The Escheatment Process for Gift Cards

Gift cards are popular for their convenience and flexibility, but it is not uncommon for them to go forgotten, lost or only partially used. In fact, a considerable portion of gift card balances never get spent. When this happens a legal process known as escheatment kicks in. This refers to cases where unclaimed property or assets revert to the state after a period of inactivity or when the owner cannot be located.

In most jurisdictions, businesses and financial institutions are required to report to the state when an account or asset remains unclaimed for a certain period, typically between one and five years. This includes situations where there is no activity on an account or the institution cannot make contact with the asset’s owner. After reporting, the assets are held for another period during which the owner can claim them back. If the owner does not claim the assets within this period, they officially escheat to the state.

Escheatment serves a dual purpose. It ensures that assets do not remain indefinitely with financial institutions without rightful ownership, and it allows the state to potentially use unclaimed properties as general funds, though owners can still reclaim their property by proving ownership.

Legal perspectives

When it comes to the escheatment of gift cards, the legal landscape is fragmented, with each state having its own set of rules and regulations that determine whether and how gift cards are treated as unclaimed property.

To further complicate matters, recent rulings by the U.S. Supreme Court have challenged some states’ rights to claim dormant gift cards.

The lack of uniformity in regulations presents a complex legal landscape for businesses to navigate. Here is an overview of the typical regulations applied across states:

• Gift cards as escheatable property: In some jurisdictions, such as New York, any balance on a gift card that remains unused for a certain length of time, typically between two to five years, is deemed abandoned and must be turned over to the state. These states view the unredeemed value as an outstanding obligation of the retailer to the cardholder.
• Specific exemptions: On the flip side, several states, such as California, have enacted laws that exempt gift cards from their unclaimed property statutes. The exemptions often are conditional, based on terms such as non-expiration of the gift card or the absence of dormancy fees. Businesses operating in such states are not required to report or remit the funds associated with unclaimed gift cards.
• Federal floor and state variability: The Credit CARD Act of 2009 mandates that gift cards cannot expire earlier than five years from the date of issuance or the date of the last reload for reloadable cards. Beyond this floor, states have broad leeway to regulate gift cards under their unclaimed property laws.
• Anonymous gift cards: For anonymous gift cards, where the owner’s identity is not known, the second priority rule dictates that the funds are escheated to the state of the company’s headquarters if it is not considered a non-escheat state.
• Breakage and redemption for cash: “Breakage” is the term for the unused portion of gift card balances. In some states, consumers may redeem gift cards for cash if the balance falls below a certain threshold. For example, California allows consumers to redeem gift cards for cash if the balance is $10 or less. Massachusetts and Colorado have similar laws. Other states do not require businesses to provide cash redemption options.

Retailers’ obligations

The escheatment process can complicate a retailer’s financial landscape significantly. For many businesses, revenue from the sale of gift cards cannot be fully recognized until the cards are either redeemed for goods or services, or the likelihood of the cards being redeemed becomes sufficiently remote for the funds to be considered breakage.

However, if the likelihood of redemption cannot be established, and the gift cards become escheatable, then retailers are obliged to remit the unused balance to the state. This creates an additional liability on the balance sheet.

Retailers opting to establish separate entities in states with more favorable escheat laws face added complexity in terms of legal structuring and regulatory compliance across multiple jurisdictions.

And, in an era where consumer trust is paramount, unclaimed property laws also come with possible reputational risks.

Amid this complex landscape, the following tips provides some guidance:

1. Understand priority rules. The “first-priority rule” states that unclaimed property is reported to the state of the owner’s last known address, as indicated by the records of the holder. If the address is unknown, the second-priority rule applies, and the property is escheatable to the state where the business is incorporated.

2. Determine state-specific laws. Understand where, when, and how to report unclaimed property. Ascertain which states consider gift cards as escheatable and familiarize yourself with their respective dormancy periods.

3. Comprehensive record-keeping. Implement a system to maintain the purchase and last active date of all gift cards. The system should be capable of tracking the user’s last known location to facilitate the correct state reporting.

4. Regularly update financial records. This will help identify unclaimed property swiftly and accurately.

5. Stay informed on current laws. Regularly consult with legal experts or leverage compliance software solutions that track legislative changes across jurisdictions.

6. Create an escheatment process. Define a clear internal process for identifying, managing, and reporting unclaimed property. This should include regular assessments of unclaimed gift cards and timely reporting to the appropriate states.

7. Timely reporting. File reports in accordance with individual state requirements, ensuring adherence to the respective deadlines and formats.

8. Use exemptions and deductions. If your state law permits, take advantage of allowable exemptions or deductions for breakage.

Consumer perspective

With billions of dollars’ worth of gift cards going unspent each year, the fate of these dormant funds is of real concern to consumers.

Here is a step-by-step guide to help navigate this challenge:

1. Check balances

This can often be done on the retailer’s website, over the phone or in-store.

Tip: Keep a record of your gift card details, including the card number and any PIN.

2. Check its status

Most states have a specific period of inactivity after which a gift card is considered unclaimed property. Look up your state’s unclaimed property laws to understand the timeline.

3. Search the state’s database

Each state has an unclaimed property office or website where you can search for unclaimed assets. Websites like Missingmoney.com and the National Association of Unclaimed Property Administrators can direct you to the correct state database.

4. Submit your claim

If your gift card balance is listed in the state’s unclaimed property database, you’ll need to submit a claim. This typically involves filling out an online form or mailing in a claim form. Be prepared to provide proof of identity, such as a government-issued ID, and any documentation related to the gift card (e.g., the original purchase receipt, the gift card itself).

5. Follow up

After submitting your claim, monitor its status through the state’s unclaimed property website or contact the unclaimed property office directly. Keep copies of all correspondence and documentation.

There is no uniform rule across the board; each state dictates its own laws when it comes to whether unused gift cards fall under unclaimed property regulations.

Consumers should be proactive in understanding their rights and the processes to claim escheated funds should their cards fall under such circumstances.

Retailers, on the other hand, face considerable compliance burdens. The diversity of state regulations demands that businesses stay informed and conduct regular reviews of their gift card policies, sales tax obligations, and unclaimed property reporting procedures to avoid costly tax pitfalls and legal disputes. Many retailers argue against the escheatment of gift cards, citing the financial strain and the complexity it introduces to their operations.

Both consumers and retailers must arm themselves with knowledge and a keen awareness of the ever-evolving landscape of unclaimed property and escheatment laws.