Six keys to managing gift card escheatment risk

Gift cards are more than a customer engagement tool. For issuers, they can also create complex unclaimed property compliance and accounting obligations. When a gift card, gift certificate or similar stored-value product remains unused, the remaining balance may be subject to state escheatment rules.

Effective compliance starts with a few simple questions: Which state has jurisdiction? Does the product qualify for an exemption? What amount, if any, must be reported? Can the company's records support the position taken if challenged by a state?

The following six keys can help companies that issue gift cards assess exposure, strengthen processes and reduce audit risk.

1. Start with the priority rules

The first step is determining which state has jurisdiction over the potential unclaimed property obligation. In general, unclaimed property is reportable first to the state of the owner's last known address, as reflected in the holder's books and records. If no address is available, the property is generally reportable to the holder's state of corporate domicile, such as the state of incorporation or formation.

This matters for gift card programs because many issuers do not collect address information at purchase or redemption. When no owner address exists, unused balances may default to the issuer's state of domicile, where the applicable rules may be more or less favorable than the rules in states where cards are sold or used.

2. Know the laws that apply to your specific program

Gift card rules are highly state-specific. A product that is exempt or treated favorably in one state may be reportable in another. Companies should analyze both the legal definitions and the operational features of the program, including:

• Is the product labeled a gift card, gift certificate, stored-value card or another type of instrument?
• Does the card expire or is it subject to dormancy, service or administrative fees?
• Can the card be exchanged for cash, reloaded or used with unaffiliated merchants?
• Is the card issued in physical, digital, promotional, loyalty or co-branded form?

Many states exempt certain gift cards from escheatment, most often in cases where the card does not expire and is not subject to dormancy fees. Some states also allow partial-reporting or deduction rules that permit a holder to retain a portion of the unused value. These positions should be documented carefully. A reporting exemption may eliminate the obligation to remit funds to a state, but it does not necessarily eliminate the company's obligation to honor the card for the customer.

3. Establish a repeatable compliance process

After identifying exposure and applicable reporting jurisdictions, companies should build a process for tracking, aging, reviewing and reporting gift card balances. A strong process maps the system data needed for reporting; and documents the assumptions used to support each filing decision.

Companies that discover past-due amounts should also evaluate whether voluntary disclosure programs or similar state resolution options are available. These programs may provide a way to come forward and resolve prior-year liabilities while reducing or eliminating potential interest and penalty assessments.

4. Identify and monitor audit risk

Gift card compliance is not a one-time exercise. States continue to revise unclaimed property statutes, enforcement positions and audit practices. At the same time, issuers frequently update gift card programs through new platforms, digital wallets, third-party distribution, promotional campaigns and co-branded products.

Companies should periodically reassess whether existing exemptions still apply and whether records are sufficient to defend the company's position during an audit. Useful questions include:

• If an exemption was changed or narrowed, could the company quantify prior-year exposure?
• Do systems retain the issue date, activity history, redemption data, fee history and owner address information needed to support the reporting position?
• Would the company be prepared for an audit lookback period of 10 report years or more?

5. Look beneath the balance before reporting

When preparing unclaimed property reports, it is important to understand the nature of the amounts being reviewed. Not every unused balance represents the same obligation. Promotional cards, customer accommodations, loyalty awards, rebates, employee incentives and marketing credits may require separate analysis.

A deeper review can help prevent both over-reporting and under-reporting, while also creating a more consistent approach across a company’s product offerings.

6. Work with specialists before changing strategy

Some companies may be able to structure gift card programs in a way that makes use of available exemptions or more favorable state rules. However, any change intended to reduce unclaimed property reporting obligations should be evaluated carefully before implementation.

Gift card escheatment sits at the intersection of customer experience, accounting, tax, legal and state unclaimed property law. Specialized advisors can help evaluate product terms, systems, record retention, reporting positions, voluntary disclosure options and audit defense strategies.

Next steps

If you would like to learn more, please contact any member of the Baker Tilly Unclaimed Property Management Team to discuss gift card escheatment, asset recovery, or other unclaimed property developments that may affect your company.