Breakage or Escheatment? Making Sense of Unused Gift Card Data

Gift cards are the number one most requested present during the holiday season and nearly 20% of all gift cards are purchased during the winter holidays.  As the weather begins to cool and the holidays approach, it’s more important than ever for retailers and restauranteurs to make sure that their gift card strategy is ready for the busy season.

Gift certificates and gift cards are a great way to encourage sales from current customers and generate new business.  Their purchases also come with significant uplift, as 72 percent of customers spend more than the value of their gift card when it is used.  This is because customers using gift cards are less price-sensitive when they’re not spending “their own money.”  Additionally, when redeeming a gift card, 25% of shoppers purchased an item they had not planned to buy, 8% bought a more expensive version of an item they had already planned to buy, and 11% of gift card shoppers are visiting a new business for the first time. 

However, contrary to popular belief, revenue from a gift card sale is not actually considered income until a consumer has redeemed the card or the seller declares the card as “unused.”  Because of this, many states specifically legislate when a card can be considered abandoned property and if/when businesses are required to escheat these funds to the state. 

Breakage, Escheat Laws, and Uplift (Oh My!)

For merchants, the benefits of gift cards or gift certificates are obvious: immediate cash flow and a compelling reason for the consumer or the consumer’s giftee to return to your store or restaurant.  Historically, companies could also benefit from the “free money” gained from unredeemed gift cards.  This windfall is known as breakage. However, unused gift cards can become a source of liability because of differing unclaimed property laws throughout the country.

What do Escheatment Laws mean for Your Bottom Line?

Escheat laws are what govern unclaimed property.  These laws determine when, how, and under which circumstances a business must turn over – or escheat – unclaimed property to the state government.  The purpose of unclaimed property laws is to ensure the protection of abandoned property until the rightful owner is located.  If the owner cannot be located or reached, states use any derivative funds earned on such property for the public good. 

Every state has a different set of escheatment regulations, so there is no uniform system of law.  Various state legislations differ on details such as what kinds of property, like unused gift cards, must escheat to the state, how long property must go unclaimed or unused (2-5 years is the general range), the process for reporting unclaimed property, and the penalties for not reporting unclaimed property in a timely manner. 

Unused Gift Cards: Breakage or Escheatment?

Considering the potential value of unredeemed gift cards, the question of which state’s escheatment laws apply is critical.  In Texas v. New Jersey, the Supreme Court explained the rules for deciding which state gets the escheat of unclaimed property.  The first rule dictated that the State of the purchaser’s last-known address gets the escheat when this information is available.  The second priority rule states that if a purchaser’s records do not disclose, the property is subject to the laws of the seller’s state of incorporation. 

Since each state has unique escheat laws, staying compliant and managing unused gift cards can be costly and complicated for merchants.  Nearly every state offers some type of voluntary compliance initiative (often referred to as “VDA Programs”) to help businesses and entities come into compliance with the states’ unclaimed property laws.  In exchange for the holder’s voluntary compliance, states will often waive or reduce penalties and interest on past due items.

Uplift: A New Hope

For organizations required to escheat unused gift cards, it may be worthwhile to remind consumers to use their unused gift cards before they expire and/or are considered unclaimed property by state laws.  This simple reminder could drive in-store or online traffic, allow the business to keep the funds originally spent on the gift card rather than escheating them, and creates the potential for uplift.  Uplift is the amount that a customer spends over the value of the gift card.  In fact, 65% of gift certificate recipients spend around 38% more than the value of their gift cards. 

The Answer is in the Data

For years, businesses have tried to find ways to avoid escheating their gift card breakage to state governments.  Some choose to sell their gift card liability to a third party and others establish a subsidiary to issue gift cards in a state that has no escheat requirement.  At Agilence however, we encourage our customers to learn more about the effectiveness of their gift card and loyalty strategies by examining performance data.  Simply reminding customers of their unused gift cards may deliver worthwhile results by allowing the seller to avoid escheating the original value of the gift card and creating opportunities for uplift.  Some organizations may even choose to devalue the original card and reissue one of the same value to reignite the incentive to patronize the store or restaurant and endearing them as loyal customers. 

There is no one-size-fits-all answer to optimizing gift card strategies.  However, using the A data analytics platform, users can isolate historical data to identify patterns and measure performance so that they can easily make decisions that are backed by data while also staying compliant.  This is just one example of the actionable insights that can be obtained through enterprise-wide data analytics.

PLEASE NOTE: This post should be used for general information purposes and not as a legal reference.

Learn more about measuring promotional effectiveness and the path to success for a modern Data Hero in our on-demand webinar, “The Data Analytics Hero: The Roadmap to Measuring Promotional Effectiveness.”