Gift Card Breakage and Your Bottom Line

Christmas and other end of the year holidays are popular times for present giving, and gift cards have become a popular gift for those that don't know exactly what to buy their friends and family. Predictions for 2011 and 2012 put total gift card purchases over $100 billion annually, but a significant portion (estimated $41 billion since 2005) will go unused. Both federal and state laws have done away with dormancy fees and expiration dates on gift cards. As a retailer or issuer of gift cards, how can you take advantage of the unused portion of gift cards taking into consideration the Credit Card Act and other changing state laws? From the Wall Street Journal:

The Securities and Exchange Commission allows companies to take unused gift-card money as income once they can reasonably say the card won’t be redeemed, but there’s no set time limit. Best Buy, for example, sets that level at about two years. In fiscal 2011, the electronics company recorded $53 million in income from gift-card “breakage,” or cards that are unlikely ever to be redeemed, up from $43 million a year earlier.

But some states don’t allow companies to keep unused gift-card cash. They demand that companies give the money to the state after a certain period of time to add to unclaimed-funds accounts. States claim this is a way to reunite consumers with their unspent money, but practically it’s a way for cash-strapped governments to give themselves more liquid funds. Money the state holds as unclaimed funds can be used for general purposes until someone claims it. For example, in 2008 — the most recent year for which data could be obtained — New York state collected $9.6 million in unredeemed gift cards and returned around $2,150 to the rightful owners.

Gift card issuers can structure their programs in ways that will allow them to take advantage of the SEC rules for recognizing income, while minimizing unclaimed property risks. Many states provide exemptions from reporting unused and abandoned gift cards, so long as certain requirements are met. Other states allow retailers to report only the portion representing the cost of sales, not the expected profit that would be realized if the purchase had been completed. With proper planning, the breakage from unredeemed gift cards can remain with your company and be recognized as income instead of being reported to the states.

With the recent changes in both federal and state laws, previous gift card planning strategies should be reviewed to make sure the plans still are taking advantages of income recognition and state unclaimed property exemptions.