ASHLEY: Welcome to Outgrowth: A Slice of Pro Beauty with your hosts Ashley Gregory Hackett.
JAIME: And Jaime Schrabeck. Traditionally, salons and beauty pros have relied on the sale of gift cards and certificates to generate extra revenue during the holiday season. But facing the prospect of future shutdowns, and even permanent closure, is that a smart move?
ASHLEY: To discuss the best practices and legalities of gift cards, we’re joined by Amy Toepper of Legal In A Box. Let’s grow together.
ASHLEY: Welcome back, Amy.
AMY: Thank you so much. Thanks for having me again. Glad to be here.
ASHLEY: Alright. Well, let’s jump into it. This is going to be a hot topic given the time of year, but from the perspective of a small business owner, like a salon owner, a booth renter, what’s the difference between a gift card and let’s say a paper certificate?
AMY: So I just wanted to say how much fun I had really researching this topic because it is sort of much more intricate than I ever thought it would be. And so I want to approach our conversation today from sort of three different perspectives. I want to answer your questions in terms of legal requirements, accounting requirements, and then really business and marketing strategy, individual business decisions. So from a legal perspective, I sort of want everyone listening to realize that a gift card or a gift certificate is essentially a contract. And in the law, we define a contract as an offer, an acceptance of that offer, and that there was consideration for that arrangement and consideration just is a fancy word for money. So under that paradigm or under that structure, we analyze gift cards and gift certificates. So from a legal perspective, there isn’t really a difference between gift card and gift certificate. When we look to analyze this under sort of a legal umbrella, we first start whether or not there’s a federal law that applies. Interestingly, there is a federal law, federal CARD Act from 2009, that says here’s how the federal government is going to regulate gift cards or gift certificates. And for every state across the country, we are going to say that they cannot expire within five years if you issue one. However, number two, you can charge a small fee if they are not being used. So that’s sort of the first step from a legal analysis. It’s a contract. Federal law applies to some extent as far as how long they exist for and what you can do if someone isn’t using it. And then the next step is we looked at each individual state to see if there are any additional requirements in your state for gift cards or gift certificates. So from a legal perspective, no, they are both, contracts, small contracts.
JAIME: That being said, Amy, that it wouldn’t make any difference if that gift card or gift certificate took the form of either plastic or paper, or physical versus some sort of virtual or digital format.
ASHLEY: Since there is federal law involved, can we as business owners place limitations on how that value is spent?
AMY: So limitations can be placed on how that value is spent as long as it is clear to the person purchasing the gift card or the gift certificate. So in other words, again, thinking about this in terms of a contract, if I’m purchasing a service from you, and you’re selling it to me, and I’m giving you money for it, well, now what? When someone comes to repaint your kitchen, or when someone comes to put in a new driveway, there’s a contract as to what each side is going to be responsible for. When you’re reserving these types of contracts for specific services, quite frankly, I just think the gift certificate tool works more effectively because you can put right on the document what this is for. I think with a gift card, just best practices for a gift card, is that someone understands this as a prepaid card that they can use for any service. If you do want to restrict what can be purchased using a gift card, I just think you have to work a little bit harder to make clear to the purchaser what those restrictions are, whether it’s an attachment to the gift card or something on your website, but I think that makes it a little more difficult.
JAIME: Amy, as far as the terms of service are concerned, how much of that needs to be put in front of the purchaser in advance? Does it need to actually be on the item itself or is it something that you can put up on your website and review with the person before they purchase?
AMY: Yeah, I, certainly something you can put on your website and review with a person. Again, the key is, and with any contract is, to just make sure that the terms of service are clearly stated so that everybody understands the agreement that they’re getting into, right? So we have really complex, 20 page contracts. This is not that. So now we’re talking about how are we going to really legally effectuate a quote unquote contract, but do it in a way that is by far the easiest from a business perspective. So when you give someone a gift card, they’re going to understand that that really just translates as money. When you give someone a gift certificate, that specifically restricts services on the face of that document, they’re going to understand that. Could you do it different ways? Can you restrict gift cards? Yes. I think it makes it more difficult. Legally, you can, from a business practices perspective. I just think that makes it a little bit tougher.
ASHLEY: Seeing as though there is a federal card act, what role does state or even local municipality regulation play in the sale of a gift card from a small business?
AMY: So again, no matter where you are, everyone’s going to be under the regulations of the federal government. So we know that everybody listening to this is, number one, going to have at least that requirement: five years, the ability to charge after 12 months if a gift card or gift certificate is not used. The next step is to say in my individual state, what are the laws that apply to gift cards? And if they’re more restrictive than the federal government, those are the ones that I have to follow. And then going one step further, is there anything more on a county basis or a city basis that I have to look at? So from a legal perspective, we want to look at those three levels and go from there.
