Unclaimed property is generally defined as any intangible property that is held, issued, or owing in the ordinary course of business and has remained unclaimed by the apparent owner for a specified period of time after it became payable or issued. Any time a restaurant or franchise generates a payable or a liability, that transaction may become unclaimed property if it remains uncashed, unredeemed or unclaimed by the owner.
Unclaimed property basics
Every U.S. state and territory has active unclaimed property statutes, and because unclaimed property is not a tax, there is no “nexus” test to determine where a restaurant may have a potential reporting responsibility. In order to assess which state’s unclaimed property laws apply, a company would have to look to the priority rules established by the Supreme Court in 1965:
- First priority rule: Generally speaking, unclaimed property is reportable to the state of the owner’s last known address as indicated on the issuer’s books and records.
- Second priority rule: When no last known address exists, property is generally reportable to the state of corporate domicile (i.e., state of incorporation/formation).
Therefore, when a company does not have address information, such as with some gift card programs, any potential unclaimed property may be reportable to its state of formation pursuant to the second priority rule.
Key unclaimed property considerations for restaurants
Regardless of industry, the most common types of unclaimed property consist of the “big three” property types: uncashed payroll checks, uncashed vendor payments and accounts receivable net credit balances. While companies in the restaurant industry can generate all of these, the two main areas comprising a restaurant’s reporting responsibility consists of uncashed payroll checks and unredeemed gift certificate and gift card balances.
Uncashed payroll checks
Small, uncashed payroll checks are part of day-to-day business with most restaurants. Unfortunately, with a few exceptions, no matter how small the amount, an outstanding payroll liability is likely to be reportable as unclaimed property once it becomes dormant, which is typically one year from the date issued in most states. While there are a few states that have exemptions for wages for $50 or less, Kentucky, Michigan and Ohio, most do not and require wages as small as $0.01 to be reported as unclaimed property. This can also include returned direct deposits. The key to managing a restaurant’s reporting responsibility, specific to payroll transactions, is to adopt proactive and regular communication with employees (current and former) about uncashed or returned payroll disbursements.
Gift Cards and Loyalty Programs
Gift cards
Many states have full or partial exemptions for unused gift card balances, but there are so many variables that impact whether an exemption may apply that it can often be difficult for a restaurant to determine whether one applies. Typical criteria that can influence whether an unredeemed balance is subject to a full or partial exemption in a state include:
- Expiration dates
- Ability for the customer to exchange it for cash
- Deductions for administrative fees
- Ability to replenish or reload the card
- Type of storage medium (physical card, e-card, paper certificate)
- Ability to redeem at unaffiliated retailers (i.e., open versus close looped cards)
- Type of entity and the jurisdiction of domicile of the entity that issued the gift card
In addition to the potential criteria in each state, it is important to note that they are not always applied in a uniform manner. For example, most state exemptions require gift cards not to have an expiration date, while Idaho only exempts gift cards WITH an expiration date. The key to correct reporting and applying allowable exemptions is to know and understand how the various state laws apply to a company’s specific gift card program.
In order to reduce or eliminate a company’s reporting responsibility specific to unredeemed gift certificate and gift card balances, restaurants can implement and restructure their current program to take advantage of existing exemptions within holder-friendly states.
Promotional gift cards
Typically, a restaurant will not receive money or other consideration from a customer when issuing promotional gift cards. A common example of a promotional gift card is where a purchaser will receive a “bonus” gift card when they make a purchase, such as getting a small value gift card for free when they purchase another gift card. As the restaurant does not receive any consideration for these gift cards, they are usually exempt from any unclaimed property reporting requirements. However, restaurants should make sure that any promotional gift card can be distinguished from a standard gift card that the restaurant sells (e.g., separate account or card ID numbers), and are not redeemable for cash, – otherwise the burden of proof will be on the restaurant if these accounts are selected for an audit.
Loyalty Programs
Like promotional gift cards, a restaurant usually does not receive any money or other consideration when customers join their loyalty program. The restaurant receives customer information for marketing purposes, and the customer receives points, credits or some other demarcation of value based on the volume or value of their purchases or other activities. These programs do not typically give rise to unclaimed property, but depending on the rewards offered, they may generate unclaimed property. The key issue is whether any value accrued in the program can be redeemed for cash. If that is the case, the seller may have a difficult time convincing a state that when unredeemed these items do not give rise to unclaimed property. However, most programs offer points that can be used to receive a discount on merchandise, or to receive a gift (e.g., free drink, free dessert) once enough points have been earned. In these cases, the restaurant may have a strong position that accrued points do not represent unclaimed property.
Strategies for managing a company’s reporting responsibility
Gift card program review
When considering a structure or program designed to reduce or eliminate any potential unclaimed property reporting obligations, it is important to make sure that both the planning and implementation are thoroughly vetted to avoid pitfalls and unintentionally generate state-challenges relating to the new program. This includes evaluating what information is collected at the time of issuance – whether issued in-store or through an e-commerce platform – and a restaurant’s ability to associate a purchaser’s name and address information to the unredeemed balances of the company’s gift card programs.
Annual reporting
Like all companies, restaurants have annual unclaimed property reporting obligations. To meet these requirements, restaurants can either file their own unclaimed property reports or outsource their compliance responsibility.
Catch up reporting
Sometimes, a restaurant has never reported unclaimed property, and/or has property that is past-due. Depending on the states involved and if the amounts are small, it can often be wrapped into the ongoing compliance process. However, when significant amounts are past-due, exploring voluntary settlement options may be the best solution to avoid large penalty and interest assessments or triggering an audit. This can include a formal settlement agreement with a state or participating in a state’s settlement program.
Unclaimed property regulations often require careful attention to detail by your accounting team or outside consultant. For more information on unclaimed property please reach out to your Baker Tilly representative.
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.
