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Flourish in a Flash: Gift Card Escheatment Basics

Updated: Aug 22, 2019

Episode Transcript

Please note: Transcripts are computer generated.

Intro [00:00:04] You're listening to the Flourish in a Flash Podcast with the Flourish team Dez Holly Kristen and Erika.

Kristen [00:00:18] Hello everybody and welcome to another episode of flash in a flash. Today we have a riveting topic for all of you. We are going to be talking about escheatment.

Kristen [00:00:29] So we have the whole team here.

Kristen [00:00:30] And there was a recent article published about Overstock who is one of I think the last merchants to kind of go through a lawsuit that was leveled against a lot of merchants back in 2014 and there oh the state of Delaware quite a large sum of money. So we thought we would kind of use this episode to talk a little bit about this about a treatment and what is it. Why why does it matter and why you should be paying closer attention to your escheatment practices if you are a brand who has a gift card.

Holly [00:01:03] Yep I think a good place to start is with breakage because that's basically where this is all going to begin. And so breakage for merchants specifically is essentially the unused funds on a gift card.

Holly [00:01:21] So a lot of people seem to think that's a good thing for a retailer. And we're here to tell you it is not retailers hate when you do not come in and used your gift card. Why? Because of things like escheatment. So I thought we'd start with breakage. Walk into a little bit about what a sheet it is where it applies maybe where you've seen it apply and then we can talk a little bit about what's going on and why it's so difficult with gift card. Yeah go ahead.

Kristen [00:01:56] Well I was just going to say so to kind of just explain a little bit about what escheatment is and it's you know it's one of those concepts where it's essentially abandoned property. So the gift gift cards are issued by an entity that is registered within a certain state and that state will claim that certain funds remaining on the gift card after a certain period of time is their property because it's considered abandoned by the customer. So one of the things that you have to pay careful attention to is that if you're not capturing the information of where the customer resides the default of what state those funds get sheeted to goes to the state where your cards are issued from that to you from what you know the entity that you're red the company is registered and gosh this is confusing. So it's the the issuing entity and where they're incorporated essentially. That's a good way to summarize it.

Holly [00:02:53] So for instance if you're a company based in Illinois and so let's say you're a retailer based in Illinois and you do not know that Kristen who lives in Seattle Washington is the one holding the gift card. Then the law defaults to the state of Illinois's laws. It doesn't then apply to whatever the state of Washington would dictate. So for a lot of merchants they'll set up their gift cards. In advantageous states or where escheatment does not apply. Or the laws are a little easier on the merchant. So I mean basically it's all about. You know. escheatment laws basically determine. When. How. And under which circumstances a business must turnover.

Holly [00:03:39] And the turning over of funds is called escheating. So. When the business must escheamt the unclaimed property to the State Government not the federal government the state government. And that's what makes this so complex.

Kristen [00:03:53] And that's a really good point because the treatment laws are determined at the state level there is no universally applied federal law other than the fact that the CARD Act in 2010 stated that gift cards can no longer expire other than within very specific circumstances. But now you have to kind of go by the state laws and they all differ.

Kristen [00:04:17] And so it's just so much fun keeping track of you know what New Jersey is doing this week and you know certain states that are particularly difficult when it comes to this particular topic. So it's definitely something that is a moving target constantly changing and states are constantly re-evaluating what there is treatment laws are and when that timeframe is that they can consider property abandoned that they can then claim those funds back for their revenue.

Holly [00:04:45] You know a good generalization I would say in terms of that timeframe Kristen just mentioned is about two to five years is what we see in a lot of states are actually making that earlier. There's some new accounting best practices that came out this year that I think a lot of you're going to start to see it turn more like two years being the overwhelming timeframe that merchants use. And say like. If a gift card does not walk back in in two years. O if there is even a dollar twenty five left on that gift. Hard. After two years. Then. You should be able to claim that monetary value. Per unclaimed property laws. Or escheatment laws.

Dez [00:05:30] Well to clarify and to a throw of another kind of thing into that whole mix. So. We're saying a escheatment can start as early as about two years right now. And also. Gift cards can't expire. So there's this whole. Other area of. What happens if funds have been escheated. And then someone walks in. With a gift card. Three years later.

