Monday, January 14, 2008

Gift Horse Redux: The Three Year Rule!

This just in. Or rather, my controller Roxanne was just in, and placed a copy of a San Jose Mercury News Article about gift cards on my desk. Highlighted in pink was an interesting paragraph, which had caught her eagle eye: "A National Retail Federation spokesman...emphasized that unused cards without expiration dates--and by law in California that includes all store-branded cards--still can be redeemed after a retailer records them as income." (Emphasis mine.)

Records them as income? Hmmm.

This led Roxanne to the State of California's website where she found Legal Guide S-11, "FAQs and Tips on Gift Certificates and Gift Cards." (While this guide does not include the update that took effect Jan. 1, 2008, enabling consumers holding gift cards with a value of $10 or less to receive cash from retailers instead of using them for a purchase, I think it's probably safe to assume it's up to date in other respects.)

There it was!
Question 7:
Q: "Does an unredeemed gift certificate escheat to the state?" (Oh, it's a verb all right. Imagine the television show: Escheaters!)
A: "Not if it does not contain an expiration date." (Folks who write laws enjoy double negatives; they sound scarier.) "Specified tangible and intangible personal property that is held or owing in the ordinary course of business and remains unclaimed by the owner for more than three years escheats (reverts) to the state. The escheat laws do not apply to gift certificates subject to the rules discussed above." (Emphasis mine.)

So hush my mouth. As a California gift card seller, I get to enjoy Big Sur, the Golden Gate Bridge, redwood trees, and the right to book unused gift cards over the age of three as revenue, even as I wave a fond farewell from my balance sheet?

Of course we must still honor these cards--that's part of the deal here in the Golden State, where gift cards never really expire. Even after they die.

Tuesday, January 1, 2008

Son of Gift Horse

Another holiday season has come and gone, and as the dust settles, spas everywhere are toting up their gift card and gift certificate sales. I hope you had a tremendous season. My last posting elicited several requests for additional information about the particulars of gift card expiration. To top it off, I read a disturbing article that may portend the future of gift marketing for retailers in states with Escheat Law.

My last posting discussed the double edged sword that is the gift business. We are aware that about 20% of the gift cards we sell will not be redeemed. Instead, they will be thrown away with the gift wrap, tossed into drawers, or uncomfortably avoided by Cousin Midge, who would never dream of taking off her shoes, let alone her clothes, for a spa treatment. What’s not to love about that? Well, in states where you can expire Midge’s gift card, there is much to love.

In California, we lost our ability to expire gift certificates and cards in 1997. Like earthquakes and wildfires, the Undead Gift Card is just the price we pay to live in this beautiful state. And to rub it in a little more deeply, the state of California enables third-party gift sellers, such as a shopping mall that sells gift cards redeemable at its retailers, or gift marketing companies such as Spa Finder or Spa Wish, to expire their gift cards.

At moments like these, I close my eyes and picture Big Sur, or the Golden Gate Bridge on a sunny day.

Hawaii and Maine are also among the states that do not permit expiration of gift cards. (They too boast incredible scenery. Is this more than a coincidence?)

Other states have enacted laws that dictate expiration periods. Kansas and Arkansas, for example, require that gift cards remain valid for five years, which is a nice, sensible period of time that would even give Cousin Midge a chance to stumble across her long-lost gift card.

So, let’s get into this topic in a little more detail. As I alluded to last time, Escheat Law treats unused gift cards and certificates as “abandoned property” after a period of “dormancy.” And guess what happens to this woebegone abandoned property? It can be claimed by the state. How long a dormancy period must pass before Cousin Midge’s long-lost gift card is pronounced dead? It depends on your state, but usually ranges from 3 to 10 years.

(For a quick update on gift card/certificate law, state by state, visit the Consumer’s Union Website:

Abandoned property laws were originally designed to enable states to help themselves to abandoned bank accounts or unclaimed stock dividends. Perhaps recognizing that gift cards and certificates are a horse of a different color, Arizona and North Carolina are two states which have excluded gift cards and gift certificates from the abandoned property laws.

As I mentioned last time, the phenomenon of escheat-law states going after spa gift card sellers’ “abandoned property” is virtually unheard of. I say virtually, and I personally have never heard of an instance affecting a spa. But I have a feeling that will change soon. Starting in…Maine.

Why? Let’s put it this way: when was the last time you heard a state official complaining about having too much money in the government coffers? Maine has decided that it will shortly begin enforcing its existing abandoned property law to collect money from gift card selling retailers. There’s a slight twist: Maine is only going to take 60% of the value of these dormant/abandoned gift cards from those lucky companies.

One hopes that the big retailers will close ranks and lobby the heck out of other states entertaining the same idea. The laws making this possible are in place in plenty of states, but enforcement has been minimal. So what has changed? It’s a bit of a perfect storm: gift cards, which replaced cumbersome paper gift certificates with instantly updated electronic databases, are easier to track. The ease and appeal of gift cards has grown gift sales exponentially. Much of the hand-wringing about lower retail sales we’ve heard from the media during the past several holiday seasons fails to take into account the impact of gift card sales, which can’t be counted until those magic cards are converted into purchases.
Gift cards are ridiculously convenient and appeal to the time-impoverished or just-plain-unimaginative among us. Their small size makes them easy to merchandise year-round, where they appear at the point-of-sale in nearly every major retailer. Gift cards’ small size, which makes them easy to slip into a wallet, also makes them easy to lose—and that means more “abandoned” funds to tap.

Just how abandoned are these abandoned funds, anyhow? Whenever we make a sale—gift card, service or product--there are hard and soft costs associated with it. We spent a lot of money this holiday season to inspire customers to buy gift cards, from the big Client Appreciation Event that cost over $10,000, to the additional staff that we brought in to handle the additional volume during the hectic week before Christmas. Year round, we maintain gift card records in our databases, for both gifters and giftees. And we pay the people that do this reporting and accounting; we also rent, and heat, and light the office space in which these folks work.

And, oh yes, we’ve paid taxes on the money already. The IRS and the State of California considers it taxable revenue if we “have use of” the money, even though Generally Accepted Accounting Principles (GAAP) don’t let us recognize the sale on our income statement until the gift card is redeemed for a service or product. (If this confuses the heck out of you, you’re not alone. Come to our Spa Director’s Management Intensive and we’ll get you fluent in gift card program management.)

In the state of Maine, the Powers that Be must’ve heard this sort of argument and concluded that businesses can hang onto 40% of the face value of their abandoned gift cards to cover such overhead expenses. When they come to get our abandoned funds in California, I suspect they will be a bit less generous. (I can hear Arnold exulting now about the wonderful new revenue source that did not require increasing taxes.)

What’s a spa to do? Well, it’s probably time to recognize that the gift card party may soon be over in the abandoned-property states, and to start placing half your gift revenues in reserve if cash flow permits. It will take a long time to adjust—if you’re not doing this now, you really can’t go cold turkey on gift cash and still fund your current gift redemptions.

But there is something you can do in the meantime: write your state representatives and squawk. It’s so easy now, via e mail, that there’s no excuse for not chewing on your Congressman’s ear regularly. Your state has a Chamber of Commerce. Stamp your feet and yell to them too. Running a small business here is about to get harder. In California, the most business-unfriendly state in the nation, that’s nothing new.

I think it’s time to go look at some redwoods.