A company imports printed gift cards into a Tennessee warehouse and ships them to restaurants and retailers across the country. Does it owe Tennessee sales or use tax on the cards, and can it buy them tax-free for resale?

Plain-English summary

The taxpayer is a subsidiary that buys and distributes gift cards for a restaurant group. It purchases printed gift cards from an out-of-state vendor; the vendor ships them (title passing outside Tennessee, FOB shipping point) to an unrelated third-party warehouse in Tennessee, where they're stored until shipped out to the group's affiliated restaurants and third-party retailers all over the country. The company keeps title to the cards until a consumer buys one, loaded with a dollar amount good for food and drinks.

The company asked how Tennessee sales and use tax applies. The Department split the answer based on where each card ends up:

1. Cards re-shipped out of Tennessee — not taxable (import for export). Tennessee's use tax reaches tangible personal property "used, consumed, distributed, or stored for use" in the state (§ 67-6-203(a)). But the law says it is "not the intention of this chapter to levy a tax upon articles of tangible personal property imported into this state... for export" (§ 67-6-313(a)). Cards that come into the Tennessee warehouse only to be shipped back out are imported for export, so Tennessee doesn't tax them.

2. Cards distributed within Tennessee — taxable; not a "sale for resale." For the cards that stay in Tennessee, the company owes Tennessee sales/use tax, and it can't claim the resale exemption. Here's why. A "sale for resale" (exempt) requires that the buyer later make a bona fide resale of the item as such (§ 67-6-102(75)). But a gift card's real worth isn't the plastic — it's the intangible right to redeem stored value later. Under Barnes & Noble Superstores, Inc. v. Huddleston, selling a card that carries such a right is the nontaxable transfer of an intangible right, not a taxable sale of tangible personal property — even though a physical card changes hands, and even though customers can pick different card designs. Because the company doesn't resell the cards themselves — it uses them only as a means to transfer that intangible right to the consumer — the company is the end consumer of the physical cards and owes use tax on the ones it distributes in Tennessee.

The throughline: a gift card is just a token for an intangible right. Selling the loaded card to the public isn't a taxable sale of the card, so the business that buys and distributes the card stock is the one that consumes the physical cards — and it owes Tennessee use tax on the cards that stay in the state, while the cards it merely routes back out of state are exempt as imports for export.

What this means for you

Companies that buy and distribute gift cards, loyalty cards, or stored-value cards

If you purchase physical gift/stored-value cards and put them into circulation, don't assume you can buy the card stock tax-free "for resale." Because the eventual sale of a loaded card to a customer is a nontaxable transfer of an intangible right (not a taxable sale of the card), you are generally the consumer of the physical cards and owe Tennessee use tax on them. The resale exemption applies only where there is a subsequent bona fide resale of the item as such.

Using a Tennessee third-party warehouse / fulfillment center

Routing inventory through a Tennessee distribution facility doesn't automatically create Tennessee tax on everything that passes through. Goods you import into Tennessee only to ship back out of state are exempt as imports "for export" (§ 67-6-313(a)). The practical line is destination: tax follows the cards distributed within Tennessee; the cards re-exported are not taxed. Keep records that let you separate in-state from out-of-state distribution.

Why card design didn't change the answer

The company offered many card designs and special-occasion cards, but that didn't put independent value on the plastic — the true object was still the intangible redemption right. A decorative or collectible angle generally won't convert a stored-value card into a taxable sale of tangible personal property.

Accountants and tax professionals

The analysis: (1) the use tax reaches TPP stored/distributed for use in Tennessee (§ 67-6-203(a); "use" § 67-6-102(94)(A)), but the import-for-export carve-out (§ 67-6-313(a)) exempts goods imported only to be exported; (2) the sale-for-resale exemption (§ 67-6-102(75), (75)(A); Rule 1320-05-01-.62(1)) requires a subsequent bona fide resale to a dealer selling the property as such — absent here; (3) the true-object doctrine plus Barnes & Noble Superstores v. Huddleston (1996 WL 596955) treats a stored-value/discount card as an intangible right, so the card-distributor is the consumer of the physical cards (compare Qualcomm, AOL v. Roberts, Penske, Thomas Nelson, AT&T, Rivergate Toyota, Ltr. Rul. 14-10).

