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Concerns with the sale of gift cards?

Question:  With the holiday season approaching, what do I need to be concerned about with the sale of gift cards?

Answer:  According to the National Restaurant Association, the size of the restaurant gift card industry is fast approaching $5 billion per year.  Despite the fact that gift cards have become increasingly popular, restaurant owners engaged in the offer or sale of gift cards are required to comply with the Michigan Consumer Protection Act and the U.S. Department of Treasury’s Regulation E.

Regulation E includes specific provisions related to gift cards with expiration dates and requires that gift cards cannot expire for at least five years.  Similarly, gifts cards sold in Michigan cannot expire for at least five years and consumers may not be charged inactivity or other service fees.  In addition, gift cards must conspicuously disclose all terms and conditions related to the gift cards, which may not be altered after purchase.

One of the attractive qualities of gift cards, however, is the extent to which gift cards go unused.  Recent estimates suggest that approximately 6-10% of all gift card sales never result in redemption.  In some states, this unused gift card amount (breakage), must be returned to the state (escheat).  In other states, breakage may be retained by the restaurant.  If you are part of a franchise system, your franchisor will have a system-wide procedure related to breakage with which you must comply. 

In Michigan, the Uniform Unclaimed Property Act, which governs whether unused funds are required to escheat, does not apply to “gift certificates” as that term is defined in Section 3e of the Michigan Consumer Protection Act.  This means that if your gift card program is properly structured, restaurant owners in Michigan are not required remit breakage to the state. 

As holiday gift card sales ramp up, make sure you consult your legal counsel to ensure you have properly structured your gift card program.  You should also consult your accountant to verify whether you are properly accounting for all gift card proceeds and redemptions, particularly in light of the five year expiration requirement.

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