A Guide for Businesses Selling Gift Cards Under the Credit Card Act's Gift Law.
By Seth Gardenswartz (originally published on BoomTime.com in 2010)
If you are like many small or independent retailers across the US, you are probably wondering how the new federal gift certificate laws affect you and your business. This guide is meant to help you understand the new law and determine how to adjust your gift card or gift certificate program. It is not legal advice, and should not be a substitute for legal counsel. With that out of the way, let's get started!
Gift Card Rules: The Card Act sets a federal minimum term for the sale of gift certificates, store gift cards and general use prepaid cards of five years from the date of issuance or the date funds are last loaded on the card (if it is a store gift card or general use prepaid card). It also requires disclosure of any expiration term for funds underlying a gift certificate or gift card on the card prior to purchase. The new law also limits dormancy, inactivity, or service fees that can be charged to gift cards or certificates. Specifically, it does not permit such fees unless there has been a year of inactivity and then only permits one such fee per month. Such fees must be disclosed clearly and conspicuously prior to purchase. However, since few small and independent retailers are charging the types of "inactivity" or "dormancy fees" covered by the new law, we will focus on expiration dates as they might commonly affect small and mid-sized retail businesses.
How to determine when or if you gift cards or certificates can expire:
It's actually simple. Step one; determine if your gift card or certificate is subject to the federal law. If the answer is no, mazal tov! The new law does not apply to you, but your state law still does. So you have to understand what your state law says and adjust your expiration date (and other terms) accordingly. If the new law does apply to you, step two is to see if your state law is more or less restrictive than the new law. If it is more restrictive, you go back to your state law. If it is less, the new federal law applies to your card or gift certificate. Simple right? Our government rocks!
How to determine if the new federal law applies to your gift card or certificates:
The good news (for everyone) is that the new federal law does not apply to all gift certificates or cards. To figure out if your gift program is affected, you have to know what the law says. It's harder to find than you might think. The legislative history is slightly different than what we learned from the campy schoolhouse rock. A short history of the Card Act: Credit card companies did lots of nasty things to their customers like jack up annual interest rates without warning or make oppressive changes in their service agreements. The Congress came to the rescue by passing the Credit Card Accountability Responsibility and Disclosure Card Act of 2009 (the "Card Act"). The Card Act is mainly concerned with credit cards but while they were at it, congress decided to regulate gift cards and gift certificates. Specifically, the Card Act requires that most gift cards and gift certificates be redeemable for at least five years, and limits the manner in which inactivity fees can be charged.
The Card Act was signed into law by on May 22nd, 2009. You can read the gift card provisions here, but that won't really give you the whole story. The juicy bits you might have missed at first glance are in Section 2 of the Card Act, which gives the Board of Governors of the Federal Reserve System (the "Board") authority to make additional rules it thinks are necessary to implement the Card Act by implementing Section 915 of the Electronic Funds Transfer Card Act ("EFTA") under Regulation E. The Board decides how individual definitions and provisions of the EFTA and Regulation E apply to gift cards, certificates and other stored value products. Therefore it is the "Final Rule" issued by the Board that really discusses, defines and constitutes the federal law that affects business selling gift certificates or cards. It is important to remember that one of the core functions of the EFTA is to determine "individual consumer rights." That means the purpose of this law is not to help small business. It is consumer protection, protecting your consumers from you.
Are Your Gift Cards Covered in the Card Act's Definitions: Who cares about the legal mumbo jumbo! What is my expiration date? We're getting there. The good news is that the Final Rule (and the amendment that was passed on August 11th, just eleven days before the provisions became effective) is very helpful in explaining how the Card Act is to be applied. It is over 100 pages of rule, explanation and official staff comments, which are more or less the law. Lets jump into step one and analyze if your gift cards are subject to the new law. The Final Rule slightly modifies the Card Act's definitions of "gift certificates and "store gift cards". It says:
(1) Gift certificate means a card, code, or other device that is:
(i) Issued on a prepaid basis primarily for personal, family, or household purposes to a consumer in a specified amount that may not be increased or reloaded in exchange for payment; and
(ii) Redeemable upon presentation at a single merchant or an affiliated group of merchants for goods or services.
