Gift Card Escheatment, Expiration, Exemption, and Dormancy
Overview
The purpose of this article is to discuss how gift cards end their lives through escheatment, expiration, exemption, and dormancy. One of the most important takeaways from this article is that Paytronix reminds you to discuss how you want to handle this material with your own legal counsels.
It is worth noting that the majority of Paytronix clients do not use any of these mechanisms to remove value from gift cards; unredeemed balances remain on the cards in perpetuity. You are NOT required to remove value from cards due to guest inactivity or expiration. You could just keep value on the cards until your guests use that value. Not removing value because of inactivity or expiration is looked at as guest friendly.
Gift cards have laws that apply to them, called "escheatment" laws, or "abandoned property" laws. These laws deal with how a gift card ends its life. Ultimately, there are six ways that a card can end its life:
It is left with at least some balance on it forever, which is never redeemed.
It is fully redeemed and is not reloaded.
It is never fully redeemed and the remaining amount is escheated.
It is never fully redeemed and the remaining amount is expired.
It is never fully redeemed and the remaining amount is exempted.
It is never fully redeemed and the remaining amount is removed through dormancy fees.
Escheatment, expiration, exemption, and dormancy are defined and affected by state laws. Each state has its own set of laws. A store’s state of escheatment (or if the card is registered, the state of registration) dictates which laws gift cards must follow with regards to escheatment, expiration, exemption, and dormancy.
High-Level Technical Details
There are four mechanisms for removing value from gift cards (not including normal use and redemptions):
Escheatment
Expiration
Exemption
Dormancy
The three mechanisms: (1) escheatment, (2) expiration, and (3) exemption are all set up with the same event schedule and rule, which, at the indicated time and if conditions are met, drives a gift card’s balance to $0. The value removed from a gift card by this process shows up on the Expiration Summary & Detail reports with a transaction type of escheatment, expiration, or exemption as specified by the Gift Card Expiration Law table.
Based on the output of the expiration summary & detail reports, the merchant then takes appropriate actions; remember, Paytronix can remove the value from cards in the Paytronix System and detail those value-reduction transactions in reports, but it is UP TO THE MERCHANT to act on the decremented value:
For value that is labeled “escheat”, the merchant reports and remits those funds to the state.
For value that is labeled “expire”, the merchant reports the funds to the state and KEEPS those funds.
For value that is labeled “exempt”, the merchant neither reports NOR remits those funds to the state.
Note that the difference between expiration and exemption is basically one of reporting to the state and associated tax liability.
The fourth mechanism, (4) dormancy is used to remove value from gift cards in small, monthly amounts beginning after a set number of months of guest inactivity. The merchant keeps the value removed from cards affected by this process. Dormancy is set up with a separate event schedule and rule than escheatment, expiration, and exemption. You can view value removed through dormancy fees by running the Dormancy Summary & Detail reports.
More and more states are forbidding the practice of dormancy. Paytronix has a "Dormancy Rule" that can handle this activity, but the majority of merchants do not utilize dormancy fees.
Gift Card Expiration Law Table
The expiration rule (which is set up for escheatment, expiration, and exemption) pulls information from the Gift Card Expiration Law table which is under the Merchant Admin tab on pxsweb.
This table is populated with contents specific to each state’s laws regarding:
“Expires by” - Whether remaining gift card value is subject to escheatment, expiration, or exemption (note: “perpetual” means that value will remain on the cards associated with that state in perpetuity).
“Months to Expiration” - The number of consecutive months of guest inactivity until the card is eligible for escheatment, expiration, or exemption.
“Review Month” - Specifies in which month(s) remaining value can be removed from cards that have reached the specified “months to expiration” inactivity-time-period threshold.
“Keep-alive Activity” - Specifies the type of transaction(s) that constitute as guest activity which resets the “Months to Expiration” clock: (1) Sale and Reload, (2) Sale, (3) Guest Transaction (card registration and any POS transaction including balance inquiry will count).
Only Massachusetts and Texas have predefined conditions. Your Paytronix contact will have to manually enter the above conditions based on merchant request for all other states.
A Store’s State of Escheatment
The escheatment rules apply to a registered gift card’s state of registration. As is most often the case, if the card: (1) does not allow for registration, (2) allows for registration but is not registered, or (3) is registered but does not have a guest-specified registration state, then the escheatment rules apply to the card’s store of enrollment’s defined “state of escheatment.”
Each store has its own “state of escheatment” (effective for escheatment, expiration, and exemption), which could be the same or different than its physical state location. Your Paytronix contact will set each store’s state of escheatment based on the merchant’s request.
In addition, IRS rules have been interpreted to mean that gift cards that have NOT been redeemed within two years of sale, must be counted as income to the Federal government. This further complicates gift card reporting and escheatment management, since the entity has paid tax, but may need to escheat money it does not have to the state.
Ultimately, these are topics that your Paytronix contact can discuss with you. However, you should get advice from your own tax attorneys and legal counsel on how you'd like to set this all up.
For further assistance, please contact your solutions consultant or customer success manager, or email [email protected].
Additional Resources
Stored Value Card Expiration Detail
Stored Value Card Expiration Detail
Stored Value Dormancy Detail
Stored Value Dormancy Summary
Stored Value Liability Aging By Store Summary Report
Some information of state laws for dormancy and expiration can be found here (http://www.ncsl.org/issues-research/banking/gift-cards-and-certificates-statutes-and-legis.aspx)
More information on abandoned property (http://www.hmblaw.com/media/53581/fundamentals_of_the_escheat_of_abandoned_property.pdf )