With it being tax time in the United States, I thought it might be interesting to consider how new loyalty engagement models could make loyalty a bit taxing.
Loyalty operators have never really been in the IRS or taxation spotlight. Loyalty incentives and rewards, beyond a few unusual situations, have been exempt from personal income tax. Federal and state governments have viewed loyalty currencies and rewards as a purchase incentive or an accrued discount for a consumer’s purchases. As loyalty operators move to strategies and tactics to “engage” and reward consumers beyond their purchase activity, be ready for the tax authorities to become more involved.
Engagement approaches have more of a pay-for-performance or work-for-hire basis than a reward or purchase discount feel. For instance, “rewarding” members when they provide a product review, click a “like” button or join a chat or blog could be classified as income because the member is really generating content for the program sponsor. A loyalty operator will view the member as just a loyalist, someone willing to support the brand. To the IRS, the member could be considered a contractor providing paid content or a brand endorsement leading to taxable member income.
Loyalty operators could put in a position to track and report this member “income” for their respective governments. In the U.S., this would involve issuing 1099s for members earning more than the minimum threshold per one-time event or the total for a tax year. Loyalty operators would need to track purchase earning separate from content generation and maintain sufficient records to satisfy government agencies.
Imagine a frequent flyer who flies more than 100,000 miles per year and writes a review to earn a 500-mile bonus. If miles are valued at $.02, the member would have earnings of $10.00 for the review and $2,000.00 for tickets purchased. Without detailed records, the loyalty operator would need to issue a 1099 in the U.S. for $2010.00 and the member would need to include the earnings in their tax filing. How would you like to find you owe taxes at the end of the year on loyalty earnings because the program operator kept poor records? With good records, taxes would be based on only the $10.00.
The situation gets even a bit more complex when expiration is added to the mix. If the earning has tax implications, does it make sense to have any type of point expiration on the loyalty earning? None of us would want to pay taxes on income that expires. Maybe in tax speak it could be a loss against prior income as long as the member maintained detailed records on prior loyalty reported income. Eventually, we may find consumers losing interest because it just costs too much to be engaged.
Gamification also has tax implications loyalty operators must consider. Basically, the taxing authorities might view earnings from “gaming” as taxable income. So, gamification earnings would need to be tracked separately from “purchasing” earnings and reported with any “content” activity.
Overall, engagement loyalty could get very taxing for everyone involved if loyalty operators don’t maintain good records on all member activity. And even with good records, programs with very high levels of member engagement activity will need to add another section to the terms and conditions regarding personal tax responsibilities. Or, the tax authorities could require loyalty operators to “withhold taxes” as is required with other forms of taxable income.
