By Thom AldredgeWe have looked at the genesis and development (see "Gift cards: Value multiplier for merchants", The Green Sheet, July 26, 2010, issue 10:07:02), laws governing (see "Legislative fallout for gift card providers", The Green Sheet, Aug. 23, 2010, issue 10:08:02) and merchant uses of closed- and open-loop gift cards (see "Perspective on the 'gift' economy", The Green Sheet, June 28, 2010, issue 10:06:02 and "Suit the gift card to the merchant", The Green Sheet, Sept. 27, 2010, issue 10:09:02).
Now we address the issue of whether state laws governing gift cards, and their available balances, conflict with the overriding rules of The Credit Card Accountability, Responsibility and Disclosure Act of 2009 (the Credit CARD Act).
The popularity of gift cards continues to grow despite economic setbacks to the merchants that issue them. Gift cards provide an excellent method of increasing cash for merchants while deferring the outflow of inventory. Even the accounting hassles that come with cards with outstanding balances, and the potential surrender of those balances given escheatment laws, is a minor downside for merchants.
So now the predicament for merchants is to understand the laws – federal, state and local – and how they affect gift card programs. Some of that predicament was cleared up with the passage of the Credit CARD Act in May 2009. For cards put into circulation as of Aug. 22, 2010, the expiration date must be at least five years from the date of activation or the last transaction that added value to the card.
In addition, a merchant may charge a fee against a balance on an unused gift card (a "dormancy" fee) provided that the dormancy period be not less than 12 months from the trigger date. Further, only one fee can be charged in a given month and it must be disclosed. Other disclosure requirements are also mandated.
Cards that did not meet these requirements, but were already printed and deployed by merchants, received a reprieve from Congress that makes them valid under prior law until Jan. 31, 2011, essentially when the holiday shopping/redemption season concludes.
Merchants are now busy purchasing gift cards for the 2010 holiday season that have been printed with the proper disclosures. However, the Credit CARD Act, although it mandated a minimum level of consumer protection, is superseded by state laws that are deemed to be more protective of gift card purchasers and recipients.
In that regard, merchants must become knowledgeable about the laws of the states in which they operate. It is not sufficient to merely adhere to the federal law to be compliant. Merchants must also determine if there are other conditions that a state will impose.
The concepts of expiration dates and usage fees on gift cards also apply to the states. Many states, reflecting rising levels of consumer protectionism, seek to prevent unscrupulous issuers from taking payment for a gift card and then absconding with the money. But there has been no effort on the part of the states and the federal government to coordinate their actions in the interest of protecting the consumer.
So, if a state has what are considered to be more protective laws with respect to gift cards, merchants can be caught in a bind trying to discern what rules apply. If the federal law is complied with, then what is the state statute, and is a given merchant's program compliant with both?
State laws requiring minimum terms of expiration and the prohibition or restriction of usage fees may be similar to, but not exactly the same as, the federal law. For example, the federal law states that an expiration date may not be less than five years from the date of activation or "the last date that value was added to the card."
The state statute may only require a minimum five-year expiration from the card's activation. Let's say a merchant provides a promotional amount of value to the card for repeat business by the cardholder, then expires the card after five years from activation because the promotional value-add "didn't count." Does the federal law apply, or the state law?
The usage fees are more complicated in that there can be multiple state provisions with respect to fees that can be charged (if any), primarily regarding disclosure of those fees. States may prohibit certain fees that the feds permit (for example, dormancy), or have terms that vary with respect to the applications (for example, 24 months of card inactivity instead of 12). In a more confusing context, if a card is purchased in one state (where the consideration is given), and the card is redeemed in another state (the state of the tender), and a law is violated, what state holds jurisdiction? Multistate retailers are correctly concerned with what the determination of law would be in this case.
Some states require that remaining balances be cashed out to cardholders who request this. Multistate retailers could possibly experience an influx of nonresidents wanting to cop a few bucks for the effort.
Many of our merchant customers have realized that, by eliminating expiration dates and fees, they can avoid the disclosure requirements of the federal law, and minimize the effect of any state law. But that method, in and of itself, does not prevent merchants from being bound by the "other laws" that affect their issuance of gift cards.
Most states have laws that protect unclaimed property, or escheatment laws. The federal government enacted unclaimed property laws years ago but leaves the issue mostly up to the states. Gift cards, a recent phenomenon, are still being scrutinized as to how they will be handled. In short, an unclaimed balance owed to, or owned by, an individual can become a balance the state will attempt to match with its owner.
While most states have exempted gift cards and certificates, in a few states (such as Iowa), escheatment balances on gift cards can be considered abandoned before any expiration policy of the issuer, regardless of the federal statute.
If a state considers escheatment laws to be "more protective" of the consumer than the federal expiration and fee rules, that state could enforce the turnover of gift card balances for a search process that could potentially deny the use of a balance by a cardholder that would, in fact, be valid under the federal and state gift card laws.
Local provisions affecting gift cards are rarely seen. But one exists in Knoxville, Tenn., that prohibits employees from receiving gift cards as a gratuity.
As the federal and state gift card laws move toward an almost unpreventable collision, expect to see lawsuits in the next year or so that question the jurisdiction of enforcement
Thom Aldredge is President of World Gift Card, a turnkey gift and loyalty card program provider based in Plano, Texas. He is a spokesperson for the gift card industry and serves on the Electronic Transactions Association Government Relations Committee. Call Thom at 888-745-4112 or email him at Home • Emagazine • Forums • Video • Ad Page • Podcasts • Calendar of Events • News From the Wire • Breaking Industry News • Flipbook • Resource Guide • Advisory Board • Spotlight Innovators
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