Common questions

Q: We buy gift card stock to distribute — can we buy it tax-free for resale?
A: Generally no, in Tennessee. The later sale of a loaded gift card to a customer is a nontaxable transfer of an intangible right, not a taxable resale of the card, so there is no qualifying resale. That makes you the consumer of the physical cards, and you owe use tax on the ones distributed in Tennessee.

Q: Is the sale of a gift card to a customer subject to Tennessee sales tax?
A: No. Under Barnes & Noble Superstores, selling a card that carries the right to redeem stored value later is the transfer of an intangible right, not a taxable sale of tangible personal property. (The tax comes later, on the taxable goods the card is redeemed for.)

Q: We import cards into a Tennessee warehouse but ship most of them out of state. Are those taxed?
A: No. Goods imported into Tennessee only to be shipped back out are exempt as imports "for export" under § 67-6-313(a). Tennessee tax applies to the cards distributed within Tennessee, not the ones re-exported.

Q: Can I rely on this letter ruling?
A: No. A Tennessee letter ruling is binding on the Department only as to the specific taxpayer and facts it was issued to, and it can be revoked or modified. Confirm your own facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-313(a) (import for export — no tax on TPP imported into Tennessee for export)
• § 67-6-203(a) (use tax on TPP used, consumed, distributed, or stored for use in Tennessee); § 67-6-102(94)(A) ("use")
• § 67-6-102(75), § 67-6-102(75)(A) ("sale for resale"; "resale" — a subsequent bona fide sale to legitimate dealers selling the property as such)
• § 67-6-102(78)(A) ("sale"); § 67-6-102(76) ("retail sale"); § 67-6-102(89)(A) ("tangible personal property")

Rules:

• Tenn. Comp. R. & Regs. 1320-05-01-.62(1) (2016) (sale for resale applies only to sales to legitimate dealers actually selling the property as such)

Case law:

• Barnes & Noble Superstores, Inc. v. Huddleston, No. 01A01-9604-CH-00149, 1996 WL 596955 (Tenn. Ct. App. Oct. 18, 1996) (sale of a discount/membership card = nontaxable transfer of an intangible right despite the tangible card)
• True-object / primary-purpose: Qualcomm, Inc. v. Chumley, 2007 WL 2827513 (Tenn. Ct. App. 2007); AOL, Inc. v. Roberts, 2013 WL 4067977 (Tenn. Ct. App. 2013); Penske Truck Leasing Co. v. Huddleston, 795 S.W.2d 669 (Tenn. 1990); Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621 (Tenn. 1987); AT&T Corp. v. Johnson, 2002 WL 31247083 (Tenn. Ct. App. 2002); Rivergate Toyota, Inc. v. Huddleston, 1998 WL 83720 (Tenn. Ct. App. 1998); Tenn. Dep't of Revenue Ltr. Rul. 14-10 (Oct. 14, 2014)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/18-08.pdf

Original ruling text

Letter rulings are binding on the Department only with respect to the individual taxpayer being
addressed in the ruling. This ruling is based on the particular facts and circumstances presented,
and is an interpretation of the law at a specific point in time. The law may have changed since
this ruling was issued, possibly rendering it obsolete. The presentation of this ruling in a
redacted form is provided solely for informational purposes, and is not intended as a statement
of Departmental policy. Taxpayers should consult with a tax professional before relying on any
aspect of this ruling.

The application of Tennessee sales and use tax to gift cards imported into Tennessee and distributed
both inside and outside of the State.

This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the company. The rulings herein are binding upon the
Department, and are applicable only to the individual company being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation or
modification shall be effective retroactively unless the following conditions are met, in which case the
revocation shall be prospective only:
(A)

The company must not have misstated or omitted material facts involved in the
transaction;

(B)

Facts that develop later must not be materially different from the facts upon which
the ruling was based;

(C)

The applicable law must not have been changed or amended;

(D)

The ruling must have been issued originally with respect to a prospective or
proposed transaction; and

(E)

The company directly involved must have acted in good faith in relying upon the
ruling; and a retroactive revocation of the ruling must inure to the company’s
detriment.

