6 keys to understanding gift card escheatment

While many types of property go unclaimed, one type of unclaimed property that often creates confusion involves the escheatment of gift cards and other similar stored value instruments (together “gift cards”). To assist you in taking control of your company’s unclaimed property gift card obligations, outlined below are six keys to mastering gift card escheatment:

1. Understand priority rules

Determine which state’s gift card escheatment laws apply.

• First priority rule: Generally speaking, unclaimed property is reportable to the state of the owner’s last known address as indicated on the holder’s books and records.
• Second priority rule: When no last known address exists, property is generally reportable to the state of corporate domicile (e.g., state of incorporation/formation).

Most holders do not track address information for their gift card program, resulting in unclaimed balances defaulting to their state of corporate domicile, per the second priority rule.

2. Learn the laws

Once you know which states take priority, the next step is to gain a proper understanding of the corresponding state laws and how they apply to your company. When dealing with multiple states, this analysis can be complex given the widely varying sets of gift card rules across states. Although it would be difficult to cover all states in one post, some common themes include:

• Narrow definitions: Narrow definitions often exist as to what states consider a “gift card” versus other similar instruments (e.g., “gift certificate,” “stored value card,” etc.) and the escheatment rules may differ depending on the state and how they define certain property classes. Some common variables that are considered include:

1. Expiration dates
2. Exchange for cash
3. Administrative fee deductions
4. Ability to replenish
5. Storage medium
6. Ability to use unaffiliated retailers

• Allowed exemptions: Many states exempt gift cards from escheatment if they meet certain defined criteria, some examples of which are outlined above. It is important to note that such exemptions only apply to the reporting of unclaimed property and the amounts will generally still be owed to the apparent owner.
• Partial exemptions: Similar to full exemptions, some states allow for a percentage of the gift cards’ value to be retained by the holder as part of a partial escheatment, often with additional stipulations attached.

3. Establish a process

After you have identified your company’s exposure and where to escheat, it is important to establish policies for tracking and reporting these properties in proper compliance with state law. Companies that realize they have significant amounts of past due property (i.e., amounts that should have been escheated in prior years) should explore whether the applicable jurisdictions offer voluntary disclosure programs. Such programs, which are common, generally offer holders a one-time opportunity to come forward voluntarily to escheat past due amounts in exchange for relief of potential interest and penalties that might otherwise be assessed.

4. Identify risks

With states constantly revising their unclaimed property statutes, it is important to analyze any exemptions being taken by your company and determine what effect the elimination of those exemptions would have. For example, one of the more impactful legislative changes in the past several years occurred when the state of Colorado retroactively repealed its $25 reporting exemption forcing holders to report property that was previously considered exempt. How much of an impact would a similar gift card exemption repeal have on your company? Would you have the records to quantify prior years and how far back would those records go? These are questions that are best answered now.

5. Dive deeper

When reporting unclaimed property, it is always a good idea to look into the underlying nature of the amounts being reported. Upon further review, you may find that certain gift cards were never truly “owed” to begin with (e.g., promotional activities, customer accommodations).

6. Ask the professionals

It is possible to organize a gift card program in a way that takes advantage of existing exemptions within holder-friendly states; however, one must be careful when taking any action intended to avoid escheat laws. For holders tackling these complex issues, it is always best to seek out law firms and advocates that specialize in such matters.

Please reach out to any member of the Baker Tilly unclaimed property management team if you have any questions about gift cards or any other unclaimed property concerns that may affect your company.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.