The Issue of Escheat and Gift Certificates

Tuesday, April 18, 2017

Through the years, I’ve heard many DZOs claim that the primary strategy for participating in daily deal programs like Groupon is for the ‘free money’ gained from unredeemed vouchers. This windfall is known as breakage.

“In some states, unused gift certificates are viewed as unclaimed property.”

Depending on the state in which you operate, this could be a strategy that causes sleepless nights and threatens bankruptcy if audited. This issue not only applies to those that participate in daily deals, but also businesses who sell gift certificates in a state that requires the escheatment of unclaimed property (like unredeemed gift cards).


What is Escheat?

Escheat laws are the laws governing unclaimed property. These laws spell out when, how, and under what circumstance, a business must turn over – or escheat – unclaimed property to the state government. Source: Journal of Accountancy

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This blog is proudly sponsored by Sun Path Products.

Why Escheat is a Concern

As state budgets begin to shrink, states are looking for alternative ways to raise income. Not unlike an overzealous county speed trap, states are looking for more revenue opportunities to help offset the financial squeeze. Escheatment is one of these avenues.

DID YOU KNOW: 

In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure (CARD) Act, which set consumer protections for gift cards based on many state laws. The law provides that gift cards cannot expire within five years from the date they were activated.

What are Escheatment Laws In Your State? 

If you’re not aware of the escheatment laws in your state, now’s the time to find out.

AlabamaHawaiiMassachusettsNew MexicoSouth Dakota
AlaskaIdahoMichiganNew YorkTennessee
ArizonaIllinoisMinnesotaNorth CarolinaTexas
ArkansasIndianaMississippiNorth DakotaUtah
CaliforniaIowaMissouriOhioVermont
ColoradoKansasMontanaOklahomaVirginia
ConnecticutKentuckyNebraskaOregonWashington
DelawareLouisianaNevadaPennsylvaniaWest Virginia
FloridaMaineNew HampshireRhode IslandWisconsin
GeorgiaMarylandNew JerseySouth CarolinaWyoming

SOURCE: National Conference of State Legislatures

PLEASE NOTE:  Please note the summaries should be used for general informational purposes and not as a legal reference. DropZone Marketing is unable to answer questions or provide guidance to business owners regarding gift cards and gift certificate laws and practices. If you have questions regarding issuing or redeeming a gift card or gift certificate or a retailer’s practices, please contact the Office of the Attorney General in your state.


Some Other Details About Gift Certificates to Consider: 

1. Minimum 5 Year Expiration Date

DID YOU KNOW: In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure (CARD) Act, which set consumer protections for gift cards based on many state laws. The law provides that gift cards cannot expire within five years from the date they were activated and generally limits inactivity fee on gift cards except in certain circumstances, such as if there has been no transaction for at least 12 months. The federal law creates a floor for regulation and leaves room for state regulation on redeeming gift cards for cash and unclaimed property provisions. (source: National Conference of State Legislatures)

2. How To Account for Gift Card Sales

The challenge to businesses when it comes to gift cards is an accounting one. Revenue typically can’t be recognized until a corresponding product or service is provided, and companies end up carrying a liability on their balance sheets without being able to record revenue that would clear it.


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Gift card sales should be recorded as a liability on your balance sheet and shouldn’t show up on your income statement at all. Why? Because gift card revenue isn’t your money – it’s an indication that someone intends to do business with you in the future. When a recipient comes in and redeems a gift card, that gift card is just another payment method. When you list gift card sales as revenue, you’re actually spending money you don’t really have yet.

Source: BGW CPA

3. Expiration Dates

Many cards do not have any expiration date. But if an expiration date is specified, then the date should be prominently displayed on the card and the date should not occur too quickly after the purchase. Issuers should also feature an option to transfer an expired balance to another card for a nominal fee.

4. Groupon – Have You Looked at Your Terms of Agreement? 

The issue of escheatment forced Groupon to include it in their Terms of Agreement. Have a look:

Compliance with Gift Card, Gift Certificate and Abandoned Property Laws

Merchant agrees to comply with the Voucher terms and conditions as stated on the Website, including but not limited to the “Terms of Use” http://www.groupon.com/terms, and to ensure that the Vouchers comply with all laws that govern vouchers, gift cards, coupons, and gift certificates, including but not limited to the United States Credit CARD Act of 2009 (if applicable) and any laws governing the imposition of expiration dates, service charges or dormancy fees and all Fine Print related to the Merchant Offering stated on the Voucher. Merchant is solely responsible for compliance with any applicable escheat or abandoned or unclaimed property laws. Upon written request from Merchant, but only when required, Groupon will provide Merchant with information in Groupon’s possession that the Merchant needs to comply with its obligations under this Agreement.

Source: GrouponWorks

 

What’s Next?

From my research and reading on this topic, there is a lot of gray area on the topic of gift cards with much litigation underway in many states. If you are concerned about the escheatment or gift card laws in your state, contact a tax accountant for more information.


 

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2 Comments

  1. This is precisely why I only sold lift tickets and kept accurate records of who bought which numbered ticket and when. All tickets accounted for each day. All outstanding tickets were redeemed or ticket holders notified to redeem at full ticket price. I did not sell coupons, vouchers, gift certificates or gift cards and will not do so. Thank you for bringing to attention the laws governing business and unclaimed property!

    1. And Jeffery, you were operating a DZ in the early 90s, over 20 years ago! You must have been a man ahead of your time.

      I really do not like people paying for services not rendered. I don’t even want to take payment if the weather in half an hour is questionable. Because, even more I do not like giving money back. That said, we do sell a few gift certificates each year.

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