At the peak of the 2008 holiday shopping season, gift card sales are expected to again have a material impact on the financial reports of many retailers. Gift card “breakage,” or the portion of gift card balances that consumers fail to redeem for merchandise, can boost a retailer’s short-term cash flows. In the long term, gift card breakage can enhance the bottom line of the retailer — or state treasuries — depending on how the retailer’s gift card program is structured and the escheat laws of the states in which it operates.

Escheatment of gift cards creates challenges for both businesses and regulators. Reporting and compliance requirements can be consequential and can place businesses at risk. Stephen Larson, Iowa deputy treasurer and president of the National Association of Unclaimed Property Administrators (NAUPA), warns that there is “a tremendous amount of misinformation out there.” As a result, he says, “many [businesses] fail to adequately understand the reporting obligations that they have under various state provisions.” That’s because requirements are not uniform across states and some potential conflicts remain untested and thus unresolved. Based upon extrapolations of available information, Larson believes that his state, Iowa, could easily be due as much as 10 times the amount that it actually collects. Estimates such as these, he says, are driving states to “take a fresh look at how to provide clarity to firms with regard to how they can comply with applicable state laws.”

The stated purpose of escheat laws is to unite lost or abandoned property with its rightful owner. But when it comes to unclaimed gift cards, the money paid for the card is seldom united with the gift card owner, given that owner information is rarely recorded, ownership is easily transferable and it is highly unlikely that a gift card owner who fails to redeem his or her card will, in turn, take the necessary steps to trace funds to a given state and initiate a claim for reimbursement. Instead, most escheated gift card money reverts to the state’s general fund.

According to an NAUPA survey in 2006, states controlled roughly $33 billion of various unclaimed property, managed more than 117 million accounts and returned more than $1.7 billion in property. But obtaining accurate figures on how much of these amounts are attributable to gift card escheatment is difficult because reporting requirements in most states lump unclaimed gift cards with other categories of abandoned property, such as dividends, payroll checks and utility refunds. However, interviews with the directors of unclaimed property of several states suggest that the amounts escheated from gift cards are substantial. Moreover, while states seemingly are forever adjusting escheat laws, businesses are also adjusting their practices in response to those laws. As a result, companies often find themselves contending with multiple states over the same dollars.

This article has been excerpted from the Journal of Accountancy.
Read the full article here.