IRS Declares War on Swag

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Swag–those wonderful free promotional gifts that make jobs from record store clerk (I wore my free, untaxed Guns 'r Roses T-shirt for years in the go-go '80s with nary a declaration of value to any tax authority) to, um, multimillionaire movie star, more palatable–is in the IRS's sights.

This year, the free gift bags given out at every celeb gathering, award show, gala, and festival, full of expensive items that companies want stars to be seen using/wearing will come with a tax form, and recipients will be legally on the hook for taxes on the value of the items. The IRS deems them not true gifts, since, in the words of an IRS statement, "Organizations and merchants who participate in giving the gift bags do not do so solely out of affection, respect or similar impulses for the recipients."

As a result, after this year, the Oscars at least will be killing off the gift bag entirely. The effects on the LA economy, with one less reason to leave the house, have not yet been calculated.

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  1. Wearing a “free” T-shirt with a band name, LP/CD advert, or book advert, etc. on it isn’t anything like getting an Oscar-party gift bag. When I worked at an independent bookshop, I got that kind of stuff all the time. Of course, I and my co-workers actually read the comps and Advanced Reader’s Copies we scored, and those often came with a “not for resale” marking on them to limit their transformation into cash. The store dress-code discouraged wearing clothing with messages on it, except that promotional Ts for product we carried was explicitly allowed. I could make a good case for our “swag” being intended to educate the staff about our stock, and by extension, our customers. If Brian’s G&R shirt sold more of Axel and Slash’s lousy music, it was in the store’s interest that he wear it, not that they needed any help. Wasn’t it proper record-store employee practice was to wear shirts extolling the newest and/or most obscure acts? 🙂

    Kevin

  2. Have these idiots ever actually given or recieved a gift before? Definition of a Gift: Something someone gave me.

    At some level, many gifts are not given “solely out of affection, respect or similar impulses for the recipients.”

    If that were the criteria, retailers would be in big trouble at Christmas. Some guys want to get in a girls pants. Some don’t want to look like assholes at Christmas. Some want a raise.

    In fact, I’d go so far as to say the the “not wanting to look like an asshole” (or it’s logical corollory “wanting to look good”) as a far bigger and more prevalent reason for gift giving than “affection” or “respect” put together.

    I – and arguabvly most of America – give plenty of gifts to people that I/they neither respect or have affection for.

    And then there’s the potential for higher taxes being paid in the long run as these gifts – used undoubtedly as a marketing expense – generate sales.

  3. Some guys want to get in a girls pants.

    “Listen, babe, if you don’t sleep with me, you’re gonna have to claim that on your taxes…”

  4. At some level, many gifts are not given “solely out of affection, respect or similar impulses for the recipients.”

    Right, for example: “The U.S. income tax system is built on the idea of voluntary compliance.”

    http://www.irs.gov/app/understandingTaxes/jsp/whys/lp/IWT1L3lp.jsp

  5. This was all prompted by the incident between Lauren Bacall and Chris Moltisanti.

  6. It’s charming to watch them act as if they think that there won’t be ways found to go around this.

    I do confess to a little schadenfreude to think that celebrities might be audited a little more often.

    Then I get start having daydreams about celebrities taking up the cause of smaller government.

  7. The problem is, probably, that the giver writes it off as a business expense, while the recipient takes it as a gift.

    The IRS wants either the giver or the recipient to pay the tax, either through not deducting it at the giver’s end, or by declaring it as income at the recipient’s.

  8. “The problem is, probably, that the giver writes it off as a business expense, while the recipient takes it as a gift.”

    But it’s already income to whomever provided it. I frequently get solicited to buy customized pens, calendars, and other chatchkas with my business name on it. It’s not like I’d get them for free. It’s advertising, and might as well be considered consumed as soon as (or even before)it’s given, just as much as skywriting smoke or the electricity going into a sound truck’s sound. Are recipients going to have to declare as income the value of advertiser-supported magazines, newspapers, and TV shows they receive?

  9. There’s actually one fairly real and detrimental effect – a lot of small local business get paid by the Oscar organizers to put their product in the bag. The payment is usually token, but the Oscar organizers know that someone who, say, makes skin care treatment on her stove at night doesn’t have the wherewithall to make several thousand units gratis. It’s a smary favor, true, but it’s also a visible notation on their bottom line.

