Gift cards! Often viewed as giveaways or as marketing ploys. You may want to think twice before you throw them into your offerings mix -- there are potential obstacles you may not have considered. Franchisors sometimes offer gift cards for their franchisees to sell, usually through programs funded by the franchise system's ad fund. The big question to consider is, once the franchise system collects the funds, what happens with the unused portion (the "breakage") of these gift cards? Are these funds kept by the franchisor? Are they turned over to the franchisee?
Many states have "escheat" statutes (the process of re-assigning legal title of unclaimed or abandoned assets to a state authority) that require these funds be turned over to the state after the passage of a prescribed period of time. The determination of which state is entitled to such funds can be complex and challenging. For example, let's suppose that the franchisor is based in one state, and the cards are sold through the franchisee located in another state, or that the franchisor sells the gift card through its website to an individual located in a different state. Which state laws apply? Which state has a legal right to make a claim for the breakage? The answer to these questions is dependent on the states involved and the statutes of those states. For purposes of this discussion, we use gift cards and gift certificates interchangeably.
Let's go through a few examples around the country. For gift cards issued in Delaware, unclaimed funds are to be remitted to the state of the owner of the card after the shorter of five years or one day after the expiration date (if there is a stated expiration date) of the gift card. If the state of the owner is unknown, the unclaimed funds become the property of the state where the card was issued (in this example, the presumption is that the card was issued in Delaware).
In California, current law prohibits expiration dates for gift cards. Furthermore, the statute on record requires that the cards may be redeemed for their cash value, or subject to replacement. Based on this statute, gift cards issued after 1997 (the effective date of the legislation) are not subject to escheat laws.
In Colorado, gift certificates that are redeemable in cash are subject to escheat laws if those funds are unclaimed for more than five years. However, if the card is redeemable for goods and services only, it is not subject to escheatlaw.
Colorado and California are two examples of states that generally do not consider gift cards to be property subject to escheat laws. There are a number of other states that do not consider gift card funds to be property, and therefore not subject to escheat laws. However, where state laws differ, the issuer would be subject to the escheat laws of the owner's domicile state.
Other states are not as clear-cut. For example, Massachusetts statutes do not permit expiration dates that are fewer than seven years from the date of issue. And gift certificates that do not clearly indicate the date of issuance and the expiration date on their face are valid in perpetuity. It is unclear, though, whether the value of the gift card is considered tangible personal property subject to escheat laws for those gift cards that are properly marked with an expiration date. If you are issuing gift cards in Massachusetts, I would recommend you consult your legal advisors and determine exactly what your obligations and/or rights are as an issuer.
On the national level, Congress passed The CARD Act in 2009, which went into effect January 1, 2011. The Act establishes mandates, where gift cards are concerned, a minimum expiration date of 5 years for gift cards and certificates, allowing certain flexibility for state statutes. The expiration date must be clearly and conspicuously stated. The Act also clearly defines the limitations on inactivity fees and under what circumstances such a fee may be imposed, including the requirement that such fees, when applicable, be clearly disclosed.
So, the correct answer just might be that these unclaimed gift card funds belong to neither the franchisor nor the franchisee, but the state in which the funds were received or where the card owner is domiciled. With this in mind, detailed records must be maintained, especially in the case of national franchisors, where the likelihood is that gift cards are being distributed throughout the U.S. In addition to keeping detailed records of such transactions for fiduciary purposes, franchisors should consult with their tax advisors or their legal advisors before establishing a gift card program to determine whether they have a fiduciary obligation to turn these funds over to the states of issue.
Conducting proper research and establishing an exhaustive record keeping system in advance will very likely save the franchisor big headaches down the road. In an environment where states are looking to fill revenue voids created by tax collection shortfalls and reduced federal subsidy, don't put your brand in jeopardy for punitive assessments based on noncompliance.
Ronald Tramazzo is a partner with Citrin Cooperman. For more information, contact Citrin Cooperman at 212-697-1000 or visit www.citrincooperman.com.
The only publication dedicated exclusively to the hottest topic in franchising - Multi-Unit and Multi-Brand Franchisees.
A unique event because it is highly influenced by its advisory board, consisting of the very best multi-unit franchisees. The board works diligently to ensure that the conference delivers on its promise of being the best platform for franchisees to learn how to grow their businesses.