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Read the Fine Print: Gift Card Reform on Horizon

Retailers counting on cashing in on the $2 billion windfall generated from gift card "breakage" may need to check up on state law.

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It might seem like not a lot of money--the two or three dollars, known as "breakage," that typically get left on gift cards issued by retailers. Add them all up, however, and it's no spare change: Of the estimated $36 billion to $38 billion in gift card sales per year, approximately $2 billion of that gets left in the breakage wasteland.

On average, most customers who receive a gift card (the modern version of gift certificates) worth $20 only spend $18 on a store purchase, says David McKinney, vice president of marketing for Gift Card Technologies, a gift card manufacturer in Arlington, Texas. In most states, these unspent dollars are considered "abandoned property" and must be handed over to the state so state officials can try to return the money to consumers.

"The state [holds] that money for the consumer for a certain amount of time. If the consumer doesn't come forward, then the state gets to keep it," explains Terri J. Seligman, partner with LOEB & LOEB law firm in New York.

Compliance with the laws has been fairly low, however, as has enforcement. That's been a boon to many retailers, which haven't had much trouble hanging on to those breakage dollars and crediting them to their bottom line. But the tide may be turning. "These are bad economic times," says Seligman. The bottom line? "There are laws out there, and regulators are getting a lot more interested in pursuing this money."

Many businesses assert that the law, which in theory is about protecting consumers, is just a way for states to pad their pockets, says William Saagman, director of government affairs for the Michigan Restaurant Association in Lansing, Michigan. "Most retailers are not collecting enough information to match cards with consumers," says Saagman--many retailers claim consumers consider this an invasion of privacy--"which makes it nearly impossible to return the lost property to its owners."

Statutes vary by state, but at least 15 states, including California, Florida and, most recently, Massachusetts, have successfully lobbied to have gift cards exempted from abandoned property laws--allowing retailers to keep the unclaimed values. Other states offer exemptions only if the remaining money left on the cards is below a certain value. And while some states allow the exemptions, it doesn't necessarily mean the retailer is free of reporting obligations. Typically, that means reporting the names and last known addresses of the gift card purchasers, date of purchase, and the nature and amount of the unclaimed property.

Expiration dates can stymie card sellers even further. While it's perfectly legal to attach expiration dates to gift cards in most states, others, such as California, Hawaii, New Hampshire, Massachusetts and Rhode Island, have laws restricting expiration dates. California is the strictest, prohibiting gift card expiration dates altogether.

Add to that the fact that many states and consumers are demanding protection for lost or stolen cards, and retailers may have a real mess on their hands. "Many consumers are under the misconception that the gift cards, because they resemble credit cards or debit cards, carry the same protections--when in fact they do not," says Christine Pritchard of New York attorney general Eliot Spitzer's office. In June 2002, Spitzer's office mediated complaints with a handful of consumers who claimed The Home Depot had refused to deactivate and reissue their lost or stolen cards. (One such consumer was missing a card worth more than $1,000.) Prior to June 2002, The Home Depot's policies stated that they were not responsible for lost or stolen cards; following mediation with Spitzer's office, the company reissued the missing cards and agreed to change their policies nationwide.

Spitzer's office reached similar agreements with at least 15 other retailers, including Best Buy, Circuit City, Target and Borders.

Eventually, Pritchard says, "we hope market pressures will provide the initiative necessary for [other retailers] to change their policies as well."