Unqualified Offerings

Rep. Fred Kessler (D-Milwaukee) wants the state of Wisconsin to appropriate the value of unused gift cards from Wisconsin merchants rather than letting the merchants book the breakage themselves after the expiration date. On what theory of law and justice? On the theory that Fred Kessler would really like to have that money. Radley Balko wonders if Kessler would also like “the change in your couch cushions, unused newspaper coupons, and spare french fries at the bottom of the bag.”

In fairness, you could make the argument that Kessler’s proposal is just a minor modification of Wisconsin’s existing uniform unclaimed property act, although as I read the act, the state is only entitled to unclaimed property that can’t reasonably be restored to the owner. If you simply add “gift cards” to the list of intangible property beginning at 177.01(10)(a), then the only gift-card balances the state would be entitled to would be cards where the purchaser can’t be contacted.

That’s something worth clarifying with Kessler, actually. Is he proposing to take whatever can’t be restored to the purchasers after good-faith effort by the merchant, or does he want to cut the purchaser out of the action entirely? I have my suspicions - Kessler didn’t announce a crusade to get people’s gift card breakage refunded to them, after all. But it would be good to know. (So many merchants have loyalty programs now that a good portion of cards should be traceable.)

There’s another complication. Some merchants at least used to accept expired gift cards/certificates. The expiration date existed to let the company get the accrued liability off its books, but for customer-service reasons the certificate’s functional life was infinite. That was our policy at Waldenbooks for most of the years I worked for them; it may have been the policy for all the years but I don’t remember any more. Presumably the amounts involved were, in accounting’s favorite word, immaterial.

As a practical matter, merchants plan for breakage on gift cards using retrospective analyses. It’s an expected income line and a reason why merchants sell gift cards in the first place. (There are others: cash flow and commitment chief among them.) If states start taking 80% of the breakage - Kessler’s proposed figure - I expect merchants will start charging service fees on top of the value of the gift cards. Most merchants don’t do this with cards they themselves sell, though if you buy cards from third parties like a grocery store, you’ll often have to pay one. So gift card purchasers will pay more for the same value card.

Do I think Wisconsin and other states can get away with this idea? Sure. It fits in the established concept of escheatable intangible property. And hey, who’s going to stop them? What do I think would be reasonable? A less-grasping alternative: just make merchants book the breakage as taxable rather than nontax income. Gift card sales aren’t themselves taxed; what you buy with the gift card is taxed. Taxing the sale itself would be double taxation. But the state can get a cut of the breakage if the breakage is booked as subject to whatever taxes the merchant’s ordinary sales are. The state gets its cut and consumers pay no more than they are paying now.

Full disclosure: Within the past year I’ve done unclaimed property analyses for my (non-Wisconsin) employer.