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Major Retailers Violate DFCRA To Deprive States Hundreds of Millions of Dollars

33 Major Retailers Violate DFCRA To Deprive States Hundreds of Millions of Dollars
33 Major Retailers Violate DFCRA To Deprive States Hundreds of Millions of Dollars
unredeemed gift cards

An ex-senior officer of Card Compliant (a company formed to help affected companies avert having to report unredeemed gift cards to the states, including the State of Delaware) has initiated a whistleblower (“Qui Tam”) lawsuit against 33 major retailers, the National Restaurant Association and the whistleblower’s (legal term, “relator’s”) predecessor employer.

The Complaint alleges that these companies, including the Relator’s employer, Card Compliant and its predecessor CardFact, LLC violated the Delaware False Claims and Reporting Act (“DFCRA”) by knowingly failing to report and remit the value of unredeemed gift card balances in a scheme to deprive the state of hundreds of millions of dollars due to the state under its unclaimed and abandoned property laws.

Under the provisions of Delaware’s False Claims and Reporting Act “DFRCRA”, if the Relator’s claims are upheld by the court then the named defendants could be required to report and remit, as unclaimed property, all of the previously unremitted gift card balances to Delaware together with interest and penalties, which amounts up to 125% of the unredeemed balance plus three times the amount otherwise due (arguably excluding interest and taxes). This could amount to hundreds of millions of dollars.

More than 50 percent of Fortune 500 companies, and close to one million business entities, have made Delaware their home>>>Why Corporations Choose Delaware

Gift cards were introduced in the mid ’90s by Blockbuster. Aite Group forecasts that prepaid retail transactions will grow to $252 billion dollars market-wide by 2016, with prepaid making up 5 percent of all retail transactions. More than $1 billion on gift cards goes unredeemed annually. (One thousand million = 1Billion). If the state of domicile explicitly exempts gift cards from escheat, the issuer can generally recognize breakage income for cards with an “unknown owner.” Companies have to do relatively little for those easy earnings, just buy some plastic cards or implement digital ecards or branded currency. DELAY IN RECOGNITION OF SALE Bulletin no. 101 requires the transfer of product (merchandise) as a necessary condition for revenue to be recognized. So, instead of recognizing actual revenue on the sale of gift cards, retailers record a deferred revenue liability on the balance sheet for the cash exchange until the gift card is redeemed. Popular unclaimed property compliance management techniques are for holders to establish separate gift card management companies or other entities. These companies/other entities manage a gift card program from the purchase and design of cards to the sale of cards, tracking, redemption and other aspects of marketing gift cards. Depending on where it is domiciled and other factors, the management company/other entity also may be intended to enhance unclaimed property compliance with respect to unredeemed gift card balances. Consumer behavior trends show 10-19% of many gift card purchases will never be redeemed, the key element in maximizing revenue via breakage. A quarter of gift card recipients still haven't spent gift cards a year after receiving them. "The Gift That Keeps Giving" is also a 3 minutes 20 seconds long Christmas single.

Federal Reserve's Highlights Of The Gift Card Rule

Gift card protections offered by state laws.

Arizona: Expiration and fees allowed only if they are made clearly visible to consumer before purchase. Does not cover prepaid telephone cards or promotional or rewards cards.

Ariz. Rev. Stat. Ann. §44-301(15) Gift certificates/cards are not considered property and not subject to escheat laws.

Arkansas: No inactivity fees within the first two years.Any fees after two years must be printed clearly on front or back of card in at least ten point font.Covers gift cards usable at single store or chain. Does not cover prepaid telephone cards, promotional or rewards cards, cards linked to bank accounts, or cards usable with multiple unaffiliated merchants.

Ark. Stat. Ann. §18-28-201(13)(B) Gift certificates/gift cards, in-store merchandise credits, or layaway accounts issued or maintained by any person in the business of selling tangible personal property at retail are not considered property and not subject to escheat laws.