[TAXPAYER] (the “Taxpayer”) is the wholly-owned subsidiary of [COMPANY]. The Taxpayer oversees the
acquisition and distribution of gift cards for all [PARENT COMPANY] restaurants, including [AFFILIATED
RESTAURANTS] (the “Affiliated Restaurants”).

1

The Taxpayer purchases gift cards and related services from an out-of-state third-party vendor (the
“Vendor”). The price paid by the Taxpayer to the Vendor for the gift cards depends on various factors,
such as the type of gift card stock purchased, the design of the gift cards, and the volume of the gift
cards purchased. The Vendor ships the gift cards to an unrelated third-party distribution facility in
Tennessee, where they are stored in a warehouse until being shipped to Affiliated Restaurants and
third-party retailers located throughout the United States.
The Taxpayer and the Vendor have entered into a contract regarding shipment. Under the terms of the
contract, the gift cards are shipped FOB Shipping Point and the freight charges are passed through to
the Taxpayer at the invoice amount. Thus, title to the gift cards passes outside of Tennessee. The
Taxpayer retains title to the gift cards until the gift cards are purchased by the ultimate consumer. Gift
cards are sold to consumers with specific dollar amounts loaded on the cards for use in purchasing
food and beverages at the Affiliated Restaurants throughout the United States. Consumers may choose
among a variety of gift card options based on design of the card or the special occasion represented on
the gift card.

1. Is the Taxpayer liable for Tennessee sales and use tax on gift cards that are imported into
   Tennessee, temporarily stored in a third-party distribution facility, and later distributed to
   locations outside of Tennessee?
   Ruling: No. The Taxpayer is not liable for the Tennessee sales and use tax on gift cards that are
   imported into Tennessee, temporarily stored in a third-party distribution facility, and later
   distributed to locations outside of Tennessee because such gift cards are not subject to the
   Tennessee sales and use tax under TENN. CODE ANN. § 67-6-313(a) (2018).
2. Do the Taxpayer’s purchases of gift cards from the Vendor that are imported into Tennessee,
   temporarily stored in a third-party distribution facility, and later distributed to locations within
   Tennessee, qualify as sales for resale?
   Ruling: No. The Taxpayer is subject to Tennessee sales and use tax on gift cards that are
   imported into Tennessee, temporarily stored in a third-party distribution facility, and later
   distributed to locations within Tennessee. These sales do not qualify as sales for resale because
   the Taxpayer uses the gift cards as a means to transfer an intangible right to the ultimate
   consumer.

IMPORT-FOR-EXPORT
1

Under the Retailers’ Sales Tax Act, the retail sale or use of tangible personal property and specifically
enumerated services are subject to the sales and use tax, unless an exemption applies. “Retail sale” is
2
defined as “any sale, lease, or rental for any purpose other than for resale, sublease, or subrent.”

1
Tennessee Retailers’ Sales Tax Act, ch. 3, §§ 1-18, 1947 Tenn. Pub. Acts 22, 22-54 (codified as amended at TENN. CODE ANN. §§ 676-101 to -907 (2018)).
2

TENN. CODE ANN. § 67-6-102(76) (2018).

