The Impact of Gift Cards on Companies: Navigating Unclaimed Property Reporting

Gift cards have become a cornerstone of modern retail and corporate gifting practices. They provide businesses with an effective strategy to boost sales and enhance customer loyalty, and offer flexible gifting options that appeal to a wide audience. However, with the evolution of unclaimed property reporting, as well as significant regulatory changes, companies need to understand these developments to remain in compliance. 

Unclaimed property laws exist to protect consumers and ensure that unredeemed gift card balances are appropriately reported and remitted to the state. This typically occurs after a defined dormancy period, which varies by jurisdiction. While several states have exemptions from escheatment related to gift cards and other similar instruments, the last few years have resulted in signification changes to this area. With the landscape shifting in 2024, numerous states implemented stricter enforcement measures and revised reporting protocols, resulting in a more challenging compliance environment for companies. Key changes include enhanced self-audit programs, new reporting deadlines, and increased scrutiny and examinations. States introduced rigorous self-audit programs that require businesses to diligently review their records and report any unclaimed property proactively.  

Complexities in Escheatment for Gift Cards 

The complexities in accounting for gift cards, particularly in relation to unclaimed property reporting, arise from several factors: 

1. Unclaimed property regulations fall to each state and while some states have adopted National Association of Unclaimed Property Administrator (NAUPA) standards for property codes and dormancy periods, many have not, resulting in varying definitions and nuances.  
2. When gift cards are not redeemed, the remaining balance may be considered unclaimed property. Companies must track these balances and report them to the state after a certain dormancy period, which varies by jurisdiction. 
3. States may have narrow definitions for gift certificates, gift cards, stored value cards, etc. and escheatment requirements can differ by state. Common variables that are considered include expiration dates, cash value, fees, ability to replenish, and ability of use at third-party retailers.  
4. Some states exempt gift cards from escheatment if they meet certain criteria, such as those variables mentioned above. Other states offer partial escheatment where a portion of the gift card value is allowed to be retained by the holder. 

This variable landscape means that businesses must stay up-to-date on state-specific regulations to remain in compliance.  Non-compliance with unclaimed property laws can also lead to audits and penalties. Companies should maintain accurate records and implement robust tracking systems to mitigate these risks.  These factors make the accounting for gift cards a detailed and nuanced process, requiring careful attention to regulatory changes and diligent recordkeeping. 

Enforcement Uptick 

Companies that fail to comply with these audits may face state examinations, substantial fines, or even legal repercussions. The gift card industry is currently seeing increased scrutiny by states, including:  

1. Increased Enforcement: States have been ramping up their enforcement of unclaimed property laws, particularly targeting companies with significant gift card sales.  
2. Multistate Audits: Many states conduct multistate audits, often managed by third-party audit firms. These audits can be extensive and cover multiple years.  
3. Self-Audit Programs: States have implemented self-audit programs, requiring companies to proactively review and report unclaimed property. Non-compliance can lead to state examinations and potential penalties. 

The Impact of Legislation, Regulation, and Litigation 

The ever-evolving landscape of unclaimed property legislation at the state level has added to the complexity of escheatment. For example, in 2024 Idaho passed Idaho H.B. 471, eliminating the $50 de minimis exemption and instead allowing exemption for gift cards that do not expire or impose fees.   

Businesses also need to adapt their accounting practices to comply with recent fraud prevention legislation and regulation and should be aware of existing cash-back laws.  Since some states unclaimed property gift card exemptions apply only to cards that are not redeemable for cash, except where required by state law, changes in company policies could result in unclaimed property risk in states with no or lower cash-back requirements. 

Litigation has also had significant impact on unclaimed property.  This can be seen in the $36M settlement of H&M with the State of New York for unlawfully keeping millions of dollars in unused gift card funds and the landmark ruling by the U.S. Supreme Court in 2023 on Delaware v. Pennsylvania and Wisconsin.  This case transformed the unclaimed property landscape, creating new precedents for businesses handling financial instruments. The Court ruled that specific financial instruments, such as MoneyGram's agent checks and teller's checks, need to be escheated to the state of purchase rather than the state of incorporation. The ripple effect of this ruling has critical implications.  We can expect other states to challenge each other over the right to escheat various types of property. A common example is the ongoing disagreement over where gift cards should be escheated. For companies, especially those involved with gift cards and related products, the implications are clear: Unclaimed gift card balances may need to be reported to the state where the card was purchased, rather than the company's state of incorporation. This shift would necessitate a comprehensive overhaul of existing reporting systems, placing additional responsibilities on companies to accurately track the point of purchase for their financial instruments. To navigate these regulatory changes effectively, companies should adopt a multi-faceted approach.  It is not uncommon for companies to outsource these efforts to stay up-to-date and regularly review state-specific unclaimed property laws and reporting requirements in order to gain valuable insights and updates on best practices. For companies that identify gaps in their compliance history, exploring voluntary disclosure programs offered by various states can be an effective strategy. These programs allow businesses to disclose non-compliance issues and may mitigate the impact of penalties or interest charges linked to past infractions. 

Conclusion 

The sweeping changes in unclaimed property regulations, coupled with recent litigation including the groundbreaking Supreme Court ruling noted above, emphasize the growing importance of proactive compliance and sound financial management for companies utilizing gift cards. By remaining informed about new regulations and adopting best practices for recordkeeping and reporting, businesses can successfully navigate these shifts. In doing so, they are able to continue to reap the benefits of gift cards while adhering to stringent state regulations. Proactively addressing these challenges strengthens a company’s operational integrity.