Holly [00:05:55] Yeah. Great point.

Kristen [00:05:59] So technically the merchant has to honor that gift card even if they've already is cheated the funds to the state. So it gets to be an accounting nightmare really to try to keep track of gift cards that are used after money has already been cheated. And how you reclaim that money back from the state saying hey you know Dez walked back in to Sephora after support a has already as she did the money on her gift card you know five years later to use it. I need that money back you know. So it's quite a process and it's a big undertaking to just manage all of the moving pieces involved with it.

Holly [00:06:40] And it should be noted none of us are lawyers by the way so you definitely want to talk to a lawyer about a whole book. But it is. I mean it. These are sort of the high level basic principles of what a sheet it is about. And the difficulties that they really. Mean these laws cause. One thing that I know we always preach on this podcast is. Let's use data. Let's dig in and see who our customers are. And. You'll see. Retailers can avoiding that. Because. The legal and accounting on this is so complex. It's almost. Easier to not know. Who. Is actually in the and holding those funds. Because it doesn't matter if I Holly bought Dez. A gift card. I may not be the rightful. Owner of that property. So. You can even trace it back to the bite. There. It has to be with. Whomever. The gift card. Sits with. So. It's. You know I mean the laws are the laws are clear state by state.

Holly [00:07:44] They are. The problem is. That they are all different. And. So you have to really be on top of. You know. The way that each state is legislating. And to that point I think it was two years ago. Illinois was redoing some of their unclaimed property laws. And the terminology they were using was actually. Contradictory because people don't understand our industry. So they were saying you know and I can't remember anymore because. It's. A bit of a non-issue now. But. They were just using the wrong terminology. So if you were in the business you're like that actually doesn't track. So that's the other thing you know people who don't understand the industry. Creating these laws which I know happens. In a lot of industry cases of course. But. In. Our terminology. Like we've said is is not exactly consistent. So. You hope that these laws are. As clear as possible and not up for debate. Because. You know if I say the term stored value.

Holly [00:08:45] You know does that mean the same thing to you as prepaid. Does it mean the same thing as gift card. It may not to different people. But we do use those terms interchangeably. And for anyone who's not in. The industry it can be very confusing. So let's just add more confusion. There you go.

Kristen [00:09:05] It's so true. It really is an important distinction to make. And just really important you know it seems like we're getting really into the weeds and into the nitty gritty.

Kristen [00:09:15] But unfortunately when it comes to this you have to. And it's one of those things you just cannot avoid. So it is really important to make sure that you're staying on top of all of this and being super clear about your language and even on your terms and conditions on the back of your gift card. You know when when you're when you're selling a gift card to a consumer making sure that there's really clear language on there about the issuing entity and that you know they can transfer the escheatment responsibility based on the issuing entity and there's just a lot of nuance there. So it is it is quite complicated and certainly. Something that you want to get some professional help. In in making sure you're doing everything. To the letter of the law.

Holly [00:09:58] Exactly. So while we usually do talk about all the fun things that come with gift card there is it is a very complex product. And I think it's something that anyone on this podcast right now or anyone listening who deals with gift cards would say it is a shockingly complex products. If you had no idea how much nuance went into it until you were in the thick of it.

Erika [00:10:21] You know even being introduced to it like I'm like I I've mentioned before like I'm really new to the industry and I just thought you know gift cards. That's going to be a fun topic. Easy you show up to the store you buy a card. Great job done for. The store because they're getting more business. Easy for me because it makes it convenient. And now that I'm getting into the nitty gritty of all these details of what really is included in this industry. Wow I wow I I never thought about it that in depth before but it's a lot more complicated than one would think walking into a store and getting a gift card.

Kristen [00:10:58] Absolutely.

Kristen [00:10:59] You know and so the original action kind of just to give you a scope of this problem that you know it's not just these small brands who are having trouble kind of keeping track of the escheatment laws and the ever changing state by state regulation you know action was brought against some pretty major retailers from that lawsuit back in 2014. You know brands that include you know like Apple and Shutterfly and Overstock as we've talked about.

