Does your business issue gift cards? Do you outsource management of your gift cards to a third party or subsidiary? If so, a recent whistleblower lawsuit filed in Delaware underscores the need to carefully re-examine your gift card program or risk significant fines – up to 125 percent of unredeemed gift card balances plus three times the amount otherwise due to the state in which your company operates.
The lawsuit was unsealed recently after having been filed in June 2013 against 33 large retailers, the National Restaurant Association, and Card Compliant, Inc. The lawsuit claims that Card Compliant (and its predecessor) conspired with the other defendants to circumvent Delaware’s law that unredeemed gift card balances are to be turned over to the state as unclaimed property. State of Delaware ex rel. French v. Card Compliant, LLC, et al., N13C-06-289 (Superior Court of Delaware, New Castle).
All states have laws which govern unclaimed property, and some, like Delaware, consider the unredeemed balance of gift cards to fall within the definition of unclaimed property after a specified period of inactivity. Delaware further requires the retailer to remit the value of that balance to the state once the specified period has expired. Other states do not consider unredeemed gift card balances to be unclaimed property or don’t require it to be remitted to the state. Thus, whether or not a business is obligated to turn over those balances to the state depends entirely on which state it calls home, generally the one in which it was formed.
To ensure your business doesn’t inadvertently fall within the sights of state law enforcement due to the failure of what may otherwise seem to be a perfectly legitimate gift card program, here are a few tips to mitigate your risk:
- Review all programs which provide for the issuance of gift cards, promotional certificates, and merchandise credits to ensure they comply with your state requirements, which would generally be those of the state of your corporate formation.
- If you use a subsidiary to manage these programs, analyze its form and substance. Ensure that it operates from an independent economic standpoint and isn’t merely a shell. Ensure proper intercompany agreements are in place and all formalities are followed.
- Check if your state has a voluntary disclosure program where you can report and remit unpaid amounts which you may find are subject to the state’s unclaimed property laws. Organizations formed in Delaware have until June 30, 2014 to do so.
- If you have a business relationship with a third party service provider, review your agreements and analyze whether they require amendments to minimize your exposure to potential fines and penalties.
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