't sell the card to the customer: the customer hands over $25, gets a card worth $25, and there's no separate charge for the card itself. A gift card is functionally a paper credit voucher — no transfer of title, possession, or service happens when it's issued, and the card's intrinsic value is incidental. Under City of Boulder v. Leanin' Tree (72 P.3d 361 (Colo. 2003)), a transaction is a nontaxable sale of a service or intangible even though it involves transferring incidental tangible property; the gift card is more like a receipt for an intangible account payable. Because the card isn't resold to the customer, the retailer can't claim the resale exemption, and the supplier's sale of the card stock to the retailer is taxable.

2. The bundled tracking service is taxable unless separable and separately stated. Services are generally not taxed (§ 39-26-104, § 39-26-202), but when taxable and nontaxable items are bundled, the whole transaction is taxable unless the service is separable and the supplier separately states the price of the taxable card stock and the nontaxable service (§ 39-26-102(12) — sales price includes "all materials, labor, and service, and the profit thereon"; § 39-26-703(4) — the taxpayer claiming the exemption bears the burden of proof; A.D. Store Co., 19 P.3d 680 (Colo. 2001) — services not taxable if separable). On the thin facts, the Department couldn't tell whether tracking is separable (who performs it? is it really a software license? can the retailer buy the stock without it?). It also applied the true-object test: since the cards have value to the retailer even without tracking, the true object of buying bundled stock-plus-tracking is not a service. And a closing warning: even if separable and separately stated, the supplier cannot understate the price of the card stock and recover the difference in the price of the nontaxable service.

What this means for you

Retailers buying gift-card stock

Don't assume you can buy blank/printed gift cards tax-free for resale. If you don't charge customers separately for the card itself (you only load value onto it), you're not reselling the card — so your purchase of the stock is a taxable retail purchase, not an exempt wholesale buy.

Suppliers bundling cards with services

If you bundle card stock with a tracking or analytics service, the entire price is taxable unless the service is genuinely separable and you separately state it on the invoice — and you carry the burden of proving separability. You also can't game it: shifting price off the taxable cards onto the "service" line to shrink the tax base isn't allowed.

The voucher principle

Gift cards, credit vouchers, and similar instruments are treated as evidence of an intangible right, not as goods being sold — echoing Leanin' Tree. That's why loading value onto a card isn't a taxable sale of the card, and why the resale exemption doesn't attach to the plastic.

Common questions

Q: Can a retailer buy gift cards tax-free for resale in Colorado?
A: Generally no. If the retailer doesn't separately charge the customer for the card itself, the card isn't resold, so the retailer's purchase of card stock isn't an exempt sale for resale — it's taxable.

Q: Why isn't selling a gift card a taxable sale?
A: Because the card is functionally a credit voucher — evidence of an intangible account, not goods. Under Leanin' Tree, transferring that incidental piece of plastic isn't a taxable sale.

Q: Is the bundled tracking service taxable?
A: It's taxable along with the cards unless it's genuinely separable and separately stated on the invoice. The supplier bears the burden of proving separability, and can't shift price onto the service to reduce tax on the cards.

Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance, not binding on the Department.

Citations and references

Statutes and cases:
- § 39-26-102(9), C.R.S. — definition of wholesale sale / sale for resale
- § 39-26-104(1)(a), C.R.S. — imposition of sales tax on retail sales
- § 39-26-102(12), C.R.S. — sales price includes all materials, labor, service, and profit
- § 39-26-703(4), C.R.S. — taxpayer claiming an exemption bears the burden of proof
- City of Boulder v. Leanin' Tree, Inc., 72 P.3d 361 (Colo. 2003) — incidental transfer of TPP; nontaxable service/intangible
- A.D. Store Co. v. Department of Revenue, 19 P.3d 680 (Colo. 2001) — services not taxable if separable

Related Colorado bundling / separability letters:
- [[gil-08-024-taxability-of-alteration-services]] — optional, separately stated alterations are separable and not taxable
- [[gil-08-016-software-updates-and-support-services]] — separating taxable upgrades from nontaxable support/training
- [[gil-08-020-taxability-of-certain-goods-and-services]] — required vs optional bundled charges

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-07-006.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-2007-6