    As usual, it’s the little guy who gets screwed here.

  10. “The payment is usually token, but the Oscar organizers know that someone who, say, makes skin care treatment on her stove at night *snip*”

    Ah. “Skin Care Treatment”! That’s what the junkies are calling it these days…

    [/bad joke]

  11. One more reason to declare War on the IRS. We need to scrap this insane system; at the very least, or as a start, replace it with a national sales tax.

  12. I propose we scrap the IRS and simply print the money the government spends. That way, we tax everyone with no accounting necessary. Even the Afghani opium trade and Bangkok slave trade, if they deal in US Dollars, would have to chip in.

  13. But it’s already income to whomever provided it.

    No, whoever provided it has business expenses in producing it. He pays tax only on the profit after he deducts these.

    Everything gets taxed once, pretty much.

    One point of tension is that people enjoy some business expenses and the IRS feels they’re cheating somehow but doesn’t quite see how to get at them for it.

  14. In theory, all gifts are subject to tax unless they meet certain criteria for exemption from tax.

    If you classify these gifts as business gifts the gift giver is limited to a $25.00 deduction per individual, which puts Brian’s G&R Tee Shirt under the limit.

    I can’t get a sense of where the IRS is going with this but based on what I read in the article, some auditors would classify the SWAG BAG as compensation subject to both income tax and social security tax.

    I see it more as a fully deductible promotional expense, regardless of how extravagent the bag of goodies might be.

    Like much of tax law, this is an interpretation and definition problem.

  15. The thing is, the value of the swag at the Oscars *far* exceeds the gift tax exclusion. The linked article mentions Gwynyth Paltrow getting a $20,000 trip to Antarctica, and I have no reason to think that was all that was in her bag.

    If I *won* a swag bag in a contest, I’d be on the hook for the taxes. If I obtained the cash value of the swag bag, I would be on the hook for the taxes.

    I don’t see any reason why they shouldn’t be on the hook for the taxes just because they’re rich and companies want to throw expensive goodies at them. Fuck that shit.

  16. As a professor, I get free copies of textbooks all the time, often unsolicited. Am I expected to start keeping track of these and paying income taxes on them now? It’s not trivial: new math textbooks often are in the $120-$150 range at the bookstore, and I usually get anywhere from 5 to 10 (sometimes more) review copies of various new textbooks every year.

  17. Rich writes: “There’s actually one fairly real and detrimental effect – a lot of small local business get paid by the Oscar organizers to put their product in the bag. ”

    It’s *way* beyond that now. Unless the lady making skin creme on her stove is making it out of human embryos and selling it for $30,000 a jar.

  18. Chuck writes: ” It’s not trivial: new math textbooks often are in the $120-$150 range at the bookstore, and I usually get anywhere from 5 to 10 (sometimes more) review copies of various new textbooks every year.”

    Compared to the value of the Oscar bag, that *is* trivial.

    The IRS is unlikely to care about $1200-$1500, given that the annual gift tax exemption is ten times that amount.

  19. The Sopranos had a great episode featuring Ben Kingsley about swag gifts for stars.

    I own a graphics & marketing business and I handles premuims, t-shirts and tons of other goodies.

    Whether it’s pens and squeeze balls or ipods and designer watches, for the guy providing the swag, it’s a marketing expense.

    For decades, business owners have given out free samples, premiums and anything with their name on it in order to secure people as viral marketers.

    They count on folks to use or talk about their products, wear the t-shirts (or hats or other goodies) or leave the pens off all over town.

    The goal is to get sales and name recognition generated, which would (hopefully, for the IRS anyway) lead to more taxes being paid in the long run. There are opportunities for abuse, but no more than any other opportunity to avoid or mitigate taxes. Classification as a gift does not apply because it’s not a gift, as such.

    The IRS’s problem is with the recipient. The recipients are defacto marketing personnel receiving the goods as compensation for using them. The IRS is seeing this as income that is not being taxed.

    I think the biggest factor is the apparent relative value of the swag over, say, a shirt or a pen. This issue, though, is less bothersome as a tax issue for wealthy celebrities and more troublesome as an example of the pernicious and byzantine lengths the IRS will go to to get it’s hands on a piece of someone’s money.

