Franchising & Distribution Law Blog

The holiday season is upon us. For many retailers, that means gift card sales are about to explode, which is great news. Not only can gift card sales help generate new customers, but industry data continues to confirm that consumers often never use some portion of their gift card balance, which can ultimately result in additional breakage profit.

In Wells v. Holiday Companies, Inc., No. A12–1476, 2013 WL 777384 (Minn. Ct. App. 2013), the Minnesota Court of Appeals reversed an order granting a motion to dismiss a class action lawsuit alleging that car wash receipts constitute gift cards that cannot expire under state law.

In response to the rapid growth of gift card sales and the variety of ways in which they are sold and redeemed, the IRS has been issuing guidance to address accounting issues associated with such sales. Most recently, the IRS issued Rev. Proc. 2013-29, which addresses the tax treatment of gift cards sold by one entity and redeemable by an unrelated entity. Prior to the issuance of Rev. Proc. 2013-29, if a taxpayer sold gift cards redeemable by an unrelated entity, the taxpayer would recognize as income the full value of the gift cards in the year of sale. The new guidance, however, allows a taxpayer to sell gift cards in one year, and in some circumstances, delay recognizing income from those sales until the subsequent year.

For the past year and a half, various lawsuits have alleged that daily deal coupons, such as those offered by Groupon and Living Social, violate Regulation E’s rules for gift cards because such coupons expire too quickly. Regulation E, found at 12 C.F.R. § 205, et seq., is the Treasury’s official regulations enforcing the gift card provisions of the Credit Card Responsibility Act of 2009. It requires the funds underlying all gift cards to remain valid for at least five years.

Dan Garner's most recent article discusses the surprisingly extensive ramifications of gift card laws, from both a legal and practical perspective. The article was published in the October 2012 edition of Law Journal Newsletters Franchising Business & Law Alert.

Read the article to learn more about the potential ramifications of gift card laws.

As gift cards continue to rise in popularity among consumers, the regulations and laws that companies must follow in issuing and accepting them continue to increase as well. Beyond the extensive requirements of the new federal gift card law – Regulation E – one of the issues just starting to gain traction with state legislatures is the idea of requiring retailers to give customers “cash back” on a gift card once the balance falls below a particular level.