Swag bags are part of popular culture now. Both “Entourage” and “The Sopranos” built episodes this season around the lavish gift-giving to celebrities at awards shows and film festivals. So it stands to reason that the IRS, which sometimes functions as a Ministry of Envy, would decide to start taxing these gifts that can be worth as much as $100,000, and would probably have continued to escalate if the government hadn’t stepped in. From the LA Times’ coverage:
“There was an awful lot of publicity about the ever-increasing value of these baskets,” IRS Commissioner Mark V. Everson said. “And somebody said, ‘Why don’t we do something about this?’ It was just so clearly taxable we felt we had to step in.”
The IRS reminded Oscar presenters before this year’s ceremony that noncash compensation was just as taxable as a paycheck. Everson said the effort was linked to his drive to bring “a sense of fairness that resonates throughout the system. You can’t let the rich get away with something.”
Legally, these baskets might be deemed gifts, but in gift-giving, it’s the thought that counts, and the thought behind swag bags is purely mercenary — product-placement PR. The thought being that if Will Ferrell wears the sunglasses or wristwatch, while enjoying the comp week at a pricey resort, someone might see it — in People magazine, or the National Enquirer. That’s a huge bang for the buck, worth more than advertising at a fraction of the cost. Guests visiting his home might enjoy his new plasma TV and want one like it. Friends might smell his new cologne and ask him for its name. That’s “WOM,” word-of-mouth publicity. All to give brands the right kind of visibility, and associate it with the coolest of the cool.
The product-placement concept is growing in many directions; I wonder if the IRS’ decision will have an impact.
For example: If you read the PR blogs about PR blogging, you frequently see giveaways mentioned as a key strategy to get bloggers on your side. The suave PR person is supposed to note that a trusted someone is blogging about electronic games, say; or maybe writes a lot about wine. An e-mail is sent: “I’m enjoying your blog tremendously. You’ve got a lot of cred. Hey, would you like to try …” and offer (never unsolicited!) a free sample, a beta test, whatever. If the blogger likes it, the suave PR person will encourage them to write about it.
Will these giveaways also be taxed? I detected a note of panic in these comments:
“Wow — this is insane,” J. Dubb, the marketing director for Five Four Clothing, the maker of high-end urban apparel, said when informed of the IRS announcement. (At this year’s Sundance Film Festival in Park City, Utah, Five Four was handing out cartloads of clothing in its crowded freebie suite.)
“It’s hard to say what the impact will be, but it will definitely be a hit,” Dubb said. “But we think [celebrities] like our stuff enough that they’d be willing to pay tax.”
Britt Johnson, whose Los Angeles events company Mediaplacement organized a freebie suite at last year’s Golden Globe Awards, said past recipients of swag may soon hesitate when offered ostensibly free products. “You are going to see a lot of people turning things down,” Johnson said, “and a lot more people donating to charity.”
I agree with Johnson, not Dubb. The prospect of paying a tax will be a massive disincentive. For the marketers, the idea that their gift baskets would be auctioned off for charity is also somewhat of a disincentive, because the point was to adorn celebrities with these items, not a bunch of nobodies who win silent auctions.
The solution is obvious. Every item in every gift basket should come accompanied by an endorsement contract. Be a little more business-like, folks. I’m not a tax accountant, but it seems to me that if you get the celebrities to sign something that says “I will wear your high-end urban apparel to assist in your promotional efforts,” then it’s no longer a gift. Perhaps there is another tax consequence, but since it’s an upfront exchange of value, I would guess it’s more favorable.
UPDATE: Randi Schmelzer’s piece in PR Week (link for subscribers) straightens out some of my own confusion, as well as the Times’. The IRS has determined that the swag baskets are not gifts, and that is why they will be taxed from now on.
If any organization is truly benefiting from this news, however, it’s the IRS. Focusing on both recipient reporting and the filing of Form 1099 by merchandise providers, the IRS’ outreach program includes letters to entertainment industry groups and tax professionals, an online FAQ, and plenty of media relations, according to Nancy Mathis, a DC-based public affairs specialist at the IRS.
“Any individual’s requirement is to pay tax on income,” she said. “You are not required to pay taxes on gifts, [but] our position is that these… are items given with the expectation of something in return, that use by a celebrity will enhance sales, and the products themselves serve as compensation.”
Okay, I’m a celebrity, and I get a gift basket that has some items in it I wouldn’t be caught dead using. Can I return them so I won’t have to pay taxes on them? And, if I return an item I don’t want, am I required to publicize that fact? “Hi, I’m a celebrity, and for the record, I never wear Axe body spray. The gallon of Axe body spray I was given in a swag bag went straight down the kitchen sink.”
On the same subject, I enjoyed PR Week’s Julia Hood’s humorous editorial on product placement in “Entourage.” You have to be a subscriber to read the whole thing, but here’s a taste:
As soon as a program becomes popular, it is apparently doomed to become little more than a platform for a parade of brands. Entourage in particular has transformed from a sly comment on the peculiar balance of power and egos in Hollywood into a fantasy camp for young guys who suddenly have unlimited sums of money to spend in the shopping mecca of the planet. Motorcycles, video games, flat-screen televisions, and Las Vegas have all been promoted through the adventures of our winsome foursome, and the producers are secure in the knowledge that their marketing partners are gleefully reaping the benefits of reaching their target demographic.
In truth, it probably doesn’t matter that someone like me is put off by the preponderance of stuff that Entourage, and many other programs, is awash with. I’m not in the elite group of 18- to 25-year-old boys these marketers covet. But this is an example of a program that is buckling under the weight of its own success, forgetting that consumers are savvier today than they used to be and will see right through those curiously blank beer bottles the boys of Entourage seem partial to, as opposed to the lovingly displayed wine label of choice.