JAIME: Where do you suggest that we look? And I have to give you some background, Amy. In preparing for this episode, Ashley and I made the effort to reach out to various state agencies to try to get information. And all they do is put the law in front of you and tell you, it’s up to you to interpret it, and I think that’s not very helpful because of course it’s written in legalese and it doesn’t really translate to what we need to know as small business owners.
AMY: Yeah. So I actually, I have a great website that I can send you and you can include as a link when the podcast goes out as to what each individual state law says, if they say anything, about gift certificates or gift cards. And so it is, I think, a challenge to say, well, I don’t really understand what that means. Where do I go next? And so obviously an attorney is always the best place to go. We’re more than happy to answer those questions for your listeners. We can try with other business owners to see whether or not they’ve gotten any advice and whether or not that advice is consistent with your understanding of the law. Chamber of commerce, to the extent that they’re helpful, or might have some guidance on it. But more importantly, I want people to just think from a common sense perspective. That even if I don’t really understand fully the law, am I making decisions under this analysis of a contract that are clear? Is my customer going to understand what it is I’m trying to do with this gift card? Is my customer going to understand that this gift certificate is limited and you know, if all else fails, think of it from a business perspective. Is this, does this make sense?
ASHLEY: Okay. So switching gears slightly, what happens if the physical gift card or certificate gets lost or stolen by either the purchaser or the recipient? What obligation do we have as business owners to that issue?
AMY: Like any contract, you want to keep a copy of your contract and you want to be able to access that in some sort of Excel spreadsheet or physical file folder. So like a gift card or gift certificate, we want to, as business owners, keep the information associated with that. Now switching from a marketing business practice analysis, here’s where people find gift cards to be beneficial because gift cards, whether it’s a virtual or a physical plastic card, really can be incorporated into any point of service business. So if you have a register, if you’re using Square, if you’re using any kind of electronic format for your customers to pay, it’s very easy for a gift card to be issued, categorized, and then a record of that being kept. Gift certificates certainly can do that too. It’s just you have to take a little bit more effort to make sure that you’re keeping track of them, whether or not there’s a barcode on the face of that gift certificate or a specific number, but we want to make sure that the information we have from the person purchasing it is retained for our records. So if someone comes to you and says, I can’t find it. It’s a little bit easier than to check a plastic gift card because you’ll be able to see whether or not it’s been redeemed at all, whether there’s been a partial redemption, whether or not somebody found it and used it all. And so that makes it a little bit easier. A gift certificate is a little bit harder because we’re just really talking about a paper document. But at the same time, if you keep good records as a business owner, you should be able to tell that person, we have no record of someone redeeming this. So we’ll go ahead and issue you another one. But that’s where from just a practical standpoint, I think the gift cards make it a little bit easier to track that.
JAIME: Without getting too specific, is there any legal language that we should include on our websites? I know I’ve asked this previously, but I’m concerned that when we do make these sales, we’re selling it to a purchaser, but who that person gives it to hasn’t agreed to those terms.
AMY: I agree with you. And again, I kind of use the phrase, you know, keep it simple. Keep it as simple as possible. If someone buys a gift card and gives it to somebody else, there is an understanding that this gift card represents a certain amount of money. That if I lose this gift card as the buyer of the gift card or the recipient of a gift card, it’s going to be a little bit of a hassle. So it’s, it’s my job to keep good track of it. But in any case, I think it is also good practice for anyone to put on their website. Hey, just like any other purchase where we give you the terms and conditions as to how you can return something. What if you purchase it and you don’t like it? What’s our refund policy? I think it makes sense to have a gift card and/or gift certificate policy right there on your website that says here’s how we use them. Here’s what we charge for them. Here is the amount of fee and an explanation of how the fee will be assessed if they aren’t used after 12 months. So those types of things, again, thinking about it in terms of a very simple contract, just disclosing as much as you can will help out the customer and at least provide the customer a place to look for answers.
ASHLEY: Okay, so help us understand how expiration dates do apply, if at all, knowing that there is that federal limitation of five years.
