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Posted by Sucharita Mulpuru on March 17, 2012
Until a few months ago Bank of America won the “Best In Biting The Hand That Feeds You” Award when it initiated its $5 debit card fee increase. Citibank may have trumped that in January when it decided that frequent flier miles that it gave away as promotional bonuses in exchange for getting customers to sign up for a new bank account was taxable income that needed to be reported to the IRS. The absurdity of this move is so large it’s not even measurable. Because if they pull this off, they will solidify a position as an anti-customer bank at a time when banks could use some customer love, but worse they threaten to kill the single most effective tactic in the entire marketing industry: the promotion. By giving away a gift in return for a customer’s patronage, and then calling it taxable income, this is the ultimate string attached. Does this mean free ice cream at Ben & Jerry's on their customer appreciation day is taxable? What about upgrades airlines sometimes give for free on flights? Or the eyeglasses that Coastal.com is giving away for free? Most of the time your social security number isn’t captured, so there isn't an easy means to report any promotion or gift to the IRS, but let’s hope we never get to the day where we do have to give away such information in order to take advantage of a promotion. How anyone at Citi could have thought this was a good idea (and not making very clear the taxation consequences) is baffling. Marketing freebies are aimed at getting new customers or retaining existing one; taxing them only gives people a big reason to not take advantage of them. Why isn’t every marketer in America screaming from the hilltops that this is a terrible thing, and why is Citibank not being shamed for such an outrageous and self-serving action?
Two things could have made Citi come off a bit better: if they hadn't assessed a highly speculative value of the frequent flier miles at 2.5 cents (which translates to $625 for a 25,000 mile bonus, hardly fair given all the blackout dates and restrictions around using these tickets at all), or if they'd just done the noble thing and grossed up the value of the "bonus" to cover the tax, a standard HR procedure when people get their job relocations paid for. Hopefully with enough customer pressure, they’ll reverse their position. Or when other banks and PayPal take away the market share they’ve left on the table, perhaps they’ll realize it was a bad idea from the start.