Gift Bags and Sales Tax
Did Will Smith really slap Chris Rock, or was it all a publicity stunt? That was the major question following the Oscars last month. However, we had another question on our minds. When events like the Oscars, the Grammys, or the Emmys take place, many celebrities leave with gift bags worth thousands of dollars. These bags can include treats such as plastic surgery, luxurious getaways, and expensive skincare products. In fact, this year some celebrities left the Oscars with a plot of land in Scotland! All of this had us thinking, what are the tax requirements associated with gift bags?
Income Tax Implications
This year, each Oscar nominee received a gift bag worth just under $140,000 from Distinctive Assets, a Los Angeles marketing company. This gift bag contained many things, such as $25,000 in home renovations, a liposuction procedure, and yes, a plot of land in Scotland. As if that’s not enough, other items like food, drinks, spa treatments, and vacations were also included. However, if accepted, these gifts come at a cost.
In all reality, these gifts were not given out in appreciation or affection for the celebrity. The vendors' intentions were to gain business from either the celebrities themselves or their fans. Therefore, according to the IRS, these gift bags are to be treated as taxable income and are to be taxed at the gifts’ fair market value. Seeing that many of these celebrities make millions of dollars per year, the gifts could be taxed at a federal rate up to 37%, which would be about $50,000 if all the gifts were accepted. Yikes! The good thing for these celebrities, though, is that many of these gifts are simply offers, which will not be taxed unless they are redeemed. For example, if they do not want the liposuction treatment and the offer is never redeemed, they would not have to pay the income tax on that particular gift. Physical items in the bag, however, would be taxed as income if accepted.
While most of us will not find ourselves being handed a gift bag worth hundreds of thousands of dollars anytime soon, this is still an important concept to understand. In general, if a gift bag is given with intentions other than affection or appreciation, the fair market value of the accepted bag contents must be reported as taxable income by the recipient. Vendors should be familiar with this concept as well to apply proper reporting practices.
Sales Tax Implications
The sales tax implications of gift bags and their contents depend on the state. In this example, the Oscars were held in Los Angeles, California. In California, gift-givers are generally responsible to pay sales tax on the item being given if it is typically taxable. In fact, even if the item is bought using a resale certificate and then given as a gift, use tax is still required. So in this example, because personal care products are typically taxable in California, the skincare products found in the gift bag could be subject to sales or use tax. Whoever it was that gifted this item to the celebrities would be responsible for paying the tax on this given item.
However, other items, such as the liposuction treatment are generally not taxable in the state of California, and therefore, there would not be a sales tax responsibility associated with this gift.
With all of this being said, these gift bags may be much more expensive than you may have initially thought for both the vendor and the recipient. From the vendor’s perspective, they may be responsible to pay the sales tax on the item they are giving away. From the recipient’s perspective, they may be required to claim the value of the gift as taxable income. So while there are some great items in these bags, it is important to keep in mind that they may come at a cost to everyone involved.
References
https://www.salestaxandmore.com/guest-blog/2022/4/22/personal-care-product-sales-to-customers
https://www.salestaxandmore.com/guest-blog/2022/4/22/gifts-marketing-aids-premiums-and-prizes
https://www.salestaxandmore.com/guest-blog/2022/4/22/gift-bag-questions-and-answers
By: Briana Wagner
This blog is intended for educational purposes and not as tax advice. Tax policies and procedures change frequently, so specific information, such as thresholds, rates, etc. included in this blog may have changed since it was originally published. Please request a consultation for more in-depth information.