By William A. Raabe (Co-Editor, South-Western Federal Taxation Series).
It can be difficult to shop for certain people at Christmas. It can be difficult to shop for some people at Christmas. According to the National Retail Foundation, a gift card is the most requested gift every holiday season for a decade. Surely, each of your students has received or given one.
Gift cards are a popular choice for retailers because the gift card holder almost always spends more than the gift certificate amount when they visit the store. A large percentage of gift cards are never used, so the retailer (and most likely the gift card broker), receives an upfront cash injection to finance inventory and compensation.
Gift cards worth $150 billion are bought each year. Most of these gift cards are used for restaurants, departmental stores, and coffee shops. Amazon and other e-tailers promote gift cards as a way for regular users to spend more on gift-giving. Unused gift cards are recorded by the issuer as a book liability until they are used. The retailer then recognizes the revenue.
Perhaps $5 billion worth of gift cards purchased within a single year will never be used. They may get lost or thrown away in a drawer. The default period for most states is five years. After that, it is assumed that the card won’t be used. The default period ends and the unclaimed funds are “escheated” to the state that created the retailer.
Uncashed paychecks, unclaimed proceeds from insurance, rebates/refunds, legal settlements that remain unspeakable for, and bank accounts that have been “staled” due to non-use are all examples of “unclaimed property receipts” for the state. Some states have a list of unclaimed property on their websites. This list alerts consumers to the existence of unclaimed property and includes the tagline “If you are on this list, contact state, you might get some money coming your direction.” A national database facilitates consumers’ claims.
If the consumer doesn’t claim the funds, the state will permanently revert any funds that the government has collected from the bank, retailer, etc. This post was written by the author who found his name on one such list after he failed to claim a refund for a cancelled software subscription. Your students might have made the same discovery. It is similar to finding $20 in an old jacket’s pocket.
This non-tax revenue is an important budget-hole-fix in many states. If the state can reasonably predict the gift-card “defaults”, it can insert that amount prospectively into its budget revenues. Numerous research firms provide data to the state and others on making such forecasts.
Delaware has had great success in identifying unclaimed assets that may be available for budget purposes. It is the state with the highest number of incorporations of large US companies, especially legacy retailers and banks. Unclaimed property collections account for about ten percent of the annual state budget proceeds, even though the state alerts consumers to the possibility of their recovery.
Other states are trying to maximize this revenue source: some are changing their escheat laws to shorten the default-uncollectible period, and to broaden the number and types of transactions that qualify for state takeovers, eg as to unclaimed cryptocurrencies, digital subscriptions, and electronic pay plans.
States will be more focused on finding new sources for escheat revenues in the future. They will also dedicate (like Delaware) financial resources and personnel to identifying and processing escheated properties claims. Unclaimed property will face more legal problems in the future. Why should a Starbucks card that was not used, which was purchased in Nebraska, be part of Washington State’s infrastructure budget?
Businesses are changing gift card agreements and working to amend state laws. Interpreting existing law so that any balances left over can be kept by them instead of being transferred to state, is another example. These new revenues can be used to finance capital budgets and operations, as well to increase earnings per share and stock price.
Consumer activists could force states to do more to locate those who claim the escheated property and to facilitate their recovery. It is their money, not the state’s. It is important to monitor the moral hazard of the state managing these funds correctly.
Is the escheated system of property a stat?