What you need to know about gift cards

November 3, 2021

Blog Post

Retail and restaurant gift cards have become an increasingly popular way for consumers to give gifts for the holidays. This year, due to low inventory levels, supply chain disruptions, container shortages, port closures, labor shortages, and shipping delays, consumers are expected to increase their purchases of gift cards during the Holiday season. Consumers need to understand the risks associated with the purchase of gift cards and issuers of gift cards need to understand the laws governing gift cards.

Below are answers to certain frequently asked questions when it comes to gift cards:

Do gift cards have expiration dates?

A federal law went into effect in 2010 that is designed to protect consumers by restricting gift card fees and gift card expiration dates. These rules apply to two types of cards: retail gift cards, which can only be redeemed at the retailers and restaurants that sell them; and bank gift cards, which carry the logo of a payment card network like American Express or Visa and can be used wherever the brand is accepted.

The Treasury Department’s regulations governing gift cards and loyalty programs (called the Credit Card Accountability Responsibility and Disclosure Act) became effective August 2010. Under the act, gift cards cannot expire for at least five years (with few exceptions). This rule is a federal law that applies to every state in the country. In addition, many states have since passed similar gift card laws, some of which entirely prohibit expiration dates.

The issuer of the gift card must disclose any terms and conditions that come with the card. This rule includes any information about the expiration date. However, some states have enforced specific conditions to this rule that the recipient of the gift card must follow. Gift card laws vary from state to state.

Are there fees associated with the purchase of a gift card?

When it comes to fees, each state has different laws regarding the charges an issuer of the gift card can charge a consumer. However, some fee laws apply to every state, and those are:

There must be a disclosure of any fees either on the gift card or on the packaging of the card.
If states allow post-sale inactivity fees, these fees typically cannot apply until after one year of inactivity.
There shouldn't be more than one post-sale fee per month.

Some state laws permit post-sale fees for gift cards, including:

Maintenance fees.
Activation fees.
Transaction fees.

What happens to unused gift cards?

Typically anywhere from 6-10% of all gift card sales never result in redemption. Sometimes when people haven’t used their gift cards entirely, they can cash in the remaining amount. However, this comes with certain conditions and rules that vary from state to state. Many states require individuals to spend all the money on the gift card until it expires.

Under generally accepted accounting principles, revenue from a gift card sale is not actually income until a consumer has redeemed the card or the seller declares the card as “unused.” If the consumer still has a balance once the gift card expires, many state laws require that the balance be turned over to the state. The time frame of when the money is turned over to the state solely depends on where a person lives. The nature of gift cards purchased as gifts will often render it impossible for the issuer of the gift card to know where a gift card owner lives or where any particular unredeemed gift card is at any given time. Where at least two states have a claim to unredeemed gift cards, federal common law controls the priority of the states’ claims.

In Texas v. New Jersey, 379 U.S. 674, 680-82 (1965), the United States Supreme Court established two “priority rules” to resolve any conflict regarding which state is entitled to intangible abandoned property such as unredeemed gift card funds.

The first priority – called the “primary rule” – belongs to “the State of the last known address of the creditor, as shown by the debtor’s books and records.” If the primary rule fails to resolve the conflict because there is no known address for the gift card owner (as is usually the case) or because the gift card owner’s address is in a state that does not escheat abandoned gift cards, then the “secondary rule” provides that the state where the debtor is incorporated triumphs unless another state proves it has superior rights.

Consequently, an issuer of a gift card that does not keep records reflecting the residence of the person/entity purchasing the gift card, and is incorporated in a state that does not escheat unredeemed gift cards will be able to convert the unused funds into breakage. Thus, it is critically important for issuers of gift cards to know and understand the applicable state laws impacting their gift card programs.

What happens to unused gift cards when the issuer goes out of business?

If the gift card issuer goes out of business and closes its doors the purchaser is typically out of luck and the gift card is worthless. Below are a few suggestions in this circumstance:

If the gift card was purchased from a vendor rather than from the store/restaurant itself, contact the vendor. You may be allowed to redeem the card’s value for a card at a different store/restaurant.
If you paid for the gift card with a credit card, contact your credit card company. In some cases, consumer protection laws may qualify you for a refund.
Try using the gift card at a competitor. The competing store/restaurant has no obligation to honor the card and may not even have the means to do so. However, in some cases, stores accept their competitors’ gift cards or may give you a discount in exchange for them. In these ways, they try to earn you as a customer.

What happens to unused gift cards when the issuer files a bankruptcy case?

When a consumer purchases a gift card, they are paying up-front for future purchases at the retailer/restaurant that issued the card. When the issuer of the gift card files for bankruptcy protection, holders of unused gift cards are generally lumped in with the issuer’s other unsecured creditors, who often get little or nothing after secured creditors are paid. If a company wants to honor gift cards while it is in bankruptcy, it must get permission from the bankruptcy court to do so. There is no requirement that the gift card issuer seek permission of the bankruptcy court to continue honoring unused gift cards. Purchasers of unused gift cards can file a claim against the gift card issuer’s bankruptcy estate, but typically unsecured creditors receive substantially less than the amount of their claims and many times nothing at all. Some companies emerge from bankruptcy and resume business or are sold to a new third-party purchaser. When this happens, the reorganized company or the new purchaser may accept old gift cards that were issued prior to the bankruptcy.

This decision only adds to to the growing circuit split on the application of the “hypothetical test” or the “actual test” in bankruptcy, and may lead a higher court to consider the issue. For franchisees in the Sixth Circuit who desire to reorganize in bankruptcy, however, this decision provides clarity about which test parties may use to determine if a contract could be assumed.

This ruling reveals the limits to the rejection power of the Bankruptcy Code. While a bankrupt franchisee can use bankruptcy to unburden itself of future monetary liabilities due to a franchisor, such franchisee cannot completely rid itself of those bargained-for equitable remedies that are there to protect the integrity of the brand and the confidential, proprietary information that the franchise arrangement is designed to protect.