Read the Fine Print: Gift Card Reform on Horizon

It might seem like not a lot of money--the two or three dollars,known as "breakage," that typically get left on giftcards issued by retailers. Add them all up, however, and it'sno spare change: Of the estimated $36 billion to $38 billion ingift card sales per year, approximately $2 billion of that getsleft in the breakage wasteland.

On average, most customers who receive a gift card (the modernversion of gift certificates) worth $20 only spend $18 on a storepurchase, says David McKinney, vice president of marketing forGift CardTechnologies, a gift card manufacturer in Arlington, Texas. Inmost states, these unspent dollars are considered "abandonedproperty" and must be handed over to the state so stateofficials can try to return the money to consumers.

"The state [holds] that money for the consumer for acertain 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 hasenforcement. That's been a boon to many retailers, whichhaven't had much trouble hanging on to those breakage dollarsand crediting them to their bottom line. But the tide may beturning. "These are bad economic times," says Seligman.The bottom line? "There are laws out there, and regulators aregetting a lot more interested in pursuing this money."

Many businesses assert that the law, which in theory is aboutprotecting consumers, is just a way for states to pad theirpockets, says William Saagman, director of government affairs forthe Michigan Restaurant Association in Lansing, Michigan."Most retailers are not collecting enough information to matchcards with consumers," says Saagman--many retailers claimconsumers consider this an invasion of privacy--"which makesit nearly impossible to return the lost property to itsowners."

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

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

Add to that the fact that many states and consumers aredemanding protection for lost or stolen cards, and retailers mayhave a real mess on their hands. "Many consumers are under themisconception that the gift cards, because they resemble creditcards or debit cards, carry the same protections--when in fact theydo not," says Christine Pritchard of New York attorney generalEliot Spitzer's office. In June 2002, Spitzer's officemediated complaints with a handful of consumers who claimed TheHome Depot had refused to deactivate and reissue their lost orstolen cards. (One such consumer was missing a card worth more than$1,000.) Prior to June 2002, The Home Depot's policies statedthat they were not responsible for lost or stolen cards; followingmediation with Spitzer's office, the company reissued themissing cards and agreed to change their policies nationwide.

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

Eventually, Pritchard says, "we hope market pressures willprovide the initiative necessary for [other retailers] to changetheir policies as well."