AMY: So the limitation of five years is a gift card or gift certificate lasts and has value for five years. The next step would be then go to your individual state law to see if there’s any other particular explanations or restrictions on expiration dates, whether or not there’s any communications that have to be made to the card holder. But after 12 months, federal law does allow an individual business owner to charge a rate, or a fee, or, you know, almost kind of like a penalty if that gift card isn’t used. But again, you want to take a look at your individual state law because some states restrict that fee both in dollar amount and then also in time. So the expiration dates apply both at a federal and a state level. So you want to check both. And if you feel that there are a bunch of outstanding gift certificates out there, I think that there’s some marketing and best business practices and strategies to encourage folks to use those. And then I want to make it just a really quick point on accounting here. Those outstanding gift cards do not constitute income earned until those gift cards or gift certificates are spent. And so something just to kind of keep in mind when you’re talking with your CPA, those gift cards remain a liability on your books until the value is gone.
JAIME: Amy, if we donate as a business owner, a gift card, or a certificate to a nonprofit organization, in other words, no money has exchanged hands, can we restrict the use with an expiration date?
AMY: When you’re passing a gift card from yourself to then a third party, now you’ve almost entered into another mini contract with this third party. And so we’ve done that with our own PTA that my kids go to school with. Any unused gift cards that have any dollar amount on them, please feel free to donate and we can use it for a good cause here at the school or something similar to that. So now what I’m doing though is now my contract that was between myself and Starbucks, myself and Target, is now between myself and the organization that I’m donating it to. The same federal law and state law applies to how that gift card is used, and when it expires, and whether there’s any fees attached to it. So that recipient, that third-party recipient, would be subject to those same restrictions. So I wouldn’t be able to limit it in any way based on an expiration date because federal and state law would control how good that value was and for how long. If I wanted to donate it saying that I would please only like this to be used for my second grade class, because my daughter’s in that class, then now we’re talking about a separate contract and agreement between you and the third party. Does that make sense?
ASHLEY: It does and that definitely brings up just more questions, of course. This I think almost applies to something similar to a Groupon, but if there’s a third party selling gift cards to our businesses, does that present any special challenges or any additional protections we should know about?
AMY: I think it does add a layer of complexity or challenges in so far as you’re bringing in a third party to this transaction and like any contract, if you have more than two parties, there’s just going to have to be a clear explanation as to who’s responsible for what. And so, you know, I know there are retailers, and stores, and small businesses who shy away from using things like Groupon because by the time they’re done with the fees and processing, they’re really not making any money on a particular service or good. So I think the most important part there is just to really read the fine print before you bring in a third-party as a small business, to make sure that the offer that you’re giving people is financially viable for you.
JAIME: Returning to what Ashley was commenting about a card or certificate being lost or stolen, when after a length of time, a gift card goes unredeemed, who’s the rightful owner, the purchaser of the card, or perhaps a third party recipient of the card? Who do you hold the contract with?
AMY: So, this is really interesting. And so now we’re talking about a contract that we have with these gift cards or gift certificates for, a service or a good. Well that contract represents a. promise to exchange and pay for a property, right? Some sort of property, whether or not that be a service-based property, or shampoo and conditioner, actual I can touch it on the shelf. So this is sort of interesting. And I recently learned this federal law says that funds used from unused gift cards belong to the state of the last known address of the consumer. So if I have a gift card that is in my name, and I don’t use it, and it goes abandoned for five years, it belongs to the state of Illinois then because that’s where I’m located. And then each individual state has what they call escheat laws, E S C H E A T, escheat laws. And this is really a government’s right to property that has gone unclaimed for a period of time. And then when a property becomes quote/unquote abandoned, the state can take control and each state has their own rules as to how and when this can happen. So if you don’t use your gift certificate, and it sits in an old purse in the back of your closet, and five years have passed, and you don’t take steps to redeem it within that time, it belongs to the state in which you live. And that state then can get the value of it or claim that abandoned property in some way. So that’s sort of interesting to not only look at this in terms of, legally from a contract perspective, but also from a property perspective and what happens to an abandoned house. Eventually, government can take control of that abandoned house if they’ve gone to great lengths to try to find the owner, so that’s sort of interesting.
ASHLEY: That’s really interesting. So even if the business is still in business and that gift card goes unclaimed or unredeemed, I guess I should say, it still could be claimed by the state.
AMY: Yeah. It still could be claimed by the state. Now by this point from an accounting perspective, it changes whether or not that’s a liability and that’s a question for your CPA. So it’s not necessarily an outstanding liability for the business forever, and ever, and ever. And then, then, you know, the state is very specific as to how that gets redeemed and what that means for the state government. But yeah, so it can be claimed by government.
ASHLEY: So then if a business wanted to expedite redemption, what’s considered a good faith effort to notify the gift card holders of their available balances and kind of encourage redemption?