California: No expiration dates.No fees, with one exception: a monthly fee of $1 or less per month is permitted on gift cards with balances at or below $5 if the gift card is reloadable and has not been used for 24 months. A gift card that will charge this fee must include notice in ten point font. Any card with a cash value of $10 or less may be redeemed for cash at the consumer’s request. Covers gift cards at a single store or chain. Does not cover cards usable with multiple unaffiliated merchants.

Cal. Civ. Proc. Code §1520.5 Gift certificates purchased after 1997 are not subject to escheat. The escheat law does apply to any gift certificate that has an expiration date and that is given in exchange for money or any other thing of value.

Colorado: No fees. Any card with cash value of $5 or less may be redeemed for cash.Does not cover prepaid phone cards, promotional cards or cards usable with multiple unaffiliated merchants. Also does not cover paper gift certificates.

Colo. Rev. Stat. §38-13-108.4 Gift certificate redeemable in cash subject to escheat if unclaimed by owner by more than five years. Certificates issued for food, products, goods or services are not subject to escheat provisions.

Colo. Rev. Stat. §38-13-108.9 This article does not apply to unclaimed gift cards where the holder or issuer is a business association with annual gross receipts from the sales or issuance of all gift cards totaling $200,000 or less.

Connecticut: No expiration dates. No fees.Does not cover prepaid telephone cards; different rules apply to general use prepaid cards.

Conn. Gen. Stat. §3-73a Gift certificates and general-use prepaid cards do not escheat to the state.

Delaware: Del. Code Ann. tit. 12, §1197 et seq.If owner dies intestate, is missing for more than five years or abandons property the gift certificate/card reverts to the state. The period of dormancy shall be the shorter of five years or the expiration period, if any, of the gift certificate less one day.

D.C. Code Ann. §41-101 et seq.Gift certificates held or owing in the ordinary course of the holder's business that have remained unclaimed by the owner for more than five years after becoming payable or distributable are presumed abandoned. If a gift certificate is redeemable for cash or merchandise, its value shall be.

Florida: No expiration dates.No fees.Does not cover promotional cards, or cards issued by financial institutions and usable at multiple unaffiliated merchants.

Fla. Stat. §717.1045 An unredeemed gift certificate or credit memo as defined in §501.95 is not required to be reported as unclaimed property. The consideration paid for an unredeemed gift certificate or credit memo is the property of the issuer of the unredeemed gift certificate or credit memo. An unredeemed gift certificate or credit memo is subject only to any rights of a purchaser or owner thereof and is not subject to a claim made by any state acting on behalf of a purchaser or owner. It is the intent of the Legislature that this section apply to the custodial holding of unredeemed gift certificates and credit memos. However, a gift certificate or credit memo described in §501.95(2)(b) shall be reported as unclaimed property. The consideration paid for such a gift certificate or credit memo is the property of the owner of the gift certificate or credit memo.

Georgia: Expiration and fees allowed only if they are conspicuously printed on the card or have a sticker affixed to the card at the time of purchase. Covers cards that can be used at multiple unaffiliated merchants, gift certificates or store gift cards.

Ga. Code §44-12-205 A gift certificate issued in the ordinary course of an issuer's business which remains unclaimed by the owner for more than five years after becoming payable or distributable is presumed abandoned. The amount presumed abandoned is the price paid by the purchaser for the gift certificate.

Hawaii: Funds on gift cards do not expire unless the card has an expiration date. No service fees, including dormancy fees.Any activation or issuance fees cannot exceed 10% of face value or $5, whichever is less.Does not cover loyalty or rewards cards, prepaid phone cards or other reloadable prepaid cards.

Hawaii Rev. Stat. §523A-14 A gift certificate issued in the ordinary course of an issuer's business which remains unclaimed by the owner for more than five years after becoming payable or distributable is presumed abandoned. The amount presumed abandoned is the price paid by the purchaser for the gift certificate.

Illinois: No post-purchase fees. Does not include prepaid phone cards or cards usable with multiple merchants.

