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Delaware Joins Challenge Against Gift Card Entities

Jun 23, 2014

Unclaimed property compliance is an area that is commonly overlooked by many companies and their executives, even though it is an important statutory requirement that affects businesses of all sizes in all types of industries.
"Unclaimed property" is generally defined as a liability that a business owes to an individual or another entity, when a debt or obligation -- such as an uncashed payroll check -- remains outstanding after a specified period of time. Businesses, as the "holders" of unclaimed property, are required to locate the property’s rightful owner or to turn the property over ("escheat") to the appropriate state.
The Delaware Gift Card Controversy

The state of Delaware is currently at the center of an unclaimed property controversy as a result of a so-called “qui tam” lawsuit over gift card balances. (A qui tam case is originally brought by a private citizen or whistle blower, allowing the government the option to take over the case if they find merit in the action.) Recently, the Delaware Attorney General’s office moved to intervene in a “qui tam” lawsuit over the unused or unredeemed balances on gift cards.

The case, Delaware ex rel. French v. Card Compliant et. al, involves over 27 companies and highlights the risks, rights, and responsibilities of all companies that issue gift cards, whether on their own, through an affiliate, or even through an unaffiliated gift-card service company. According to the complaint that the State is now taking control over, Delaware-incorporated entities have entered into sham transactions with card service companies that are incorporated in those states where gift cards are not subject to unclaimed property laws. As a result, those companies may have intentionally avoided Delaware’s unclaimed property reporting requirements and may have deprived the state of “hundreds of millions of dollars” of unclaimed property revenue by not turning over the value of unredeemed gift card balances.

Is It Too Late to Act?

With the Delaware Attorney General poised to enter the fray, this may be an appropriate time for those businesses that issue – or are associated with – gift cards to review their procedures and liabilities. For example, if your company is using a third party to report unclaimed gift cards, or if you have incorporated a gift card subsidiary in an exempt state, you should take care to ensure that the entity is a true “holder” or issuer sufficient to withstand regulatory scrutiny.

In the past, many companies have taken advantage of amnesty programs, such as the Delaware Unclaimed Property Voluntary Disclosure Program, which limit the look-back period for any unclaimed property audit. The timing for a shortened review is critical, as the deadline to enter the current Voluntary Disclosure Period in Delaware is June 30, 2014.

In the context of unclaimed property in general, and with gift certificates and gift cards in particular, it is important for businesses to understand the states’ audit practices and to take affirmative steps to mitigate risk. Please don’t hesitate to contact us if we can provide additional information or counsel.

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