States Scrutinize Gift Certificates
Retailers will sell $42 billion to $45 billion in gift certificates and cards this year, many through national promotions, according to Boston-based consulting firm Bain & Co. Many include expiration dates on gift certificates and charge dormancy fees if cards are not used by a specified period. Until recently, only California, Hawaii, Massachusetts, New Hampshire and Rhode Island restricted the use of expiration dates. And only two states (California and Iowa) restricted dormancy fees.
But this is changing. A patchwork of state regulations makes it increasingly difficult for marketers to offer gift certificates or cards nationally. In 2003, five states (California, Connecticut, Maine, Massachusetts and New Hampshire) either passed new laws or tightened existing laws regulating gift certificates and cards. In California, dormancy fees may be imposed only if the card value is $5 or less when the fee is assessed; if the fee is no more than $1 per month; if there has been no activity on the card for 24 months; if value can be added to the card; and if the fee is noted on the card.
In Connecticut, gift certificates or cards can’t have expire dates or dormancy fees. In Maine, gift certificates can’t expiration and companies can’t impose dormancy fees on gift cards unless the fees are noted on the cards. Massachusetts extended the valid term for gift certificates from two years to seven years. In addition, when a gift certificate is redeemed for 90% of its face value, consumers have the option to receive the balance in cash. In New Hampshire, gift certificates worth less than $100 can’t expire and gift cards can’t have dormancy fees.
In addition, 10 states (Illinois, Maryland, Michigan, New York, Ohio, Pennsylvania, Rhode Island, Tennessee, Texas and Utah) have bills pending that would either prohibit expiration dates or provide a minimum term for which gift certificates must be redeemable. Bills in Illinois, Rhode Island, and Texas would also prohibit or restrict dormancy fees on gift cards. Illinois’ bill is perhaps the most draconian: It applies a scale to determine how much companies can charge depending on how long a gift card has been dormant. (Between 24 and 36 months of issuance, the fee must be 15% of the original value of the certificate; between 36 and 48 months, the fee must be 25% of the original value; and after 48 months, the fee must be 50% of the original value.)
Since a restriction that is lawful in one state may be illegal in another, marketers have their work cut out. Issuers must be willing to forego expiration dates and dormancy fees altogether, or specify that a gift certificate or card is only valid in certain states, or address requirements in every state.
The latter option is more flexible, but also more difficult to manage. For example, if a person buys a gift certificate in one state and gives it to someone in another state, which laws apply? Companies rarely collect information about the ultimate recipient of a gift certificate and are unlikely to know where the recipient resides. (The use of “smart” gift cards that can be encoded with purchase data may make this process more manageable.)
With state legislators’ growing interest in gift certificates and cards, marketers must adapt to new laws or block problematic bills. Unless promotion marketers can convince legislators that these bills are harmful to the industry and, ultimately, to consumers, it may soon become impossible for companies to offer gift certificates or cards nationally.
Contact attorneys John Feldman and Gonzalo Mon at [email protected] and [email protected].