2

TENN. CODE ANN. § 67-6-102(78)(A) (2018) defines “sale,” in pertinent part, to mean “any transfer of title
or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by
any means whatsoever of tangible personal property for a consideration.”
TENN. CODE ANN. § 67-6-203(a) (2018) levies a tax on tangible personal property that is “used, consumed,
distributed, or stored for use or consumption in this state.” Although “use” is defined broadly to include
3
“the exercise of any right or power over tangible personal property incident to the ownership thereof,”
TENN. CODE ANN. § 67-6-313(a) confirms that “[i]t is not the intention of this chapter to levy a tax upon
articles of tangible personal property imported into this state or produced or manufactured in this
state for export.”
The Taxpayer purchases gift cards in bulk from a Vendor outside of Tennessee. Title to the gift cards
passes outside of Tennessee. The gift cards are then shipped to an unrelated third-party distribution
facility in Tennessee where they are temporarily stored and later shipped to the Affiliated Restaurants
and third-party retailers. The gift cards that are subsequently distributed outside of Tennessee are not
subject to Tennessee sales and use tax under TENN. CODE ANN. § 67-6-313(a) because they are imported
4
into Tennessee for export.
SALE FOR RESALE
As previously stated, with regard to tangible personal property, a sale takes place upon the transfer of
5
title or possession, or both of tangible personal property. “Tangible personal property” includes
“property that can be seen, weighed, measured, felt, or touched, or that is in any other manner
6
perceptible to the senses.” Conversely, the sale of an intangible right, even if embodied in tangible
7
personal property, is generally not subject to the Tennessee sales and use tax.
The term “retail sale” means “any sale, lease, or rental for any purpose other than for resale, sublease, or
8
subrent.” Thus, sales for resale are not subject to the Tennessee sales and use tax. TENN. CODE ANN.
§ 67-6-102(75) defines a “sale for resale” as “the sale of the property, services, or taxable item intended
for subsequent resale by the purchaser” and requires any sales for resale to be “in strict compliance
with rules and regulations promulgated by the commissioner.” The term “resale” means “a subsequent,
9
bona fide sale of the property, services, or taxable item by the purchaser,” and only applies when sold
10
to “legitimate dealers actually selling such property or services as such.”

3

TENN. CODE ANN. § 67-6-102(94)(A).

4

TENN. CODE ANN. § 67-6-313(a) (2018).

5

TENN. CODE ANN. § 67-6-102(78)(A).

6

TENN. CODE ANN. § 67-6-102(89)(A).

7

See generally Barnes & Noble Superstores, Inc. v. Huddleston, No. 01A01-9604-CH-00149, 1996 WL 596955, at *2 (Tenn. Ct. App. Oct.
18, 1996).
8

TENN. CODE ANN. § 67-6-102(76) (emphasis added).

9

TENN. CODE ANN. § 67-6-102(75)(A).

10

TENN. COMP. R & REGS. 1320-05-01-.62(1) (2016).

3

Not all transactions readily lend themselves to classification for sales tax purposes. In order to resolve
the tension in these difficult transactions, Tennessee courts have developed a line of inquiry that
11
12
focuses on what is the “true object” of the transaction. In applying this test, the courts look at the
13
totality of the facts and circumstances to determine what objective is really being accomplished by the
14
transaction.
When a transaction involves taxable and nontaxable components and the transaction’s true object or a
15
16
17
18
19
“crucial,” “essential,” “necessary,” “consequential,” or “integral” element of the transaction is
20
subject to tax, the entire transaction is subject to sales tax. Only if the true object of the transaction is
not independently subject to sales tax and the items that would be subject to sales tax are “merely
21
incidental” to the true object of the transaction will the transaction not be subject to sales tax.
Transfers of tangible personal property in association with a sale of intangible property raise
characterization issues because intangible property rights are generally not subject to sales tax in
22
Tennessee. For example, in the unreported case of Barnes & Noble Superstores, Inc. v. Huddleston, the
11

This inquiry is sometimes stated as the “primary purpose” test. See generally Qualcomm, Inc. v. Chumley, No. M2006-01398-COAR3-CV, 2007 WL 2827513, at *4-5 (Tenn. Ct. App. Sept. 26, 2007) (giving a synopsis of the “true object” or “primary purpose” test in
Tennessee).
12

This analysis is not entirely unique to Tennessee, but the application of the test does vary in other states. See generally 2 JEROME
HELLERSTEIN ET AL., STATE TAXATION: SALES AND USE, PERSONAL INCOME, AND DEATH AND GIFT TAXES AND INTERGOVERNMENTAL IMMUNITIES ¶
12.08[1], at 12-108 (3d ed. 1998 & Supp. 2012) (discussing the “true object” test).
13

