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Monday, June 28, 2004 - Page updated at 11:31 A.M.
New state law will ban gift-card expiration
By Peter Lewis
But besides making good on purchases, a new state law to take effect Thursday also allows in-state businesses to keep money from unused certificates. Under the expiring law, they had to forward the money to the state as unclaimed property after three years.
The new legislation makes Washington one of 15 to 20 states that have passed or are in the process of adopting laws that ban expiration dates on gift certificates, according to Dan Horne, marketing professor at Providence (Rhode Island) College, who for a decade has been studying the use of gift certificates.
Washington's new statute also mostly does away with service charges such as "dormancy" fees sometimes $1 or $2 a month that kick in if certificates go unused after a certain period. The law specifically defines gift certificates to include gift cards but carves out exceptions for those issued for promotions and charities, as well as those issued by financial institutions.
Still, Horne says Washington's new law may be the most consumer friendly in the nation. Besides banning expiration dates and fees, it lets consumers cash out cards when there's less than $5 remaining.
Nearly nine out of 10 consumers who receive gift cards use them within the first three months, according to industry experts and published reports. But nationwide, the value of unredeemed cards last year alone added up to roughly $2 billion, according to Horne.
The U.S. Supreme Court has said the owner's residence determines which state gets to hang onto unclaimed property. If that can't be ascertained a likely scenario with gift certificates partly because the owner and the purchaser often are two different people the funds shift to the state in which the business that issued the certificates is incorporated.
Unclaimed-property laws governing gift certificates vary among states. The lack of standardization the absence of expiration dates, differing expiration dates, laws that don't specifically address gift cards in some cases has led to cat-and-mouse games.
Take Amazon.com, headquartered in Seattle and incorporated in Delaware.
Two years ago, Amazon.com established a company called A2Z to handle its gift-card operations. A2Z is incorporated in Idaho, a state where unclaimed-property laws do not specifically address gift cards, allowing Amazon.com to hang onto unused value. It couldn't do that under Delaware law, which requires companies to turn over unused gift certificates after five years.
Amazon.com spokeswoman Patty Smith said the company would adhere to the new Washington law for Washington residents once it becomes effective. The company does not break out gift-certificate revenues, she said.
Smith declined to say why A2Z was incorporated in Idaho. Horne believes it's reasonable to speculate that Amazon.com went shopping for a state with unclaimed-property laws more congenial to retailers.
Over each of the past five years, the Washington state Department of Revenue has collected roughly $2.7 million in abandoned gift certificates, records show.
The department's unclaimed-property division holds onto the money in perpetuity for consumers to claim. But because many gift-card holders don't know to contact the state, and because business records often lack information identifying who owns the certificates, only about $362,000 (or 2.7 percent of the total available) has been recovered since 1999. The rest has been absorbed into the state general fund.
State Rep. Ross Hunter (D-Medina), chief sponsor of the new law, considers it consumer-protection legislation because it lets "people keep their money and not have all kinds of goofy rules."
A popular gift
Gift certificates, particularly gift cards, have become phenomenally popular. Nationwide last year, sales grew to $40-$45 billion, which represents a tenfold increase over a decade.
Some examples include:
Starbucks reports that during the first three months of this year, about 3 million Starbucks cards were activated, with a total value of $44 million. Since it launched its gift-card program in November 2001, Starbucks has activated more than 29 million cards.
Key Bank, which also started its gift-card program in fall 2001, said sales last December were up 72 percent over December 2002. Key Bank, as a federally regulated bank, is not subject to Washington's new law and its cards carry an expiration date.
GiftCertificates.com, a Seattle-based company that acts as a middleman for almost 200 gift-certificate brands, reported its Web business was up 30 percent last year over 2002, a trend that seems to be continuing this year. CEO Mike Ahern said the site primarily relies on customers to speak up about where they live in order to take advantage of state consumer-protection laws.
Gail Hillebrand is a West Coast-based senior attorney with Consumers Union, publisher of Consumer Reports, and helped promote California's pioneering 1996 gift-certificate law to ban expiration dates. She said marketing makes consumers think of gift cards as cash, when in fact they can expire.
"Consumers need to do a good job of keeping track," she said, referring to the specific laws and rules governing their use.
No one testified against the Washington state bill, which received unanimous support from both chambers in Olympia. But not everyone supports the legislation.
The National Retail Federation, an umbrella group, opposes banning expiration dates. It also resists legislation prohibiting dormancy fees, arguing they are justified to cover costs of establishing and maintaining gift-card programs.
"Major retailers don't do business in one or two states," says NRF spokesman Craig Shearman. "They do business nationwide, and having to comply with a different law in each state drives up costs that must be passed on to customers."
By contrast, the trade group representing Washington state retailers supported the new law, calling it a plus for both consumers and businesses.
Dedi Hitchens, director of government affairs for the Washington Retail Association, said the average citizen didn't know to go to the Department of Revenue to claim unused property.
"Imperfect public policy"
As progressive as Washington's new law may be from a consumer's perspective, Professor Horne believes it's imperfect public policy because businesses will get to keep money that doesn't really belong to them.
He says retailers deserve a percentage of unused gift-certificate money to compensate them for costs to maintain the programs. "But if the money is truly abandoned," Horne said, "then it belongs to all people."
The trick is defining when to call it abandoned.
"That's all over the board," he added.
Peter Lewis: 206-464-2217 or email@example.com
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