Kristen [00:11:26] You know CPK Netflix. So these are some pretty big brands that you know we're all part of that original lawsuit that was brought against them for these escheatment practices. And so the one that was recently in the news was Overstock because they're finally settling. What was it it was like seven million No. I don't remember exactly what the amount was. Holly is nodding so I think seven million dollars though Overstock was ordered to pay Delaware for for damages according to this. And the nuance here but it's really interesting that it was because Overstock was saying that they were issuing their cards out of an entity based in Ohio who does not have any escheatment requirements but they never fully did all the steps required to transfer that liability over. So they were technically still it was sort of tied to the state of Delaware which is what's making this headline news at least in our world at the moment.

Kristen [00:12:30] So it's it's very interesting just kind of the nuance like you've got to make sure even if you put certain practices in place you follow all the way through so that you can claim whatever state you're hoping is really that what you're shooting to is where you actually are and the liability has been fully transferred.

Holly [00:12:50] So and the thing escheatment is it's you know these lawsuits it's not like any of these retailers were being malicious or purposefully deceitful. It's that it was incredibly confusing. It just really is. And that's kind of that's the problem. I mean and that's why you know you you'll get a gift card and if you don't register it to an account no one. That's why you can't go in and say oh I lost my gift card because they don't know that you actually had it right. I mean it's like if you lost 20 bucks and walked into my store said I lost 20 dollars over there can I get that back. No. You know if you have to treat gift cards like cash as a consumer and as a retailer you have to weigh what is important to you in terms of data you're going to collect. Understanding your customer journey and how can you practically and accurately manage the accounting and the legal that goes with a gift card program.

Kristen [00:13:56] Yeah I mean the accounting and legal is a huge part of it. Right. And that's that's part of what got overstock in trouble and all these other merchants in trouble. So yeah making sure that you're fully on top of all of those details is just supercritical we can't stress that enough.

Kristen [00:14:11] So it is very interesting I think this is probably the last one in that bunch. That. Was originally brought to task by Delaware back in 2014 so I'm not sure if we've heard any new cases per say other than this one just kind of wrapping up from several years back but. It's all very interesting stuff and just something that we always like to stress to make sure you're on top of it.

Kristen [00:14:37] So I would say you know if I were to kind of with the major things and you know that I want people to take away you know one make sure that the terms and conditions when you're issuing the card in the first place are super clear and give you the ability as the merchant to kind of transfer that liability between your legal entities so that if you do want to change the issuing state you can do that. So that's kind of number one. Number two if you are collecting data of where those where those customers are who are holding your gift cards and they have remaining funds you know you really need to be on top of tracking that on the state level and making sure that you are kind of following all those those state laws and getting legal help to help you with these things getting a professional know legal attorney from accounting firm to kind of help you manage all of these things because it is just so nuanced and you just have to make sure that you are doing everything by the letter of the law it is changing all the time so you know we go to conferences where there's legal updates which are always super exciting sessions but they actually really are very interesting from the standpoint of like just learning what's going on you know which state is is reviewing their escheatment laws and maybe considering a change that we know to tell our clients to be on the lookout for that.

Kristen [00:16:00] And you know those are just those are kind of a handful of things to make sure that you're paying attention to if you are the manager of a gift card program on behalf of a brand. So that would be my actionable feedback for you.

Erika [00:16:16] So I actually have a question. How would escheatment when applied to gift cards that deduct a fee monthly for example like I use the card it was actually a Visa card so maybe it doesn't pertain to this but I noticed that they they removed like five dollars a month since I wasn't using it.

Kristen [00:16:33] Yes that's an important distinction between an open loop gift card and a closed loop gift card. So an open gift card are those that can be sent Mastercard Amex where it is issued by a credit card company and rides credit card rails essentially and you can use it at any store. So they're basically accepted anywhere that particular network is accepted. So those are considered open loop cards and those are allowed to charge a inactivity fee. And that inactivity fee that you refer to as I like to do dollar and 50 cent charge is actually considered revenue for that issuer. So Visa or MasterCard. In those use cases. So once it gets down to a certain point as far as like number of years of inactivity they still apply to the same sheet metal laws. It's just that up until that point the merchant is allowed or that issuer is allowed to fee down that card for inactivity fees and count that as revenue. The difference being what we're mostly talking about in the rest of this episode is closed loop cards. So those are cards where they are issued by the merchant and they can only be used at that merchants location for their goods or services. So that's kind of an important distinction to make between those two things.