(2) Store gift card means a card, code, or other device that is:
(i) Issued on a prepaid basis primarily for personal, family, or household purposes to a consumer in a specified amount, whether or not that amount may be increased or reloaded, in exchange for payment; and
(ii) Redeemable upon presentation at a single merchant or an affiliated group of merchants for goods or services.
The Final Rule and comments explain that the Card Act should not be applied differently just because someone is holding a piece of plastic as opposed to a piece of biodegradable material, memory chip, paper or code. Regardless of the form, the substantive requirements of the Card Act will apply to gift certificates, store gift cards and general use pre-paid cards (the latter of which are not discussed in detail here), and adopts the terminology "card, code or other device." So let’s cut to the chase in these definitions. The "prepaid basis" requirement seems to turn on how or when the value was loaded. It's not much of an exception. The comments clarify two more exceptions. Specifically that certificates or cards (1) NOT issued primarily for personal, family, or household purposes to a consumer, and (2) cards not issued in a "specified amount" are not subject to the Card Act. The "personal, family or household" is meant as a narrow exception. Essentially, if the card is in the hands of a consumer to use for themselves, it's subject to the Card Act. The example given by the Final Rule of an exempted card is one given by a business to its employee to reimburse for travel expenses or to purchase office supplies.
The second exemption is huge, and very important for small and service business to understand. The Rule interprets "specified amount" to mean a specific dollar amount that can be applied toward any purchase. Therefore gift cards or certificates issued for a specific good, service or experience, WITHOUT A SPECIFIC OR DENOMINATED AMOUNT are simply exempt from the new federal law. So if a spa sells a gift certificate for a massage treatment, a restaurant sells a gift card for a fixed price dinner, or either one issues a card or gift certificate for 20% off, so long as the card, code or other device does not state a specific monetary value (like "a $50 value!") it is not subject to the Card Act at all. This is a very good exception. The Board's reasoning here is that if a business were liable to redeem an "experience" card or certificate for five years they would charge more for such card to adjust for anticipated price increases over the following 60 months. It is a very smart and well-reasoned interpretation. Consequently, if you issue gift certificates for a Blended Massage, or a fixed price dinner you need only abide by your state laws for expiration restrictions. You can find a handy guide here.
If your gift certificate or card is covered by the Final Rule's definitions and therefore subject to the federal law, it may still quality for an exclusion. There are six "statutory exclusions" meaning that the Card Act says some store gift cards or gift certificates, issued "in a specified amount" may be excluded from coverage. The exclusions are:
1. Useable solely for telephone services;
2. Reloadable and not marketed or labeled as a gift card or gift certificate;
3. A loyalty, award, or promotional gift card;
4. Not marketed to the general public;
5. Issued in paper form only; or
6. Redeemable solely for admission to events or venues.
Out of this list, only two of these are likely to impact a small or independent retailer selling gift certificates or gift cards. Telephone cards, are just that. Reloadable/not marketed as gift cards are mostly cash cards and the comments say that if you market them as an alternative to a bank or debit card all year but state in any form of marketing just around a holiday "ok for as a gift" you have lost the exclusion. Not marketed to the general public is also narrow. If you market gift cards or certificates exclusively to your newsletter list or Facebook friends, since any member of the general public can join that list the exclusion does not apply. Similarly, "solely for admission to events or venues" is a very narrow exception limited to tickets and the like. If you think you might qualify, grab yourself a venti caffeinated beverage, read the Final Rule and then consult your legal council. Otherwise, read on and then do the same.