Ill. Rev. Stat. ch. 765, §1025/10.6 Only applies to gift certificates/cards with an expiration date or fees or if the card/certificate was issued before the 93rd General Assembly (2003-2004). After property is abandoned, it reverts to the state.

Iowa: No fees unless there is a written contract.

Iowa Code §556.9 Gift certificates unclaimed by the owner three years after issuance are abandoned.

Kansas: No fees for one year. Does not cover prepaid bank cards.

Kentucky: Gift cards without expiration dates good until redeemed or replaced. No fees.Does not include prepaid calling cards or cards linked to bank accounts usable with multiple unaffiliated merchants or ATMs.

Louisiana: Gift cards without expiration dates good until redeemed or replaced.No service fees allowed except for a one-time handling fee of $1.Does not cover general purpose reloadable prepaid cards or loyalty or promotional cards.

Maine: No expiration dates.No fees except for transaction fee for initial issuance or for adding value to existing card which must be disclosed in separate writing before purchase.Gift or rewards cards with a value of $5 or less may be redeemed for cash, but this does not apply to rewards cards issued with an initial value of $5 or less, and it does not apply to promotional cards, prepaid telephone cards or to cards issued for returns without a receipt.Does not cover “prefunded bank cards.”

Me. Rev. Stat. Ann. tit. 33, §1953(G) A gift obligation or stored-value card is presumed abandoned if it is unclaimed by the apparent owner two years after Dec. 31 of the year in which the obligation or the most recent transaction involving the obligation or stored-value card occurred, whichever is later, including the initial issuance and any subsequent addition of value to the obligation or stored‐value card. (1) The amount unclaimed is 60 percent of the gift obligation's or stored-value card's face value. (2) A gift obligation or stored‐value card sold on or after Dec. 31, 2011 is not presumed abandoned if the gift obligation or stored‐value card was sold by a single issuer who in the past calendar year sold no more than $250,000 in face value of gift obligations or stored‐value cards. Sales of gift obligations and stored‐value cards are considered sales by a single issuer if the sales were by businesses that operate either: (a) Under common ownership or control with another business or businesses in the state; or (b) As franchised outlets of a parent business. (3) A period of limitation may not be imposed on the owner's right to redeem the gift obligation or stored-value card. This paragraph does not apply to prefunded bank cards.

Me. Rev. Stat. Ann. tit. 33, §1953(G-1) A prefunded bank card, three years after December 31st of the year in which the obligation or the most recent activity involving the prefunded bank card occurred, whichever is later, including the initial issuance and any subsequent addition of value to the prefunded bank card.

Maryland: No fees for four years.Any terms and conditions must be printed clearly in 10-point font on the card, on a sticker affixed to the card or in an envelope containing the card.Does not cover prepaid internet or telephone service cards, rewards cards, or prepaid bank or credit cards.

Md. Commercial Code Ann. §17-101(m) Gift certificates are exempted from unclaimed property act.

Massachusetts: No expiration dates for seven years.If fees are charged, notice in writing - either on the card or the card packaging – is required.Non-reloadable cards redeemed for 90% of the face value may be redeemed for the remaining cash.All eligible gift cards – reloadable or not – that have $5 or less remaining value may be redeemed for cash.Does not include prepaid calling cards or any electronic cards usable with multiple unaffiliated merchants.

Michigan: No post-sale fees (initial purchase fee allowed).Covers gift cards issued by retailers or service providers; does not include prepaid calling cards or prepaid bank cards usable at multiple unaffiliated retailers or ATMs, health care spending cards, payroll cards, or rewards cards.

Minnesota: No expiration dates.No fees.Does not include debit cards linked to a bank account, prepaid calling cards, rewards or loyalty cards, or cards linked to bank accounts usable with multiple unaffiliated merchants.

