The popularity of gift cards or certificates has skyrocketed over the past 5 years. It is estimated that annual sales has reached over $35 billion and growing. They are easy to buy and simple to wrap up. In addition, industry experts estimate that 5% to possibly 10 % of their value are never redeemed equaling $1.7 billion to $3.5 billion.
This situation has caused the states to introduce new or to revise legislation covering how gift certificates are to be addressed with respect to consumer protection and the transfer of unredeemed value to their state unclaimed property divisions.
Prior to this new interest and popularity, gift cards or certificates typically (in small print) had an expiration date and many charged a monthly service fee after a specific period both of which either eroded the value or eliminated the gift card’s value over time. Also, the issuer of the gift card did not and/or was not required to record any information concerning the buyer. One obvious result was the windfall profits for the issuer of the card at the expense of the card buyer.
New state legislation has ranged:
From: Gift cards cannot have an expiration date and cannot charge a monthly fee or an inactivity charge. A card that is not permitted to expire cannot be collected as unclaimed by the states.
To: All gifts cards must clearly state the terms and conditions regarding expiration date and any other charges on the certificate or card itself. However, upon the expiration date and after the state’s dormancy period, the unused value of the card must be turned over or ‘escheated’ to the states’ unclaimed property divisions. To expedite the transfer, many states are requiring the issuer to record the name and other information from the purchaser at the time of purchase.
Obviously the issuers of the cards and buyers of the gift cards were pleased with states that adopted the former-like legislation. This seems fair to both parties. Issuers can retain the unused value/money until used and the buyers’ gift cards never expire.
With respect to the many state variations of the later, retailers and issuers of gift cards are lobbying against any new legislation. They purport it is not necessary, anti-consumer and costly from them to require purchaser’s information and keep such records.
In reality, their real concern is that they are giving up a very profitable feature. Although they claim that they will always honor their gift cards, they also have discovered that the unredeemed portion of the card is likely to remain unredeemed or unused. Consumers simply lose, misplace or mistakenly believe that the card is worthless after a specific time period.
However, the many states acting as supposed advocates for consumer protection are rigorously enforcing their unclaimed property laws and requiring the unredeemed gift cards to be turned over. Although the state must hold the value of the unredeemed gift certificate until the owner comes forth and files a claim, the $millions collected from the issuers thru escheat is a valuable source of revenue as state budgets are tight. Delaware, for years, has been aggressively enforcing its unclaimed property laws in regard to gift certificates. With many national companies incorporated in Delaware, it has benefited from a recent Supreme Court ruling – Texas vs New Jersey by which, if the address of an owner of an unclaimed property is unknown or a foreign country, the property is transferred over to the state of the headquarters of the holder of the property (or issuer in the case of gift cards). It was reported that Delaware took in almost $13 million in unredeemed gift certificates in 2002. This windfall will likely abate for Delaware as more states require issuers to record and to retain address information from the buyers, thereby any unredeemed portion of a gift cards will be transferred to the state of the address supplied by the buyer and not to Delaware.
Major issuers of gift certificates not wanting to give up the inherent windfall have taken steps to prevent the transfer of unredeemed value of gift cards.
Recently major issuers of gift certificates have been able to avoid the ‘escheat’ laws through the means of a subsidiary. The function of the subsidiary is act as the issuer or obligor of the gift certificate. Therefore, it has the responsibility to respond and to remit any unclaimed property. Since there is often little or missing buyer information associated with the card, the first default – owner’s address cannot apply. The second default would have been the state of the issuer. However, this subsidiary is headquartered in a state (other than its parent) that does not escheat the value of the unredeemed gift certificates.
Bottom line, the consumer or buyer of the gift certificates seem to have gained valuable protection against expiring cards or the card’s value diminishing thru monthly or inactivity fees, the issuers and states have just begun to fight over who is to be the custodian of the $millions of unused or unredeemed portions of the cards.