Issued in paper form only:
This is also a very narrow exception. The official comments explain, "the sole means of issuing the card, code or other device must be in paper form." The fact that a card or certificate is printable or even generally tendered in printed form does not qualify. In fact, one of the comments seems to speak directly to users of the BoomTime services. Our platform creates a private labeled gift certificate that end users can purchase online, or at retailer's physical location in paper form. It generates an image and secure barcode that can be printed or emailed to a purchaser or gift recipient. The comment states that the exclusion does not apply because the gift certificate was "issued to the consumer in electronic form even though it can be reproduced or otherwise printed on paper by the consumer. One may argue that our retail gift certificates, which are "issued to the consumer" at retail in paper form are excluded. However, the examples given of certificates that do meet the exclusion are cases where the gift certificates are not available in any form other than paper, like a prepaid parking code or ticket from a fuel pump good for a car wash.
Loyalty, Award or Promotional:
This is a potentially large exclusion. The official staff comment to the Final Rule provides seven examples of programs excluded as loyalty, awards or promos. The summary of the Final Rule, explaining the history of the comments regarding this exclusion (yes, it really is that complicated) states that the commenters agreed with the proposed examples because they apply even if consumers have paid for or otherwise exchanged value for the certificates or cards. Of the seven examples (its Paragraph 20(a)(4) to the official staff comment if you are hungry for details) the first two and number seven are the most likely to apply to small and independent retailers. They are:
i. Consumer retention programs operated or administered by a merchant or other person that provide to consumers cards or coupons redeemable for or towards goods or services or other monetary value as a reward for purchases made or for visits to the participating merchant;
ii. Sales promotions operated or administered by a merchant or product manufacturer that provide coupons or discounts redeemable for or towards goods or services or other monetary value.
vii. Charitable or community relations programs through which a company provides cards redeemable for or towards goods or services or other monetary value to a charity or community group for their fundraising purposes, for example, as a reward for a donation or as a prize in a charitable event.
Number seven is for cards provided to a charity or community group. Nice that they are exempt (from the federal law) but not helpful to small businesses trying to control their long-term liabilities. So now you have read the examples from the official comments to the Final Rule to the Card Act, but if you are a normal person you may still be wondering; is my gift certificate exempt? Most small businesses participate in customer rewards programs and sales promotions. If you run legit promotions that fit these descriptions, gift cards and gift certificates issued under such programs may qualify and thereby be excluded from the substantive expiration requirements of the Card Act if they also meet the disclosure requirements.
Disclosure Requirements to qualify for the Loyalty, Reward or Promotional Program Exception:
In order to qualify for this exemption the Final Rule requires you to disclose on the front of the gift card or gift certificate that it is issued for loyalty, award or promotional reason; provide a toll-free phone number and, "if one is maintained" website. While it is crazy to require small businesses to maintain a toll-free number, the Board was very reasonable about implementing this disclosure. The real reason for the toll free number and website is so consumers can get fee information about their card. Comment 20(a)(4)-3 says if you aren't charging fees, you do not need the toll-free number or website to be disclosed on your gift certificate. Generally financial organizations and big gift card issuers charge non-use or dormancy fees so it makes sense that businesses who don't charge them don't need to maintain a toll-free number. The bottom line is that the Final Rule permits exemption of certificates or cards that are for retention, reward or sales promotions as defined above so long as they are clearly marked as such. The comment even gives examples; "Reward" or "Promotional" is appropriate language. So we know what needs to be disclosed and how to say it. The last question is what does it need to look like. The Final Rule states that all disclosures must be "clear and conspicuous" meaning "readily understandable" and "the location and type size are readily noticeable to consumers." The Board did not adopt a more rigid size or prominence standard for these disclosures required by the loyalty, award and promotion exception.