Montana: No expiration dates.No fees.If original value of gift card was more than $5, and remaining value is less than $5, can redeem for cash.Does not cover prepaid telecommunications or technology cards, rewards or loyalty cards or gift cards usable with multiple unaffiliated merchants.

Nebraska: Expiration dates and fees are only allowed if a notice of the fee or expiration date appears on front or back of card or in location visible to purchaser at the time of purchase.Does not cover cards usable at multiple unaffiliated merchants.

Nevada: Expiration or fees allowed only if properly disclosed.No fees within first year and no fees that exceed $1 per month. No dormancy fees before 3 continuous years of non use.Does not cover cards usable at multiple unaffiliated merchants.Does not cover prepaid telecommunications or technology cards, or rewards, rebate or loyalty cards.

Nev. Rev. Stat. §120A.520 Sixty percent of the unredeemed or uncharged value remaining on a gift certificate which is issued or sold in this state and which has an expiration date is presumed abandoned and subject to the provisions of this chapter on the expiration date. If a gift certificate is issued or sold in this state and the seller or issuer does not obtain and maintain in his records the name and address of the owner of the gift certificate, the address of the owner of the gift certificate shall be deemed to be the address of the office of the state treasurer in Carson City.

New Hampshire: No expiration dates for gift cards of $100 or less; for cards of $100 or more, expiration date when considered abandoned under state law, which is five years.No fees.

New Jersey: Funds on gift cards purchased on or after December 1, 2012 cannot expire.For cards sold on or after December 1, 2012, no fees allowed except activation or re-load fees, or fees for replacement cards.For cards that were sold before December 1, 2012, no dormancy fees until after at least two years of inactivity. Dormancy fees cannot exceed $2/month.Gift cards with an initial balance of more than $5 that have a balance of less than $5 may be redeemed for cash. This section does not apply to gift cards that can be used at multiple merchants or to cards provided in lieu of a refund for returned merchandise.Does not include rewards cards, telephone or technology cards or prepaid bank cards.

New Mexico: No expiration for five years and no expiration unless proper notice given.No fees except for purchasing the card itself.Does not cover cards usable at multiple unaffiliated merchants.Does not cover prepaid calling cards, rewards cards, bank-issued cards, or general use prepaid cards.

New York: Expiration dates and any fees that will be charged along with other terms and conditions must be clearly and conspicuously stated on the card, package, or accompanying printed document.No dormancy fee before 13th month of inactivity.Does not cover cards usable at multiple unaffiliated merchants.Does not cover prepaid calling cards or and cards linked to deposit accounts

North Carolina: Fees to be conspicuously disclosed on card at time of purchase.No fees for first year.Covers prepaid calling cards.Does not cover cards usable at multiple unaffiliated merchants.

North Dakota: No expiration for six years.No fees.Does not cover loyalty or rewards cards, general use prepaid cards, cards that can be used at multiple, unaffiliated merchants or cards linked to bank accounts.

Ohio: No fees for two years.Does not cover rewards or loyalty cards, cards for use at an employer’s businesses or cards given to an employee by an employer as a bonus, prepaid calling cards or cards usable with multiple unaffiliated merchants.

Oklahoma: No expiration and no fees for five years, with one exception.Permits a $1 per month fee only when the card has a balance of $5 or less, the card has been unused for 24 months, the card is reloadable and the fee is properly disclosed.Does not cover cards usable at multiple unaffiliated merchants.Does not cover rewards or loyalty cards, or cards issued for a food product.

Oregon: No fees.No expiration dates with one exception—if card is sold below face value and does not expire until 30 days after the date of sale and card has printed “expires on” or “expiration date” with the date of expiration.The prohibitions above do not apply to prepaid calling cards, prepaid commercial mobile radio services, or cards usable with multiple merchants.A gift cardholder has the option to redeem the card for cash when the face value of the card has declined to an amount less than $5 and the card has been used for at least one purchase. The cash redemption option is not available for promotional cards, telecom cards, or gift cards redeemed to an online account for the purchase of goods or services.

