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Retailers Beware: A New Jersey Case May Change How You Report Unclaimed Property

USA
2 Nov 2011

When you think of unclaimed property and escheatment a bank or insurance company probably comes to mind as the type of business that would be concerned with tracking and reporting items of unclaimed property. However, although state unclaimed property laws were first established because of banks and insurance companies, they now have a much broader reach and are applicable to many types of businesses. Taxand US discusses recent developments in the area of gift card escheatment and the information gathering and reporting requirements surrounding them.

Background on Unclaimed Property
Unclaimed property (sometimes referred to as abandoned property) is property held by an entity such as a corporation, business association, financial institution or insurance company that is owned by another party and has not been claimed by the rightful owner within a certain period of time.

All 50 states have unclaimed property laws. These laws require the company holding the unclaimed property to return the property (that is, "escheat" the property) to the state if a certain period of time has passed. The state holds the property until the rightful owner makes a claim. If this claim is never made, the property remains with the state.

To complicate matters, holders of unclaimed property are required to make an effort to locate the owner of an item of unclaimed property before remitting it to the state. This is referred to as the "due diligence" process. Most states require that a letter must be sent to the rightful owner as soon as the property becomes dormant but not less than a certain number of days (usually 60) prior to the filing of the unclaimed property report that would include the item. Some states are now allowing phone calls and emails in lieu of letters.

Gift Card Specifics
For many types of property, the application of the above rules is relatively straightforward. However, applying these rules to gift cards, or stored value cards, brings about a whole host of issues. To begin with, the escheatment rules for gift cards are not consistent across the states. Some states escheat the full value of the gift card, some states escheat gift cards at less than 100 percent of the face value, some states qualify only certain types of gift cards as escheatable (e.g., preloaded bank cards, phone cards et), and some states exempt gist cards from escheatment altogether.

On 7 December 2010, the state filed an appeal with the Third Circuit Court of Appeals of the District Court's preliminary injunction of the place of purchase presumption and the retroactive application of Chapter 25. Upon request, the District Court judge clarified that the zip code collection requirement was not enjoined as part of the Court's decision to enjoin the place of purchase presumption. The plaintiffs appealed the District Court's denial for preliminary injunction of the zip code collection requirement to the Third Circuit Court of Appeals.

Taxand US assesses the full case and how the outcome may affect your business

Taxand's Take


What does all of this mean for companies that issue gift cards? If the zip code collection requirement of Chapter 25 is eventually upheld, the secondary rule and the place of purchase presumption become moot, since the primary rule will always come into play.

It is a N.J. law. It has no effect in other states. Therefore, companies can choose to track only the name and address of N.J. purchasers and continue reporting under the secondary rule for all other gift card sales to the extent they do not have the address of the purchaser/owner. However, many are asking what ability, what right, does a state have to require a business to implement a data collection system? These issues will likely be addressed as the case moves forward. One thing is sure: there is little doubt that if the provisions of Chapter 25 are upheld by the courts, other states will soon follow with similar provisions. Retailers beware!

Your Taxand contact for further queries is:
Kelly Peele
T. +1 503 442 3625
E. kpeele@alvarezandmarsal.com

Taxand's Take Author