Where Has the Money Gone? ... Check Under the Gift Card

When a retailer sells a gift card or a gift certificate to a consumer -- the consumer gives cash to the merchant in exchange for a piece of plastic or a slip of paper. The retailer is then obligated to hold onto that money until the consumer (or his or her loved one or friend) decides to use the stored value, usually in exchange for merchandise or services. Generally, these funds are recorded as a liability on the books of the merchant and are not posted as a sale until the gift card is redeemed for the product. There was a time when retailers could count on consumers either forgetting about or losing their gift card or not using the full value on the gift card. This "breakage" -- or unredeemed portion of a gift card, represented a windfall that would help increase merchants' profits -- but no longer. Laws surrounding gift card are undergoing changes, and, unfortunately, some merchants are not prepared for the obligations or requirements of Unclaimed Property Laws that each state has or will impose.

Until recently, most states permitted retailers to sell gift cards with expiration dates, inactivity fees (also known as account maintenance, dormancy, or administrative fees), and/or other fees designed to whittle down unspent balances to protect unclaimed funds from escheatment laws. But, now many states have begun to change the laws to protect consumers and, in some cases where state budgets are being cut, to allow the government to stake claim to unclaimed property. It is likely that the laws in your state have already changed or are about to be changed.

If you don't already know what the current law is in your state, you can start your research by checking with your lawyer or accountant. Booksellers are also encouraged to contact their state's Controller's Office or Attorney General's Office, or search their state's Web site for the most up-to-date information. Simply search for "Unclaimed Property." Unclaimed Property or escheatment laws were originally put in place to protect dormant bank accounts, but the breath of the laws include ancillary products such as gift cards and gift certificates.

Givex, Book Sense's partner in the Book Sense Gift Card program, has provided a link to a Web site, www.kantrowitz.com/kantrowitz/uncl-prop.html, put together by Mark Kantrowitz, publisher of FinAid and president of MK Consulting, Inc., which provides valuable information about unclaimed property laws, including addresses and links to many state treasury Web pages. The information found at this link is aimed at the consumer, but still provides valuable information to help business owners to understand the law.

The January 8, 2004, SmartMoney.com article, "Looking a Gift Card in the Mouth" by Stacey L. Bradford, reported on some of the changes: "Thanks to the growing popularity of gift cards, individual states are finally stepping in and regulating them. So far, 10 states have laws on their books that extend expiration dates on gift cards and paper gift certificates well past the traditional one-year mark. Indeed, in California, Connecticut, and Maine, they never expire, and in Massachusetts they can be redeemed for up to seven years. Some of these states also have restrictions on dormancy and service fees.

"At least eight states, including Maryland, Illinois, and Utah, have pending legislation to restrict the use of expiration dates or dormancy fees, or both. 'This is the wave of the future,' says George Delta, a lawyer with Vienna, Virginia-based law firm Gary & Goodman. This phenomenon, he explains, is at least partly driven by consumer advocates who rightly believe that gift certificates are like cash."

The article goes on to report, that "some 39 states have some type of escheatment law on their books that dictates that a retailer hand over the value of a gift card to the treasurer if the value isn't redeemed by the customer within a certain amount of time. While this varies from state to state, it tends to be between three and five years."

Once this money goes to the state, consumers can file a claim to have the value returned, but most consumers never take the time to file a claim.

It is important that every bookseller understand his or her obligation under these laws. Some states are openly discussing increasing their audit staff to look for these sorts of "liabilities" from companies and have the power to assess interest and penalties. As a result, this obligation should not be taken lightly. Having good record keeping and getting some advice is a good start. --Jill Perlstein, ABA, Director of Marketing, and Maurizio DiVito, C.A., Givex, Chief Financial Officer

[NOTE: This article should in no way be construed as legal or financial advice; it is presented only to inform booksellers about current issues. ABA encourages its bookseller members to seek the advice and assistance of a lawyer or financial professional to ensure compliance.]