Rhode Island:No expiration dates.No fees.When cards are redeemed and the remaining balance is less than $1, the balance shall be provided in cash.Does not cover rewards or loyalty cards, prepaid wireless telephone service cards, or cards that are useable at multiple unaffiliated merchants.

South Carolina:No expiration dates for first year, unless expiration date is on front of card in capitalized letters in 10-point font.No fees unless disclosed on the card, the envelope, as an insert, or on the receipt given to the purchaser of the gift card.Covers cards sold by businesses for goods or services from those businesses.

Tennessee:No fees for two years.Does not cover rewards or loyalty cards, cards for use at an employer’s businesses or cards given to an employee by an employer as a bonus, prepaid calling cards or cards usable with multiple unaffiliated merchants.

Texas:Expiration or fees and other terms must be clearly and conspicuously disclosed at time of purchase. The expiration date and fees must be legibly printed on the card.

Utah: No expiration date if not printed or information is not included.No fees if not printed or information is not included.Expiration and fees must be printed in readable manner on instrument, packaging or record.

Vermont: No expiration if expiration date not clearly marked, or otherwise made available on the sales receipt, website or by toll-free phone number.Consumer may redeem unused portion after expiration date if requested.No fees, except a licensed money transmitter, financial institution or credit union may charge a one-time issuance fee of either $10 or 10%, whichever is smaller.If remaining value is below $1, the cardholder may redeem remainder for cash.Different rules for loyalty, rewards and promotional gift cards: fees and expiration dates are permitted provided that proper notice is given to the consumer.

Virginia: Expiration or fees must be clearly and permanently imprinted on card with a telephone number or Internet address to obtain information.

Washington: No expiration date with an exception.No fees with one exception.Permits a $1 per month fee only when the card has a balance of $5 or less, the card has been unused for 24 months, the card is reloadable, and the inactivity fee is disclosed on card in at least 6-point font.After a dormancy fee is assessed, the remaining value on the gift card is redeemable in cash on demand.Any card with a $5 or less remaining value may be redeemed for cash.

When you shop for a gift card, the FTC recommends that you:

Buy from sources you know and trust. Avoid buying gift cards from online auction sites, because the cards may be counterfeit or may have been obtained fraudulently.

Read the fine print before you buy. Is there a fee to buy the card? If you buy a card by phone or online, are there shipping and handling fees? If you don't like the terms and conditions, buy elsewhere.

See whether any fees will be deducted from the card after you purchase it.

Inspect the card before you buy it. Verify that none of the protective stickers have been removed. Make sure that the codes on the back of the card haven't been scratched off to reveal a PIN number. Report any damaged cards to the store selling the cards.

Give the recipient your original receipt so they can verify the card's purchase in case it is lost or stolen.

Consider the financial condition of the retailer or restaurant.

If you buy a card from a company that files for bankruptcy or goes out of business, the card may be worth less than you had anticipated.

If the business closes a store near the recipient, it may be hard to find another location where the card can be used.
A company that files for bankruptcy may honor its gift cards, or a competitor may accept the card. Call the company or its competitor to find out. Even if the company is not redeeming gift cards now, check back with them periodically; they may start redeeming cards at a later date.

When gift cards go unused, gift cards could end up leaving you -- or your giftee -- with less money than you thought. If a gift card has not been redeemed after two or three years, there is almost no chance it will ever be redeemed, regardless of when the card expires.

CardCash.com, with revenues of $56M and Forbes' #14 of Americas most promising companies, buys unwanted gift cards at a discount from consumers and resells them at a discount to the original purchase price. i.e, A $100 iTunes gift card, is purchased by the company for $70 and sells for $95 on their website.

Adventures of Gift Card Recipients

On one of the busiest shopping days of the year, before you try to redeem those gift cards you forgot you had, take a few moments to honor those who laid down their lives in the defense of our nation this Memorial Day,

President Obama’s Financial Fraud Enforcement Task Force (FFETF) was created in November 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.