posted August 16, 2017
Gift Cards - To Give or Not to Give
by Aaron Van Winkle, Senior Associate
Rewards are exciting and motivational. Everyone wants to be rewarded but often the hard question is how to provide rewards. Gift cards are an extremely popular system of reward these days, but should school districts be using gift cards? Let’s take a look.
For clarity, here is what the Arizona Revised Statutes states regarding the definition of a gift card. Under ARS 44-7401, “’Gift card’ means any gift certificate, gift card or electronic gift card or any other medium issued or sold after October 31, 2005 for which the issuer has received payment for the full face value or full banked dollar value of the card for the future purchase or delivery of goods or services.”
There are usually two common situations in which gift cards are used as rewards at a district – gifts to employees and rewards to students.
Gifts to employees:
According to the Arizona Constitution Article 9, Section 7 (commonly referred to as the gift of public monies clause): “Neither the state, nor any county, city, town, municipality, or other subdivision of the state shall ever give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation, or become a subscriber to, or a shareholder in, any company or corporation, or become a joint owner with any person, company, or corporation, except as to such ownerships as may accrue to the state by operation or provision of law or as authorized by law solely for investment of the monies in the various funds of the state.”
Districts are charged with a fiduciary responsibility over the public funds they are provided to provide education to students in a fiscally responsible manner. A district should not be rewarding employees outside the construct of district finance with funds that should be used for the educational purposes of the district. Districts often want to reward employees for their hard work and dedication; however this should be done through other means such as stipends, raises, or nominal non-monetary gifts (Arizona Attorney General Opinion I97-003). Several Arizona Auditor General school district reports have also addressed the issue of gift cards and their inappropriate use, and most of those address the issue of gift cards being specifically purchased with district funds for personal use.
To further complicate matters, if gift cards are given to employees, the district should be review those items for Internal Revenue Service implications. IRS guidelines (See also IRS Publication 15-B) state:
Cash or cash equivalent items provided by the employer are never excludable from income. An exception applies for occasional meal money or transportation fare to allow an employee to work beyond normal hours. Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not de minimis benefits and are taxable.
A certificate that allows an employee to receive a specific item of personal property that is minimal in value, provided infrequently, and is administratively impractical to account for, may be excludable as a de minimis benefit, depending on facts and circumstances.
Special rules apply to allow exclusion from employee wages of certain employee achievement awards of tangible personal property given for length of service or safety. These awards
- Cannot be disguised wages
- Must be awarded as part of a meaningful presentation
- Cannot be cash, cash equivalent, vacation, meals, lodging, theater or sports tickets, or securities.
Specific payroll accounting guidelines and reporting processes should be established to track all cash items provided to employees to determine that the district is properly reporting them for tax purposes. Gift cards in particular are noted as a cash equivalent item and would need to be included in the employee’s W-2 and appropriately coded in the district’s general ledger in accordance with USFR guidelines.
In conclusion, gift cards are considered a gift of public monies and often associated with fraud. Seeing the potential for misappropriation, the Uniform System of Financial Records (USFR) also indicates that transactions involving purchasing gift cards are a red flag, as gift cards can be a way to bypass expenditure and procurement guidelines for the very purposes stated above. As districts have many other options to reward employees, the general recommendation is to refrain from providing gift cards as employee awards or rewards and be sure to specify in policy that purchasing gift cards for these purposes is prohibited.
Gifts to Students:
Similar to employees, districts want to reward students for a job well done. Arizona Attorney General Opinion I90-072 states that giving substantial cash awards to students for mandatory activities was deemed a violation of the constitutional gift of public monies prohibition. Substantial is generally identified as amounts above $50. Mandatory activities include attendance; therefore students should not be overly rewarded for perfect attendance.
Districts may promote academic achievement with rewards such as gift cards; however they should be aware of their fiscal responsibility and possible public perception of these rewards as gifts of public monies. Any rewards program should be very specific about requirements for the goal and as general advice, the rewards should not be given out so often that the purpose of the award is diminished.
A recommendation for awards is that districts use Student Activities funds as the source for student awards.This relieves the district from using public funds and allows students themselves to provide the funds for student achievements.All applicable requirements for using Student Activities funds, including student approval, should be followed if this method is used.
Districts should always keep in mind their fiduciary duty to the public when considering all financial related decisions.Generally the potential costs can outweigh the benefits of a district providing gift cards to employees or students. Be proactive - establishing policies and procedures for these situations can set up your district for success rather than a potential report from the Auditor General.
The content of these pages is for general information purposes only and does not constitute advice. Heinfeld, Meech & Co., P.C. tries to provide content that is true and accurate as of the date of writing; however, we give no assurance or warranty regarding the accuracy, timeliness, or applicability of any of the contents.