Gift cards are a staple of the holiday season, giving retailers opportunities to boost sales, build brand loyalty, and attract new customers.
But gift cards also pose potential risks to businesses unfamiliar with the patchwork of state laws on unclaimed property. States generally require the value of the abandoned assets—uncashed checks, dormant savings accounts, and unused gift cards—to escheat, or be handed over to the state. For some states, like Delaware and New York, the billions of dollars in unclaimed assets on corporate balance sheets have become a tempting source of revenue and an offset for tax collections. State escheatment rules can be complicated. Unwary retailers brought into enforcement agency audits could face penalties for their compliance failures. And poorly executed gift card programs have become attractive targets for consumer class action.
Bloomberg Tax sat down with Michael M. Giovannini, an unclaimed property partner in Alston & Bird LLP’s Charlotte, North Carolina, office, to discuss strategies for avoiding holiday hangovers.
Bloomberg Tax: What’s new with gift cards this holiday season?
Giovannini: Gift card programs continue to grow, and I don’t see any slowdown. But retailers and hospitality companies are devising new ways to distribute gift cards. For instance, mobile app gift cards and all-digital systems are becoming increasingly popular. So we’re headed toward more innovation. In addition, retailers are competing for customers with loyalty programs that offer stored-value or gift card incentives.
Bloomberg Tax: What unclaimed property risks do these gift card programs pose for retailers?
Giovannini: All 50 states have unclaimed property laws requiring escheatment to the state when assets go unclaimed. Gift cards and gift certificates are a little more complex because the states aren’t uniform. Approximately 36 states have expressly carved out gift card balances from escheatment, but the balance of states require gift card escheatment. There are a few heavy-hitter states in this category including Delaware and New York, which assert domiciled companies must escheat all unredeemed balances where there is no name or address for the cardholder. That’s very significant because so many gift cards are sold off the rack. In addition, if an address is collected for the cardholder, which is growing in light of the move to mobile and digital cards, the holder may have to escheat to the state of such address. These companies have to essentially escheat cash. So they are not getting the sale they were expecting and they also lose the profit component built into the gift card.
At this point Alaska, Colorado, Delaware, the District of Columbia, Georgia, Louisiana, Maine, Mississippi, Missouri, Montana, New Jersey, New Mexico, New York, Oklahoma and West Virginia require the escheatment of unredeemed gift cards. Several other states escheat cards that expire and, or impose services fees.
Bloomberg Tax: How can retailers best structure their operations to avoid burdens under these state unclaimed property statutes?
Giovannini: Historically, companies have tried to move the gift card features of their operations to a business unit not domiciled in Delaware or New York or one of these states. So the company might put the issuance function in a subsidiary domiciled in states such as Virginia, Florida, Connecticut, Ohio, Texas or California. More recently, however, Delaware has challenged some of these structures on the theory that the subsidiary is an alter-ego of the Delaware parent. Delaware is asserting it can look beyond the structure and still assert a claim to escheat the balances.
An increasingly popular strategy is to redomesticate the company outside of Delaware. As a matter of corporate law, this is relatively straightforward. This may not be viable if you have a complex corporate structure or you’re a large publicly traded company. But for many businesses, it’s worth taking a look at other states. They may offer the same or better protections and may have a lower franchise tax, which has gotten quite high in Delaware.
Bloomberg Tax: Do retailers issuing gift cards face consumer protection risks?
Giovannini: There are many risks around expiration dates. There is a federal framework under the CARD—Credit Card Accountability Responsibility and Disclosure— Act, which specifies a gift card can’t expire in less than five years and fees can’t be assessed against the balance. So that’s basically the floor and some of the states have added more protections than that. The situation also gets a little muddy with loyalty programs and promotional cards, which often have expiration dates. Under some state laws, it isn’t clear if the cards can expire. So in those states an agency may take a look at the retailer’s expiration practices. You could also be looking at a class action if a plaintiff believes an expiration date was wrongly enforced.
The interview has been edited for length and clarity.