Dirk Ahlbeck, CPA | National Restaurant Practice Lead
Restaurant gift cards are great gift for the holidays. Gift cards can be convenient to purchase, offering buyers the opportunity to purchase multiple gift cards for different recipients. With as easy as purchasing gift cards may seem to both the buyer and seller (restaurant), there are risks associated with both parties, including laws governing gift cards.
For restaurants, gift cards are widely beneficial – the restaurant receives cash upfront for the purchase of the gift card, diners often spend more than the actual value of the card used, offering the sale of gift cards (especially during the holiday season) can increase store traffic and revenue, and gift cards are always a popular gift. Another benefit for the restaurant is often gift cards are lost, forgotten, or partially used or never redeemed, which since the store already received the revenue of the card, it doesn’t result in loss profit while maintaining the inventory upon a card being lost or forgotten.
When factoring gift card volume and revenue within the restaurant’s financials, owners need to consider Unclaimed Property or Escheat laws. All states have a variety of Escheat and Unclaimed Property laws, which occur when a seller declares the card as “unused.” The law requires holders to report any abandoned, intangible property to the states under law. Abandonment is defined as “dormancy period” of activity (i.e.: a buyer purchases a restaurant gift card in December 2019 and has yet to use it in the store by December 2022). Standard timeframe for these laws indicates 3-5 years after the liability is created. Additional examples of unclaimed property along with gift cards residual balances are uncashed payroll checks.
For restaurant owners to claim which state the funds are entitled to, the first step is the state of the owner’s last address. The second priority is the company’s state of incorporation. Most gift cards fall under this rule; however, states vary between full or partial exemption of gift card reporting. Some states are fully reported and require escheatment of unredeemed gift cards.
In the event a restaurant goes out of business with unused gift cards remaining with consumers, a few options are available:
- If the gift card was purchased using a credit card, consumer protection laws may result in a refund.
- Consumers may try to use the gift card at a competitor’s restaurant to gain new business.
If restaurants have a significant aged gift card balance, owners should determine if a potential unclaimed property liability exists. It’s critical for restaurants to maintain compliance with state requirements and regulations, as states also have voluntary compliance programs for noncompliance.
Savor the benefits of offering gift cards this holiday season by ensuring your restaurant is properly set up for your state’s regulations. Contact me today to discuss gift cards for your restaurant, bar, winery, café, or eatery.