States Bite into Broken Gift Cards: Understanding the Impact of State Escheat Laws

By Kile, Charles Owen, Jr.; Wall, Patricia S. | Journal of Accountancy, December 2008 | Go to article overview

States Bite into Broken Gift Cards: Understanding the Impact of State Escheat Laws


Kile, Charles Owen, Jr., Wall, Patricia S., Journal of Accountancy


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EXECUTIVE SUMMARY

* Escheatment of gift cards creates challenges for both businesses and regulators. Reporting and compliance requirements can be consequential and can place businesses at risk because requirements are not uniform across states and some potential conflicts remain untested, and thus, unresolved.

* The first step in compliance to escheat laws is to identify which among the 50 state (and District of Columbia and Virgin Islands) escheat laws apply. For businesses operating in multiple states, the precedent for determining which state has priority in receiving unclaimed property is established in the rules set forth by the U.S. Supreme Court in State of Texas v. State of New Jersey (1965).

* Companies are required to file an annual report stating the amount to be escheated to the applicable state(s). Required reports can be obtained on the NAUPA Web site (www.unclaimed.org).

* Many state laws exempt businesses from conducting "due diligence" with respect to gift cards and other abandoned property below certain amounts. But in response to pressure from state attorneys general, some national retailers have changed their policies about replacing lost or stolen gift cards.

* In some states, such as Washington and California, businesses have successfully negotiated to be relieved from the obligation of reporting gift cards and gift certificates to the state as unclaimed property. In return, the states forbid businesses from charging service fees, dormancy fees or enforcing expiration dates on gift cards.

* Recently, a few gift card issuers have begun to manage breakage by encouraging customers to register their gift cards on the company's Web site. In return for registering the gift card, the issuing company promises to replace lost, stolen or destroyed cards, track card balances and provide card verification in the event that customers experience any complications arising from their card transactions.

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At the peak of the 2008 holiday shopping season, gift card sales are expected to again have a material impact on the financial reports of many retailers. Gift card "breakage," or the portion of gift card balances that consumers fail to redeem for merchandise, can boost a retailer's short-term cash flows. In the long term, gift card breakage can enhance the bottom line of the retailer--or state treasuries--depending on how the retailer's gift card program is structured and the escheat laws of the states in which it operates. Escheatment of gift cards creates challenges for both businesses and regulators. Reporting and compliance requirements can be consequential and can place businesses at risk. Stephen Larson, Iowa deputy treasurer and president of the National Association of Unclaimed Property Administrators (NAUPA), warns that there is "a tremendous amount of misinformation out there." As a result, he says, "many [businesses] fail to adequately understand the reporting obligations that they have under various state provisions." That's because requirements are not uniform across states and some potential conflicts remain untested, and thus unresolved. Based upon extrapolations of available information, Larson believes that his state, Iowa, could easily be due as much as 10 times the amount that it actually collects. Estimates such as these, he says, are driving states to "take a fresh look at how to provide clarity to firms with regard to how they can comply with applicable state laws."

The stated purpose of escheat laws is to unite lost or abandoned property with its rightful owner. But when it comes to unclaimed gift cards, the money paid for the card is seldom united with the gift card owner, given that owner information is rarely recorded, ownership is easily transferable, and it is highly unlikely that a gift card owner who fails to redeem his or her card will, in turn, take the necessary steps to trace funds to a given state and initiate a claim for reimbursement. …

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