AMY: Yeah, so from a legal perspective, there’s really not much here other than you can’t really change the terms and conditions. The gift card or gift certificate remains outstanding for five years, unless you decide to charge a fee based on your state regulations. So really from a business practice standpoint, I would just say email correspondence, encourage customers to use their gift cards by maybe offering special discounts for gift card purchases, or additional bonus gifts when the customer redeems the gift card. If you’re looking to move that gift card from a liability over to an asset, in your books then, kind of good marketing or encouraging customers to use it by tacking onto the additional bonus is a good way to do that.
JAIME: What happens to those outstanding liabilities if a business closes, or changes ownership, or declares bankruptcy?
AMY: So again, this is a very interesting legal question. What happens to consumers and their gift cards of a retailer that issued those cards goes bankrupt and that’s certainly happened many times in the past few years. And so, some huge names that have filed for bankruptcy under chapter 11, which is the corporate bankruptcy chapter of the bankruptcy code, is places like Borders, Sharper Image, Radio Shack. So the amount on each of your gift cards may not be large, but the aggregate amount of all the gift cards issued by a retailer can be huge. So for example, when Sharper Image closed, they had about $19 million in unused gift cards when they filed for bankruptcy. At one point in Radio Shack’s bankruptcy case, there were about $46 million of unexpired outstanding gift cards. So then what happens is, and this is also very interesting too, a gift card holder can essentially petition that bankruptcy proceeding to say, hey, I’ve got to be paid on this because I’ve purchased it. And so this is what we call secured creditors or unsecured creditors and the law. And that simply means when someone goes bankrupt and they presumably owe a lot of people a lot of money, who gets to be first in line to collect any money after the company is liquidated? And in some cases, based on the bankruptcy proceedings, the holder of gift cards can get some amount of money, whether or not it’s the full value of a gift card, or whether it’s a lower negotiated rate remains to be seen. Most people probably just throw their hands up and say, oh well. But in some cases, you have a status to get money on those gift cards. Typically though, what happens is as part of the bankruptcy procedures, the retailers, the stores that are going through bankruptcy really try to seek to limit the time in which gift card holders can redeem their cards, maybe requiring them to make additional purchases in amounts exceeding the value of the card, or require the card to be fully redeemed at one time, for example. So what we’re talking about in a bankruptcy proceeding is basically everything goes into the pot, and gets melted, and based on where you’re standing in line as a creditor, you’ll get a portion of all the stuff that was melted down from the company.
JAIME: That would be like an extreme situation going through a bankruptcy proceeding. What if you just close your doors?
AMY: If you just close your doors, I think you have to be a little bit careful because technically someone could come after you and sue you for the value of the unused gift card because it really is a contract in which you never held up your end of the bargain. So if the business is closing, from a legal perspective, and then also a marketing perspective, we want to just get as much notice to those individual people that we’re closing. Come and use this. We’re liquidating. We’re winding down the business. Now’s the time and I’m giving you 90 days notice. I’m giving you 60 days notice. I’m reminding you again at 30 days. Come and use it. Like I said, is someone going to file a piece of litigation for a $50 gift card? No, but again, best practices.
ASHLEY: Okay, so let’s lay out a hypothetical here. Due to COVID and the fact that salons are up and down, in and out. We’re open. We’re closed, and that’s really taking obviously a financial toll. If you have a lot of exposure of sold gift cards that are unredeemed, and let’s say you do have to close up shop, maybe you move to another state and open there, or what have you, is there the potential for all of those outstanding gift card owners to form a class action against you?
AMY: Sure. I say to my clients, people can sue you for any reason at any time, whether or not that piece of litigation is going to be valid is a different story and a whole different analysis. So in that circumstance, what I probably would do is make it a point on your terms and conditions on your website to say that if this business intends to close or we move, here’s how we’re gonna handle outstanding gift cards. And then just follow through with that procedure to make people aware, to have a MailChimp auto-generated gift card holder list so that people are aware of what’s going on. And so then if you give someone three months notice that you’re moving or you’re closing, and now’s the time to come and use them, then you’ve modified the terms with the contract, but at least you’ve told them.
JAIME: Let me play devil’s advocate. What you’re describing as a possible class action would be a civil case. What if someone were to sell gift cards fraudulently? In other words, they knew they weren’t going to be able to honor what they’re selling because they do plan to close immediately, or?
AMY: Yeah, then that for sure. I mean, if there is some sort of premeditated criminal intent to commit fraud then without a doubt, the individual state could go after that person and have for sure.
ASHLEY: Okay. So if we’re going to be the responsible business owner and do everything right, do you have any recommendations for best practices to business owners for selling and then tracking the selling of gift cards?