XXXXXXXXXXXX
Attn: XXXXXXXXX
XXXXXXXXXXXX
XXXXXXXXXXXX
XXXXXXXXXXXX
December 4, 2007
Re: gift card stock
Dear XXXXXXXXXXX,
This letter is in response to your letter to the Colorado Department of Revenue, dated May 29, 2007, re:
taxability of bulk sales of gift card stock and tracking services. We apologize for the time it has taken to
respond to your inquiry.
Issues
1. Is a retailer’s purchase of bulk gift card stock (e.g., the physical plastic card) to re-sell to its customers
subject to sales tax in Colorado or is it considered an exempt sale for resale?
2. Are tracking services bundled with the gift card subject to sales or use tax?
Background
There is no discussion in your letter explaining how gift cards are handled by the retailer. We will assume for
purposes of this response that the following facts are typical of a retailer issuing gift cards. A customer gives
the retailer a sum of money (e.g., $25) and the retailer gives the customer a gift card which has an assigned
value equal to what the customer paid. The purchaser then presents the card at the time of purchase and is
given a credit toward the purchase up to the value assigned to the card. Although your question implies that
these cards are “sold” to customers, we assume that there is not a separate or additional charge by the retailer
to the customer for the card itself.
You state that the supplier of the gift card stock will bundle the sale of the cards with a service that tracks the
retailer’s customer’s transactions.
Discussion
1. A supplier’s sale to a retailer of gift card stock is not an exempt sale for resale.
A retailer must establish that the gift cards are resold to customers in order for the retailer to claim a “sale for
resale” exemption on its purchases from the supplier. §39-26-102(9) and 104(1)(a), C.R.S. Based on the facts
assumed above, the retailer is not reselling the gift cards to customers.

A retailer’s gift card is functionally equivalent to a paper credit voucher issued by a retailer. The retailer does
not charge the customer for the paper voucher or gift card itself; there is no exchange of title, possession or
services at the time the voucher or gift card is issued to the customer; and the intrinsic value and purpose of the
voucher or gift card is, at best, incidental to the transaction. City of Boulder v. Leanin’ Tree, Inc. 72 P3d 361
(Colo. 2003) (transaction is non-taxable sale of a service or intangible even though it involves transfer of
incidental tangible personal property). The gift card is more akin to a receipt for an intangible account payable,
much like a contract or other paper document is merely evidence of an intangible property right. See, also,
Arizona Private Taxpayer Ruling No. LR99-010; Florida Tax Information Publication No. 06(A)01-21. Therefore,
under these assumptions, the sale of bulk gift cards to the retailer is not a sale for resale to the customer.
Because the gift card is not resold to the customer, the retailer is not entitled to a “sale for resale” exemption for
its purchases of gift card stock from the supplier.
2. Bundled services purchased by a retailer from the supplier are not taxable if separable from the sale of gift
cards and separately stated in the invoice.
Services are generally not subject to sales and use tax in Colorado. §39-26-104 and 202, C.R.S. However, as
with any bundling of taxable and non-taxable items, the entire transaction is taxable unless the service is
separable and the supplier separately states on the invoice or contract the price for the taxable card stock and
the non-taxable tracking service. §39-26-102(12), C.R.S. (“[T]he sales price is the gross value of all materials,
labor, and service, and the profit thereon, included in the price charged to the user or consumer.”); §39-26703(4), C.R.S. (taxpayer claiming exemption has burden of proof); A.D. Store Co. v. Department of Revenue,
19 P3d 680 (Colo. 2001) (services not taxable if separable from sale of tangible personal property).
It is difficult to determine whether the tracking service is separable based on the few facts provided in the letter.
There is no description of who performs the service or how it is performed. For example, is the tracking
performed by the supplier or is the tracking performed by the retailer using the retailer’s point of service
equipment and a PIN imbedded within the card? Is the service more aptly described as a license to use
software? Moreover, it is not disclosed whether a retailer has the option to acquire the gift card stock without
also acquiring the service In any event, if the services are inseparable, then tax applies to the entire price,
including the tracking service.
We must also consider whether the true object of the purchase of both the gift card and tracking service is a
non-taxable service. See, e.g., City of Boulder v. Leanin’ Tree, supra. Again, it is difficult to make an
assessment on the little information set forth in the letter. We assume that even in the absence of a tracking
service, the gift cards have value to the retailer, just as paper stock has value to a retailer. Therefore, in the
absence of additional information, the true object of a retailer’s acquisition of bundled gift card stock and a
tracking service is not a service.
One final comment should be made. Even if it the tracking service and gift card stock are separable and
separately stated, the supplier cannot understate the price of the gift card stock and recover the difference in
the price for the non-taxable tracking service.
Finally, the Department makes a good faith effort to provide accurate and complete answers to questions posed
to it by taxpayers. However, the information and answers provided here are not binding on the Colorado
Department of Revenue, nor do they replace, alter, or supersede Colorado law and regulations. The Executive
Director, who by statute is the only person having authority to bind the Department, has not formally reviewed
and/or approved this response.
Respectfully,

Office of Tax Policy
Colorado Department of Revenue