Michelle André Jamie Ryan

Transcription

1 Gift Card Planning Presented by: Michelle André Jamie Ryan Tre Towers Advisory Group, LLC Bailey Cavalieri LLC Managing Member Partner (703) (614)

2 UPPO Presentation Disclaimer Use of the Unclaimed Property Professionals Organization, Inc., (UPPO) name of copyrighted materials in this presentation does not constitute an endorsement by UPPO of a member, vendor, product or service. The content represents the opinions of the author and not necessarily those of UPPO. This information is not intended as legal advice and should not be used to replace the advice of legal counsel.

3 UPPO Antitrust Statement UPPO has a policy of strict compliance with U.S. federal antitrust laws. UPPO members and/or meeting attendees cannot come to understandings, make agreements, or otherwise concur on positions or understandings, make agreements, or otherwise concur on positions or activities that in any way tend to raise, lower or stabilize prices or fees. Members and/or attendees can discuss pricing models, methods, systems, and applications, as well as certain cost matters that do not lead to an agreement or consensus on prices or fees to be charged. However, there can be no discussion as to what constitutes a reasonable, fair or appropriate price or fee to charge for any service or product. Information may be presented with regard to historical pricing activities so long as such information is general in nature and does not include data on current prices or fees being charged in any trade area. Any discussion of current or future prices, fees, discounting, and other terms and conditions of sale, which may lead to an agreement or consensus on prices or fees to be charged, is strictly prohibited.

4 Today s Agenda Gift Card Background Delaware ex. rel. French v. Card Compliant, LLC Best Practices Conversion to First Rule ULC Uniform Unclaimed Property Act Revision Gift Cards

5 Gift Card Background Early 2000s $25 billion market Minimal online gift card sales Breakage estimated at 12% Limited ability to connect purchaser Limited number of state exemptions Expiration dates Inactivity/maintenance fees

6 2013 Gift Card Background $118 billion market E-gifting $4 billion; projected to be $10 billion in 2016 Breakage expected at 1% Card Act Expiration Dates Fees Greater ability to connect purchaser 30+ states have exemptions

7 Card Compliant Suit Qui Tam Action Whistleblower lawsuit June 28, 2013 complaint filed in state court by a former Card Compliant employee Defendants companies and Card Compliant Delaware intervened in early 2014

8 Card Compliant Suit, cont d Defendants file to move case to federal district court December 10, 2014 federal district court ordered case remanded to state court stating the claims arise under state law and the federal court lacks subject matter jurisdiction

9 Card Compliant Suit, cont d Facts Delaware incorporated/organized companies Card Services Agreement: Card Compliant Assumed liability for unredeemed gift cards Issuer of new cards Trademark Licensing Agreement Handling fees

10 Card Compliant Suit, cont d Complaint Defendants schemed to deprive Delaware of hundred of millions in unclaimed property Defendants executed agreements whose only purpose was to illegally evade the unclaimed property laws The Delaware retailers were always the holders of the unused value Defendants intentionally failed to report and remit unclaimed property to Delaware

11 Card Compliant Suit, cont d Defendants Arguments Delaware must first establish its jurisdiction to escheat under federal common law Any escheat liability rests with the card issuers, not the retailers The card issuers are solely or primarily obligated under the agreement The card issuers are not domiciled in Delaware; therefore, Delaware does not have jurisdiction

12 Card Compliant Suit, cont d Defendants Arguments, cont d Defendants cannot be forced to escheat money for gift cards only redeemable in goods or services Delaware False Claims and Reporting Act Presently, existing, liquidated obligations Property actually belongs to the government Delaware issued receipt or certificate False records or statements made by defendants

13 Issues/Concerns Who is the holder? Can businesses structure their affairs to take advantage of favorable unclaimed property laws? Can states invalidate transactions previously determined to be valid? What level of economic benefit is necessary to create a valid business transaction?

14 Best Practices Business structure needs to incorporate (1) on third party agreements with a company such as Card Compliant or (2) intercompany agreements with GCS: Activation Agreement Employment Agreements Service Agreements Investment Management Agreement Accounting/journal entries must reflect the contracts

15 Best Practices What contracts are necessary? 1. Procedure Manual 2. Assignment of non-dormant unredeemed balances between Parent and GCS/Third Party Provider 3. Administrative Services Agreement 4. Sublicense Agreement for IP 5. Employee Lease Agreement 6. Gift Card Terms and Conditions 7. Consignment Agreement

16 Best Practices Failing to document services being performed for a GCS or not charging the GCS fees for services being performed would raise a red flag for an auditor.

17 Best Practices Make sure IC and Third Party Provider Agreements match actual practice: Ensure that the accounting entries match what the IC and Third Party Provider Agreements provide; GCS must actually hold the liability for unredeemed and outstanding GC and MC balances on its books; GCS employees actually work on GCS duties Use transfer pricing study to determine if the intercompany fees charged are commercially reasonable.

18 Conversion to First Rule Primary and Secondary Rules: Under the Primary Rule, the law of the state of the true owner s last known address determines whether the unredeemed balance of the GC constitutes unclaimed property. Thus, if the Issuer collects and maintains the GC user s last known address, the law of the GC user s last known address determines whether the unredeemed balance of the GC is subject to escheat. On the other hand, if the Issuer does not collect the name and address of the GC user, the unredeemed balance of the GC is subject to the Secondary Rule. The Secondary Rule looks to the law of the state of the GC issuer s domicile in order to determine if the unredeemed balance of the GC is subject to escheat.

19 Conversion to First Rule Currently, with the collection of customer information at the Point of Sale, retailers often know the name and address of the user of a GC. Knowing this information means any property that is unclaimed will escheat under the Primary or First Escheat Rule. Risk Breakage: GC s and MC s unredeemed balances are liabilities that would always continue to grow, distorting balance sheets of retailers. Therefore, accounting protocols require the liability to be relieved (i.e., eliminated) when it becomes unlikely that it will be claimed. When the GC/MC liability is relieved, it converts to income and is called breakage.

20 Conversion to First Rule All breakage under the Secondary Rule becomes income if the GCS is organized in a state that exempts GC/MC s from escheat. Breakage income is important to retailers, worth hundreds of millions of dollars. Converting to First Rule imperils breakage income.

21 Conversion to First Rule Knowing the name and address of customers is not a bad thing! Not all breakage income will be lost. First, 37 of 52 jurisdictions exempt gift cards from escheat. 29 of 52 jurisdictions exempt merchandise credits. Second, many of the states that require escheat of MC s and GC s allow a 40% margin discount to reflect the retailer s profitability on merchandise. Result: Approximately 75% of breakage income will be retained.

22 Conversion to First Rule The amount of lost breakage can be further lessened by: 1. Maintaining contact with customer via by using the information obtained. 2. Determining through contact with customer if the customer still owns the gift card or if it has been given away (thus becoming Secondary Rule Property and returning to breakage income).

23 UUPA Process of GC The Uniform Law Commission November 7-8 meeting Special working group and committee will work on drafting new model law Update