Gift Card Planning
Presented by:
Michelle André
Jamie Ryan
Tre Towers Advisory Group, LLC Bailey Cavalieri LLC Managing Member Partner
(703) 222-5010 (614) 229-3247
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service. The content represents the opinions of the author and not necessarily those of
UPPO. This information is not intended as legal advice and should not be used to
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Today’s Agenda
• Gift Card Background
• Delaware ex. rel. French v. Card
Compliant, LLC
• Best Practices
• Conversion to First Rule
• ULC Uniform Unclaimed Property Act
Revision – Gift Cards
Gift Card Background
• Early 2000s
– $25 billion market
– Minimal online gift card sales – Breakage estimated at 12%
– Limited ability to connect purchaser – Limited number of state exemptions – Expiration dates
Gift Card Background
• 2013
– $118 billion market
– E-gifting $4 billion; projected to be $10 billion in 2016
– Breakage expected at 1% – Card Act
• Expiration Dates • Fees
– Greater ability to connect purchaser – 30+ states have exemptions
Card Compliant Suit
• Qui Tam Action – Whistleblower lawsuit
• June 28, 2013 complaint filed in state
court by a former Card Compliant
employee
• Defendants - 25+ companies and Card
Compliant
Card Compliant Suit, cont’d
• Defendants file to move case to federal
district court
• December 10, 2014 federal district court
ordered case remanded to state court –
stating “the claims arise under state law”
and the federal “court lacks subject
Card Compliant Suit, cont’d
• Facts
– Delaware incorporated/organized companies
– Card Services Agreement:
• Card Compliant
– Assumed liability for unredeemed gift cards – Issuer of new cards
– Trademark Licensing Agreement – Handling fees
Card Compliant Suit, cont’d
• Complaint
– Defendants schemed to deprive Delaware of hundred of millions in unclaimed property – Defendants executed agreements whose
only purpose was to illegally evade the unclaimed property laws
– The Delaware retailers were always the “holders” of the unused value
– Defendants intentionally failed to report and remit unclaimed property to Delaware
Card Compliant Suit, cont’d
• Defendants’ Arguments
– Delaware must first establish its jurisdiction to escheat under federal common law
– Any escheat liability rests with the card issuers, not the retailers
– The card issuers are solely or primarily obligated under the agreement
– The card issuers are not domiciled in
Delaware; therefore, Delaware does not have jurisdiction
Card Compliant Suit, cont’d
• Defendants’ Arguments, cont’d
– Defendants cannot be forced to escheat money for gift cards only redeemable in goods or services
– Delaware False Claims and Reporting Act
• Presently, existing, liquidated obligations
• Property actually belongs to the government • Delaware issued receipt or certificate
• False records or statements made by defendants
Issues/Concerns
• Who is the holder?
• Can businesses structure their affairs to
take advantage of favorable unclaimed
property laws?
• Can states invalidate transactions
previously determined to be valid?
• What level of economic benefit is
necessary to create a valid business
transaction?
Best Practices
Business structure needs to incorporate
(1) on third party agreements with a
company such as Card Compliant or (2)
intercompany agreements with GCS:
– Activation Agreement
– Employment Agreements – Service Agreements
– Investment Management Agreement
Accounting/journal entries must reflect the contracts
Best Practices
What contracts are necessary?
1. Procedure Manual
2. Assignment of non-dormant unredeemed balances between Parent and GCS/Third Party Provider
3. Administrative Services Agreement 4. Sublicense Agreement for IP
5. Employee Lease Agreement 6. Gift Card Terms and Conditions 7. Consignment Agreement
Best Practices
Failing to document services being performed
for a GCS or not charging the GCS fees for
services being performed would raise a red
flag for an auditor.
Best Practices
Make sure IC and Third Party Provider Agreements match actual practice:
• Ensure that the accounting entries match what the IC and Third Party Provider Agreements provide;
• GCS must actually hold the liability for unredeemed and outstanding GC and MC balances on its books;
• GCS employees actually work on GCS duties
• Use transfer pricing study to determine if the intercompany fees charged are commercially reasonable.
Conversion to First Rule
Primary and Secondary Rules:
• Under the Primary Rule, the law of the state of the true owner’s last known address determines whether the unredeemed balance of the GC constitutes unclaimed property. Thus, if the Issuer collects and maintains the GC user’s last known address, the law of the GC user’s last known address determines whether the unredeemed balance of the GC is subject to escheat.
• On the other hand, if the Issuer does not collect the name and address of the GC user, the unredeemed balance of the GC is subject to the
Secondary Rule. The Secondary Rule looks to the law of the state of the GC issuer’s domicile in order to determine if the unredeemed balance of the GC is subject to escheat.
Conversion to First Rule
Currently, with the collection of customer information at the Point of Sale, retailers often know the name and address of the user of a GC.
Knowing this information means any property that is unclaimed will escheat under the Primary or First Escheat Rule.
Risk
Breakage: GC’s and MC’s unredeemed balances are liabilities that would always continue to grow, distorting balance sheets of retailers. Therefore, accounting protocols require the liability to be relieved (i.e., eliminated) when it becomes unlikely that it will be claimed. When the GC/MC
Conversion to First Rule
– All breakage under the Secondary Rule becomes income if the GCS is organized in a state that exempts GC/MC’s from escheat.
– Breakage income is important to retailers, worth hundreds of millions of dollars.
Conversion to First Rule
Knowing the name and address of customers is not a bad thing!
Not all breakage income will be lost.
First, 37 of 52 jurisdictions exempt gift cards from escheat. 29 of 52 jurisdictions exempt merchandise credits.
Second, many of the states that require escheat of MC’s and GC’s allow a 40% margin discount to reflect the retailer’s
profitability on merchandise.
Result: Approximately 75% of breakage income will be retained.
Conversion to First Rule
The amount of lost breakage can be further lessened by:
1. Maintaining contact with customer via email by using the information obtained.
2. Determining through contact with customer if the
customer still owns the gift card or if it has been given away (thus becoming Secondary Rule Property and returning to breakage income).
