Gift cards are popular gifts for the holiday season, but they come wrapped in unclaimed property, also known as escheat, risks.
“As popularity of gift cards continue to grow, businesses issuing gift cards need to be acutely aware of the unclaimed property risk that can result,” said Kendall L. Houghton, partner and co-leader of Alston & Bird’s Unclaimed Property Group. “Large corporations can benefit from designing or restructuring programs to manage their unclaimed property compliance burdens, especially as laws vary by state. If you don’t know what you’re doing, you may create a major multistate compliance headache.”
Many retailers also pair their gift card programs with loyalty or rewards programs, causing additional problems.
“We see these programs producing significant financial benefits to our clients, but sloppy design and implementation of such gift card and loyalty/rewards/incentives programs may have an unanticipated consequences,” she said.
Based on audits of retailers and other card issuers, some states are advocating that promotional instruments may be subject to escheat laws, which puts an issuer at risk to pay the state cash for programs that were given to customers free of charge.
“These sorts of traps for the unwary are a real concern and issuers need to consult sophisticated professionals before exposures to build a material degree,” said Houghton.
Houghton offered advice on how to mitigate risk: “To the extent that a gift card issuer has had a gift card program for several years, they also need to be aware of state unclaimed property or escheat laws, which might require unredeemed balances to be reported to a given state. This is an area where some planning may be implemented to streamline and optimize the application of state unclaimed property laws to unredeemed gift cards and issuers should understand the potential risks and benefits of this type of planning, if they intend to generate significant sales of gift cards during and after this holiday season.”
According to Houghton, businesses facing problems with exemption laws should consult with advisors who specialize in this area of law.
“The good news is that these risks can be effectively managed, if not completely eliminated, through implementation of an effective compliance program and strong internal controls,” she said.
Some gift card issuers have adopted what Houghton calls a “constant contact” model of interacting with card holders and customer base, creating frequent and regular contact through apps.
“The fact that the customer has visibility into his or her account and the gift card balance, and is effectively encouraged to redeem the balance, results in very few gift card balances becoming dormant and therefore potentially subject to reporting and remittance to a state,” explained Houghton.