See, e.g., AOL, Inc. v. Roberts, No. M2012–01937–COA–R3–CV, 2013 WL 4067977, at *6 (Tenn. Ct. App. Aug. 12, 2013) (basing the
holding on the “totality of the circumstances”).
14

Note that it could be possible that there is not a single true object of the transaction, but rather multiple objects of the
transaction. In that case, each object of the transaction should be analyzed separately for tax purposes. Cf. Penske Truck Leasing
Co. v. Huddleston, 795 S.W.2d 669, 670-71 (Tenn. 1990) (holding that a long-term truck lease agreement and a fuel agreement
were truly separate agreements and should be treated as separate transactions for sales tax purposes, despite being embodied
in a single contract document).

15

See, e.g., Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621, 624 (Tenn. 1987) (holding that a transaction involving the sale of nontaxable intangible advertising concepts was nevertheless subject to sales tax on the entire amount of the transaction because
advertising models, which were tangible personal property, were an “essential,” “crucial,” and “necessary” element of the
transaction).

16

Id.; see also AT&T Corp. v. Johnson, No. M2000-01407-COA-R3-CV, 2002 WL 31247083, at *8 (Tenn. Ct. App. Oct. 8, 2002) (holding
that a transaction involving the sale of engineering services along with separately itemized tangible telecommunications systems
was subject to sales tax on the entire amount of the contract because “equipment, engineering, and installation combine in this
instance to produce BellSouth’s desired result: a functioning item of tangible personal property assembled on the customer’s
premises,” and further describing the engineering services as “‘essential’” and “‘integral’” to the sale of tangible personal property).
17

See supra note 16.

18

See Rivergate Toyota, Inc. v. Huddleston, No. 01A01-9602-CH-00053, 1998 WL 83720, at 4 (Tenn. Ct. App. Feb. 27, 1998) (holding
that a transaction involving the commission and distribution of advertising brochures was subject to sales tax on the “‘entire cost
of the transaction’” because, although the transaction involved a number of services, the brochures themselves “were not
inconsequential elements of the transaction but, in fact, were the sole purpose of the contract”).
19
See AT&T Corp. v. Johnson, 2002 WL 31247083, at 8.
20

See Tenn. Dept. of Rev. Ltr. Rul. 14-10 (Oct. 14, 2014) (discussing Tennessee law regarding the “true object” test).

21

See generally id.

22

No. 01A01-9604-CH-00149, 1996 WL 596955, at *2 (Tenn. Ct. App. Oct. 18, 1996).

4

Tennessee Court of Appeals held that the sale of a discount card that entitled its bearer to future
discounts on merchandise was not subject to sales tax because, even though tangible personal
property in the form of the discount card was transferred to the customer, the true object of the
23
transaction was really the purchase of an “intangible right” that was not subject to sales tax.
Like the membership cards in Barnes & Noble Superstores, the “true object” of the Taxpayer’s sale of gift
cards is not the physical gift card itself, but rather the intangible value the gift card contains. The fact
that consumers can choose between various designs on the gift cards does not place an independent
value on the actual cards themselves. The underlying value of a gift card is the right to redeem it for
food and/or beverages at some future time. Thus, the sales of such intangible rights are not subject to
the sales and use tax.
Here, the Taxpayer does not purchase the tangible cards from the Vendor to resell as such. Rather, the
Taxpayer uses the gift cards as a means to transfer an intangible right to the ultimate consumer for a
future purchase of food and/or beverages. Accordingly, the Taxpayer is subject to Tennessee sales and
use tax on gift cards that are imported into Tennessee, temporarily stored in a third-party distribution
facility, and later distributed to Affiliated Restaurants and third-party retailers in Tennessee; its
transfers to Affiliated Restaurants and third-party retailers in Tennessee do not qualify as sales for
resale.

Jerry Ivery
Assistant General Counsel

23

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

10/25/18

Id.

5