6 Keys to Understanding Gift Card Escheatment
Authored by John Marbach, Manager and Matthew Chenowth, Director
While there are many types of property that go unclaimed, one classification of Unclaimed Property “UP” that often creates confusion involves the escheatment of gift cards and other similar stored value instruments (“GC”). To assist you in taking control of your company’s UP GC obligations, outlined below are “6 Keys” to mastering gift card escheatment:
1. Understand Priority Rules: Determine which state’s GC escheatment laws apply.
- First Priority Rule: Generally speaking, UP is reportable to the state of the owner’s last known address as indicated on holder’s books and records.
- Second Priority Rule: When no last known address exists, property is generally reportable to the state of corporate domicile (e.g., state of incorporation/formation).
Most holders do not track address information for their GC program resulting in unclaimed balances defaulting to their state of corporate domicile, per the Second Priority Rule.
2. Learn the Laws: Once you know which states take priority, the next step is to gain a proper understanding of the corresponding state laws and how they apply to your company. When dealing with multiple states, this analysis can be very complex given the widely varying sets of GC rules across states. While it would be difficult to cover all states in one post, some common themes include:
- Narrow Definitions: Narrow definitions often exist as to what states consider a “gift card” vs. other similar instruments (e.g., “gift certificate”, “stored value card”, etc.) and the escheatment rules may differ depending on the state and how they define certain property classes. Some common variables that are considered include:
- Expiration dates
- Exchange for cash
- Administrative fee deductions
- Ability to replenish
- Storage medium
- Ability to use unaffiliated retailers
- Allowed Exemptions: Many states exempt GCs from escheatment if they meet certain defined criteria, some examples of which are outlined above. It is important to note that such exemptions only apply to the reporting of unclaimed property and the amounts will generally still be owed to the apparent owner.
- Partial Exemptions: Similar to full exemptions, some states allow for a percentage of the GCs value to be retained by holder as part of a partial escheatment, often with additional stipulations attached.
3. Establish a Process: After you have identified your company’s exposure and where to escheat, it is important to establish policies (e.g., see embedded link) for tracking and reporting these properties in proper compliance with state law. Companies that realize they have significant amounts of past due property (i.e., amounts that should have been escheated in prior years) should explore whether the applicable jurisdictions offer voluntary disclosure programs. Such programs, which are quite common, generally offer holders a one-time opportunity to come forward voluntarily to escheat past due amounts in exchange for relief of potential interest and penalties that might otherwise be assessed.
4. Identify Risks: With states constantly revising their UP statutes, it is important to analyze any exemptions being taken by your company and determine what impact the elimination of those exemptions would have. For example, one of the more impactful legislative changes in recent years occurred when the State of Colorado retroactively repealed their $25 reporting exemption forcing holders to report property that was previously considered exempt. How much of an impact would a similar GC exemption repeal have on your company? Would you have the records to quantify prior years and how far back would those records go? These are questions that are best answered now.
5. Dive Deeper: When reporting UP, it is always a good idea to look into the underlying nature of the amounts being reported. Upon further review, you may find that certain gift cards were never truly “owed” to begin with (e.g., promotional activities, customer accommodations).
6. Ask the Experts: While it is possible to organize a GC program in a way that takes advantages of existing exemptions within holder friendly states, one must be very careful when taking any action intended to avoid escheat laws. For holders tackling these complex issues, it is always best to seek out law firms and advocates that specialize in such matters.
Please reach out to any member of the True Partners Unclaimed Property Management Team if you have any questions about GCs or any other UP concerns that may impact your company.