AMY: Probably a couple best practices. Again, from a legal perspective, is check the gift card laws and regulations in your state and then in your area, assuming and knowing that the federal law will apply. Gift card laws really vary from one location to the next. So that’s, that’s the first step. Check and follow the laws in your area. The second step is putting in a little bit of time, thought, and/or investment into implementing gift cards. Holidays and special events are popular times for gift cards, but looking into it December 1st is probably not the best time during a busy shopping season to figure that stuff out. So the last thing you want to do is implement a brand new program that’s got some kinks in it two weeks before Christmas. So instead I’d say, implement gift cards, especially if you’re switching over from paper gift certificates to actually cards with numbers or metallic strips on them, and give yourself a chance to kind of test drive your gift card program so you can iron some of that stuff out. And then probably the other piece is invest in good marketing. If you want to offer gift cards, don’t expect that people are just going to suddenly flock to your store to get them. With any sort of new initiative, invest the time and resources to put the gift card program out there. And really even as so simple as presentation. If I can buy someone a gift card that comes in a box, and is wrapped up, and is in a bag with tissue paper, it’s just going to make it more satisfying for me as a customer to say, here is not just a gift card, but rather here’s a gift that I’m giving you and that gives businesses the ability to do some great branding too.
JAIME: Throughout your responses I’ve recognized just how important the record keeping aspect is. And I recently ran a report going back 15 years for all the gift cards that I’ve sold through my business and it was amazing how many had not been redeemed, many of which had been donated to organizations. So I have no idea who has those because if they were donated to an organization, they could be sitting in the drawer of the executive director’s desk or they could have been purchased at a silent auction by some person I have no idea who. So it’s been a bit of a challenge, but I have found that in contacting individuals who didn’t realize that their name had been attached to these gift cards, that we are encouraging people to come in and redeem them. So that’s been interesting. They’re thrilled that there’s still a balance that they can use. So that’s been great, but again, I have found that even then with a first name and a last name, and a phone number, and an email address, over the course of 15 year those things tend to change.
AMY: And not only do they tend to change, I think that’s exactly why federal and state law step in then to say, okay, business owners. We’re not going to make you keep good on this promise for 19 years so that someone comes back and says, hey, I want my $10 gift card redeemed. And that’s exactly why laws are put into place to benefit and protect business owners so that they aren’t legally responsible for things that are just out there in the ether for forever. So we put a time limit on when people should reasonably expect to use those.
ASHLEY: Amy, tell us and our listeners where we can find more info if we need it and how to get in touch with you at Legal In A Box or at AMT.
AMY: Absolutely. So you can find me online at legalinabox.com or amtlawgroup.com. AMT Law Group is my own law firm practice and we service small businesses, and entrepreneurs, and startups with everything from corporate transactions, and contracts, and trademark issues, to employee handbooks and commercial lease reviews. Legal In A Box is a separate company that is flat fee pricing for some forms if you’re a DIY kind of person, or flat fees for setting up LLCs. We are on Facebook and you can message me there, or email me at firstname.lastname@example.org or email@example.com.
JAIME: Amy, thank you so much. I know you’ve given our listeners a lot to consider.
AMY: Absolutely. It’s a pleasure. It was an interesting topic and certainly pertinent for this time of year.
JAIME: Ashley, it just so happens for the year 2020 that I had put a pause on selling gift cards because I realized that pulling that report from my database, I have a lot of outstanding liabilities in terms of gift cards that had been either purchased or donated to charitable organizations.
ASHLEY: I think that that is an incredibly enlightening way to figure out exactly where you stand number one. But secondly, I think it’s super important that our listeners take away what Amy alluded to is that you don’t own that revenue until it’s been redeemed.
JAIME: And it’s likely that some of those cards at a certain percentage will never be redeemed.
ASHLEY: Correct. Well, it’s a fun mystery to see who shows up with what kind of gift card, but as always, thank you to Amy Toepper of Legal In A Box for really cracking this wide open and helping us understand exactly what our obligations are around selling and redeeming gift cards.
JAIME: And even if we’ve been selling them in the past, we may want to reset our policies for how we sell them in the future.
ASHLEY: It seems like it’s all about keeping great records as we knew. All right. Well, if you’re enjoying Outgrowth, leave a review on Apple podcasts with just one click. Visit bit.ly/outgrowthpodcast. And we would really appreciate it if you could.
JAIME: As always, you can follow us in comment on recent episodes on Instagram at @outgrowthpodcast.
ASHLEY: All right, Jaime. Well, I think I’m going to get you a gift card for Christmas.
JAIME: Oh, will it be something I can use?
ASHLEY: Probably not. I’ll see what I have in an old purse.
JAIME: I’ll just give it back.
ASHLEY: Oh, awesome. Well, until next week everybody, be smart.
JAIME: Be safe.