    That wonks with accounting degrees and an apparent dislike for their fellow citizens dream up crap like this every day is frightening in and of itself.

  20. There are countless other tax abuses of the same ilk. One that always gets me is the absurdly large per diem business travellers can receive – staying at 4 and 5 star hotels, eating at gourmet restaurants, and accumulating a billion frequent flyer eacj uear miles with which they can purchase their “real” vacations – all without paying a dime in taxes. A consultant friend of mine just took his entire family for a two-week trip to Hawaii by doing this (tax free).

    On the other end of the spectrum, poor people cheat on taxes every bit as much as the rich (though obviously with much smaller numbers). If you can find me a waitress that has honestly reported her tips to the IRS, I will not only eat my dirty underpants but yours as well. Countless “low-income” people are only “low-income” because they simply work under the table. This vastly inflates our poverty statistics.

    Should we screw the stars for the vast bag of goodies they receive. Hell yes. Them and a lot of other people.

  21. The gift tax, by the way, is a tax on the giver of the gift, not the receiver of it.

    You can give away something like $12k a year tax free per recipient (the amount seems to change yearly, not sure what it’s up to this year).

    I have the feeling that math textbooks are valued at zero, on the grounds that nobody positively wants a math textbook, and market value is just what publishers charge helpless students, not an actual market value.

    This assumption of course is entirely wrong. I have whole walls of math textbooks.

  22. “The IRS’s problem is with the recipient. The recipients are defacto marketing personnel receiving the goods as compensation for using them. The IRS is seeing this as income that is not being taxed.”

    This applies to any work that isn’t sheer drudgery. You get to play with the “toys”.

    I too receive review copies of textbooks. But the textbook isn’t exactly a consumption item, and as an employee it’s not a capital good for me to depreciate.

    Similarly I send people samples of my bubble bath (see link). In some cases it’s for my purposes of testing against urogenital irritation, and in others it’s for them to test for possible marketing. Sure, the testing is fun. But then the only thing keeping IRS from treating as income the psychic value of volunteer work is the fact that it’s not embodied in a tangible good.

    Of course textbooks are a racket in their own right, but that’s another story.

  23. Hey, academician types:

    ISTR that when profs requested examination copies of books that they were considering for course adoption, some publishers didn’t charge at all, while others would invoice for the book if it wasn’t picked as a text.

    It was a constant annoyance back when I ran the special orders department for an independent bookstore that certain “customers” with university jobs would run me ragged researching the availability and price of certain tomes, then dismiss my results with “Oh, I’ll just ask for a review copy of that.” This was especially ugly when the book I could have taken an order for was well out of Dr. Freeloader’s field. Worst of all, much of this took place in the pre-interweb days, when Books-In-Print wasn’t even on CD yet, and the search was done by perusing bound volumes, publishers’ catalogs, and, in some cases, making snail-mail queries. [/rant]

    The reselling of review copies and comps – back in the day to used bookshops, nowadays on ebay – could be a minor source of income for some folks. That also leads to suspicion of store staff selling stolen goods online, or at least buying stuff at employee discount for resale.

    Kevin

  24. Robert–

    Just because getting free copies of toys is standard pratice in a lot of professions doesn’t mean the IRS can’t at any time decide to clamp down on it. I’m not particularly worried about it, but if I were to someday be asked about it, I don’t think the “everybody else does it” defense will get me very far. In any case, I’m not going to lose any sleep over the possibility.

    Textbooks are indeed a racket, but I blame the bookstores more than the publishers. Faculty are not innocent either. I try to consider the cost of the book in deciding which one I am going to use for a course, but a lot of faculty don’t. And faculty tend to ignore bookstore deadlines for submitting their book lists, which makes it much harder for the store to find used copies. Anyway, speaking of courses, we start classes tomorrow, and I have much to do, so I will have to bow out of this thread.

    I’m ignoring Ron Hardin’s post. Of course everybody wants math books, and lots of them. Hmmph.

  25. That wonks with accounting degrees and an apparent dislike for their fellow citizens dream up crap like this every day is frightening in and of itself.

    I think it was Pascal who said something along the lines of: “The majority of humanity’s problems stem from the inability of men to sit quietly in their rooms.”

  26. When I retired I had to pay income tax on the damn gold watch….

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