Erika [00:17:53] Interesting.

Dez [00:17:57] One other question. I was thinking since we work with e commerce law and kind of smaller merchants. Is there any sort of threshold that we've seen in terms of a shipment like if I'm only doing five thousand a year and gift card sales. And only have like maybe a thousand that are two years old and need to be a. Is that something I need to be concerned.

Kristen [00:18:18] Yes it is still something you need to be concerned with. To my knowledge and again I'm not an attorney and these things change all the time. So caveat caveat caveat but they are they are still subject to a shipment laws and they still need to follow the individual states escheatment requirements so it doesn't really matter if you're only doing five thousand or five million you still have to follow the escheatment laws. And one other thing to note and this is just something that is kind of a unique law that you might not have known about otherwise but is kind of managed on a state level not the federal level is that certain states can require that you allow customers to get the cash off of their card once the card balance dips below a certain dollar threshold that threshold changes by state.

Kristen [00:19:07] So I can't give you a hard and fast blanket but typically the upper hand is 10 dollars for most states. I think California's probably the most prominent one. That says if the value of the gift card is less than 10 dollars you need to allow the customer to get cash off of that card and basically zero out the card. This includes both in-store and online calzone electronic or physical cards. So even if you are an online retailer that only allows you gift cards to be redeemed online you still need to allow customers the ability to request those remaining funds back. So you need to have a process in place to either issue them a check or something else. I know it's kind of cumbersome and very old school but that is often the best solution for a lot of merchants and it is something to really be paying attention to because California in particular is one of those states that will test you on this and they will call you and see. You and tell you they've got the gift card that has less than 10 dollars and they want their cash and you have to sell them. Absolutely. I will proxies that for you. Here's here's what's gonna happen. So make sure that you have that practice in place or how to deal with those situations.

Holly [00:20:21] Yes. And I mean to that point. Hawaii just two weeks ago issued a new law saying that Hawaiian merchants need to refund customers cash for gift card balances. Less than five dollars. So that's pretty interesting. . What is even more interesting is that the representative whom they interviewed a lot about this particular new law actually does not have an understanding of how how this works. They don't understand that like we were saying. Merchants don't actually get to keep the money. He even says in a couple of articles. That he thinks they get to things like No that's not how breakage works. There are escheatment laws. So it's kind of funny it's almost like this law was made without knowledge of escheatment practices in Hawaii. That's the way a lot of these are read to me.

Kristen [00:21:18] Yeah well and in that particular article I think they were saying that they wanted to allow Hawaiian residents to get the low balances off those cards that they can use the use that money out on island instead of going to the to the lower 48 or whatever to to use those funds. But you're right. Here's the big point in the article is oh these. The other 48 states are reaping all the benefit from these abandoned gift cards with these low balances. And you're right. Holiday like that's not necessarily the case. So definitely something to pay attention to.

Dez [00:21:54] Well I think to that point. Also when we talk about breakage and things like that there are ways that merchants can combat breakage before it happens by pushing people to check their drawers to look in their wallets see if they have a gift card you know have those reminders and have those pushes beyond just holiday you know holidays pretty frequent where after Christmas happens it's hey spend that gift card but what about the other month remind people that they have those gift cards to spend. And I think simple messaging can help combat you know at least a pretty. Pretty big percentage. Of this issue.

Holly [00:22:33] So on that happy note everybody. Well it is a lot to manage. There are services out there you can always reach out to us and we can talk about those. But you know learn as much as you can about it and stay on top of it. And Kristen's three steps are perfect. They're great places to start. So if you do want to learn more you know reach out to us on the Web site. Otherwise we will see you guys all on the next flourish in a flash.

Outro [00:23:05] Flourish in a flash is produced by Kane each connection a branded currency consulting firm. You can learn more about K+H at and you can always find out more about flourish and the flourish conference at Or follow us on all of our socials on Twitter Facebook and LinkedIn. It's @flourishcon and on Instagram it's at flourish_con.

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