Unclaimed Property Laws Often Go Overlooked by E-Marketers, But Many States Are Aggressively Enforcing Them

One set of legal obligations that are often overlooked by Internet sellers arise under states’ “unclaimed property” laws, sometimes referred to under the arcane label of “escheat.” Black’s Law Dictionary defines escheat as “the preferable right of the state to an estate left vacant, and without there being any one in existence able to make a claim thereto.” Although dense, the definition, once parsed, describes a relatively simple concept: under the laws of nearly every state, a business that is holding property on behalf of a third-party (called the “owner”) is obligated to report and turn over the unclaimed property to the state, after passage of a prescribed “dormancy” period.

Unclaimed property includes customers’ unredeemed gift certificates and gift cards, merchandise credits, and uncashed refund checks. It also includes accounts payable, payroll and benefits, shareholder dividends, and even workers’ compensation funds, among other things. Indeed, any third-party obligation that goes unredeemed may be subject to escheat. For Internet retailers, unredeemed gift obligations can be substantial (although fortunately some state laws include exemptions for gift certificates). Retailers should be aware that expiration dates on gift certificates and gift cards do not apply to states’ right of escheat and that there is no statute of limitations on escheat obligations under most states’ laws.

Essentially, as such property becomes “abandoned” under the applicable dormancy period, the holder of the property (i.e., the retailer) must pay such amounts to the state. As a general rule, the holder is obligated to remit the funds to the state of the last known address of the owner; if the retailer does not have address information for the holder, then the retailer typically must remit the funds to the retailer’s state of domicile (typically, where the retailer is incorporated).

Many states aggressively enforce their unclaimed property laws as a source of revenue. (Among the most active states for unclaimed property audits are Arizona, Delaware, Illinois, Massachusetts, Michigan, New Hampshire, New Jersey, Nevada, Rhode Island, and Tennessee.) Indeed, a number of states are increasing the number of unclaimed property audits they conduct on the belief that there are billions of dollars of unreported unclaimed property. State laws typically impose interest and penalties for failure to report, as well.

Note that there is no nexus rule that limits a state’s constitutional authority to seek to collect unclaimed property from a remote seller. Multi-state audits are common. In addition, many states are now using outside auditors, paid on a commission basis, to pursue collection. Not surprisingly, such “hired-gun” auditors have an incentive to think creatively and to conduct wide-ranging, time-consuming audits that examine records going back decades.

There are strategies for managing unclaimed property obligations and reporting. If you believe your company faces unclaimed property reporting requirements which have not yet been addressed, consult legal counsel for advice on the various solutions available.

Gift Cards: The Sleeping Dog

Many of you may have read about the federal Credit Card Accountability, Responsibility, And Disclosure Act of 2009 (the “CARD Act”). While the CARD Act largely regulates the terms and conditions for credit cards, it also provides certain protections for purchasers of gift cards that will go into effect on August 22, 2010. But many people may not be aware that the CARD Act does not preempt or otherwise supersede state laws on gift cards, either before August 22 or afterwards.

There are many states that have gift card laws that bar the use of expiration dates on purchased gift cards, prohibit or set restrictions on imposing inactivity fees or other charges with regard to gift cards, and/or require disclosures regarding fees and expiration dates. Some of these laws are enforceable by the attorneys general of the states and/or through suits brought by consumers.

Moreover, most of these laws are enforceable against online retailers, even if the online retailer doesn’t have nexus or a physical presence in the state. Constitutional “Due Process” standards permit suits against a company that might nevertheless be insulated from tax obligation under the Commerce Clause. As long as the online retailer sells to a customer in the state, the online retailer will be subject to the provisions of the state’s gift card statute.

Finally, there are several states that require the “escheat,” or payment over to the state, of the value gift certificates and gift cards that have not been redeemed within a prescribed period of time set by statute. These so-called “unclaimed property” statutes are designed to preclude a retailer from obtaining an advantage through such “breakage” and require the payment of all or a portion of the face value of the gift cards to the state.

The point is not to throw your hands up in defeat and either ignore the applicable statutes or take measures that do not make sense from a business standpoint. Rather, a prudent online retailer should review its gift card program in light of the various state statutes. This will be particularly important prior to the effective date of the CARD Act on August 22, 2010, so that the retailer can understand its obligations with respect to gift cards issued before and after the new requirements of the CARD Act take effect.