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Retailers Facing Unclaimed Property Issues Around Unclaimed Gift Cards

Guest blog by Jennifer Borden

We’re a few months removed from the holidays and, once again, gift cards were one of the top gift items of the season. From Yankee Swaps to the last minute gift for your babysitter, it’s easy to understand why: they’re convenient and one size fits all. But the question is, how many of those cards will never be redeemed? Despite their popularity, it’s projected that $2 billion of gift cards went unused in 2012.

That’s unfortunate for the recipient of the gift card. But what about the retailer?

There are legitimate questions as to how, when and by whom the gift cards should be regulated. There is ongoing contention between the federal and state governments as to who should be regulating gift cards.  New Jersey is in the midst of a multi-year dispute in federal court over whether national retailers should be subjected to onerous state requirements that clearly conflict with United States Supreme Court precedent.  The Office of the Comptroller of the Currency has weighed in, along with other federal agencies, and the newly formed Consumer Financial Protection Bureau is challenging states’ regulation in this arena.  This presents a huge compliance and unclaimed property predicament for retailers, especially on the heels of so many changes over the last couple of years that leave companies more vulnerable to audits and escheatment than they thought they were.

So how do retailers try to attack the challenge?

In many cases the legal entity that issues gift cards for retailers is incorporated in a state that does not escheat gift cards.  Since gift cards are typically “owner unknown”, and the property escheats to the holder’s state of incorporation, unredeemed gift cards should be exempt from escheatment. But states are saying, not so fast. Occasionally these special purpose entities were not established properly and therefore can’t withstand audit scrutiny. In one case a major retailer did not follow corporate formalities and the entity issuing the gift card had been administratively dissolved by its state of incorporation.  Without the retailer even knowing it, the gift cards that were issued by the legally defunct entity may have lost the benefit of the exemption, potentially resulting in millions of dollars in liability.

In another case, gift cards were issued as a result of loyalty programs, so the issuer knew the identity of the recipients.  Do these cards still get the benefit of being “owner unknown” ‘and subject to the favorable escheat rules of the state of incorporation of their issuer?  Or is the retailer now once again subject to the laws of each jurisdiction in which it has customers?

Another fairly new risk is the abundance of third party involvement in the issuing of gift cards. When a store like CVS or Walgreens carries gift cards from a variety of retailers and restaurants, who’s obligated to the value held on those cards, and what is the value that is potentially escheatable? Is it the retailer who accepted the cash for the card?  Or is the retailer where the card will ultimately be presented?  What is the amount that is potentially at risk on a $25 card that does not get redeemed?  Is it the full $25 paid, even though the issuer may only receive about $20 after paying for distribution and sales commissions?

So if you’re a retailer, how can you protect yourself from audits and unclaimed property violations if you are issuing gift cards to your consumers? The same way you get a tune-up for your car every 30,000 miles. It doesn’t hurt to do a check up every 24 months. It’s likely that there have been regulation changes or lobbying that could impact your exemption. You also want to ensure your SPE is holding strong, all corporate formalities are being respected and that you’re still protected as anticipated when the SPE was formed.

Jennifer Borden is EVP and general counsel specializing in unclaimed property issues for UPRR. She can be found at uprrinc.com.

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