By: William A. Raabe, Co-Editor of the South-Western Federal Taxation series
It is hard to shop for some people at Christmas. The done seems not to have any pressing needs, or the donor does not know the person well enough to come up with “the right gift.” The recommended action according to some etiquette experts is to give a gift card and let the donee pick his/her own present. The National Retail Foundation claims that a gift card has been the single most-requested gift in every year’s holiday season for a decade running. Each of your students surely has given and/or received one.
Retailers like gift cards because, when the holder comes into the store, they almost always spend more than the gift card amount. And a significant portion of gift cards never get used, meaning that the retailer (and likely the gift card broker) gets an upfront cash infusion with which to finance inventory or compensation.
About $150 billion in gift cards are purchased every year, mostly for restaurants, department stores, and coffee shops. Amazon and other e-tailers also push gift cards as a way to target spending for gift-giving by regular users. An unused gift card is recorded as a book liability by the issuer until it is used, at which time the retailer recognizes the related revenue.
But perhaps $5 billion of the gift cards purchased in a year never will be used, as they are lost or simply waste away in a dresser drawer. In most states, a default period of say five years is applied as the cut-off date after which it is assumed that the card will not be used. After the default period, the unclaimed funds are “escheated” and paid to the state of incorporation for the retailer.
Other sources of “unclaimed property” receipts for the state include uncashed paychecks, unclaimed insurance proceeds, rebates/refunds and legal settlements that remain unspoken for, and bank accounts that are “stale” from non-use. Some states run a list on their website to alert consumers to the presence of unclaimed property, with a tagline “If your name is on this list, contact the state, you might have some money coming your way.” A national database further facilitates the claim process for consumers.
Funds that the government collects from the retailer, bank, etc then revert permanently to the state if the consumer does not claim them. The author of this post once found his name on one of these lists – he had failed to claim a refund for a software subscription that had been cancelled. Some of your students might have made a similar discovery – it is like finding a $20 bill in the pocket of an old jacket!
This non-tax revenue has become important as a budget-hole-fix in several states. To the extent that the state reasonably can predict the amount of gift-card “defaults” that it will receive in a given year, that amount can be inserted prospectively as a source of the state’s budget revenues. Various research firms provide data to the states and others about making such forecasts.
Delaware has found great success in identifying unclaimed property that might be available for its budget purposes, as it is the state with the most incorporations of large US businesses, especially for banks and legacy retailers. About ten percent of the state’s annual budget proceeds comes from unclaimed property collections, even after the state alerts consumers to their potential recoveries.
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 certainly will become more focused in the future about finding new sources of escheat revenues, dedicating (like Delaware does) personnel and financial resources to identifying and processing escheated property claims. And legal challenges surrounding unclaimed property are likely to become more frequent in the future. Why should an unused Starbucks card, purchased in Nebraska, end up as part of the infrastructure budget of Washington State?
In fact, businesses are changing their gift card agreements, working to amend state laws, and interpreting existing law such that an unused balance can be kept by them, instead of being transferred to the state. These new-found revenues can help to finance operations and capital budgets, as well as to enhance earnings per share and stock prices.
And consumer activists may force the states to work harder to find the individuals who have claims to the escheated property and facilitate their recoveries. It is, after all, their money and not the state’s, government budgetary needs to the contrary. The moral hazard associated with the state handling these funds rightly should be monitored.
- Does the escheated property system act as a state-level tax?
- Will the state act as an advocate for the consumer in recovering the lost funds, or is it incentivized to maximize its own possession of new revenues? Should the unclaimed property process come under greater legislative and regulatory oversight? In what ways?
- Should unclaimed property revert to the consumer? The state of the issuer’s incorporation? The state in which the transaction occurred? Discuss these possibilities and come up with another means by which to apportion these revenues.
- How much did your state and one of its neighbor states contribute last year to the budget from its unclaimed property holdings? If you cannot find this information, conduct your search for Colorado, Pennsylvania, Louisiana, or California.
- Run a search on your name at missing money and determine whether you or someone in your family has a claim to some “lost funds.” Describe your search process and relate your findings.
- Summarize information about the escheated property practice of a large accounting firm or a local law firm. Be specific. Are “new hires” being made into this practice?
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