Reality Check: We are well over 2,000 words here and are still not sure when we can expire our gift cards and certificates. So let's go back to our algorithm. If your gift certificate does not meet the Final Rule's definitions, we go to state law. If it does meet the definitions but there is an exception, we go to state law. If we determine that our gift card or certificate is subject to the new law, what is the permitted expiration? It still depends, this time on your state's law and federal preemption. The Supremacy Clause of the United States Constitution generally allows federal law to preempt state law where there is a conflict. However, the Card Act's core purpose is to provide consumer protection. So the Card Act expressly preempts state laws only when they are inconsistent with its protections and only to the extent of the inconsistency. Therefore, if you sell a gift certificate that has a dollar value and is not subject to one of the seven statutory exceptions, it is subject to the Card Act's five-year minimum expiration date. If your state law says there is a three year minimum, it’s now five years. However, if your state law has a seven-year minimum, your gift certificate still cannot expire before the seven years. If you are in one of the states, like California and Florida that do not allow gift certificates to expire at all your gift cards may not be expired. It's worth noting that states like California makes it unlawful to sell one with an expiration date on it at all. Thus, the new law is a floor, not a ceiling.
Funds vs. Card Expiration:
While it’s fun to whine about how convoluted these rules are let's keep in mind that the Card Act applies to a very broad range of products. For example, a gift card has an expiration date printed on it that is hard to change. Gift certificates generated electronically offer a lot more flexibility. So, the Final Rule says that we can't issue gift certificates or store gift cards unless the underlying funds do not expire for at least five years. What does that mean? It's in the Final Rule because a card may have an expiration date before the five-year minimum and the Board wants consumers to get at least 60 months to use their funds without being confused. So, if your card expires less than five years before the funds expire, you have to say so on the card and the Final Rule gives some examples of acceptable ways to do so. In one of the most confusing parts of the Final Rule the Board states that issuers or sellers of gift certificates or cards are required to adopt policies and procedures to ensure that a consumer will have a reasonable opportunity to purchase a gift certificate or gift card with at least five years remaining until the certificate or card expiration date. This means, to avoid confusing consumers, issuers must make cards or certificates available that do not have expiration dates less than five years, even if the underlying funds are good for five years. The explanation to the comments describe why and how to comply. The comments are as confusing as the confusion they are trying to avoid. However, it should not really matter to those of us who either sell or help small businesses sell gift certificates and store gift cards. If your gift card or certificate meets the Card Act's statutory definition of a gift certificate or store gift card (as interpreted by the Final Rule), and does not qualify for a statutory exception, your expiration date and your underlying funds should be the longer of five years or what is required by state law.
What is state law? That should be easy, but you may not feel that way. There are fifty states (plus territories like Guam and Puerto Rico). Some of them are wackier than others in terms of their gift card laws. There are at least 10 states that do not permit gift cards or certificates to expire. There are several more that require valid terms of greater than 60 months. How do they feel about underlying funds? Good question. There may not be 50 different answers but its likely more than two. The big question is; how will your state handle underlying funds. Some states (like Arkansas for example) use a definition that generally tracks that of the Card Act. Therefore an "experience" or service gift certificate sold without a dollar or specific amount on its face may not subject to the Arkansas gift card law.
Lost and stolen not required for replacement:
The Card Act states clearly that there is no requirement to replace gift cards or certificates that are lost or stolen.
Prior to Disclosures: One of the simple but important requirements of the law it to mandate that if a gift card or certificate or underlying funds expire that fact must be disclosed "prior to purchase" of such card. Of particular interest to those of us involved in selling instant gift certificates and gift cards online is the requirement that for certificates or cards purchased via the web, disclosures can be made after a consumer has started an online purchase of a certificate or card, but before the purchase is consummated. However, simply posting such disclosures on an issuer's website that need not be accessed during the purchase process will not satisfy the prior-to-purchase requirement.
Non-compliant cards in inventory: On August 11th 2010, the Board issued an amendment to the Final Rule that lets card issuers sell through some existing stock of gift cards. In a nutshell addresses cards produced before April 1, 2010 that are not compliant with the new law's requirements of disclosure prior to purchase, fee disclosures, the requirement of reasonable opportunity to purchase one with at least 5 yrs left, disclosure of underlying funds expiration and the disclosure on the card of a toll-free number and website and other fee disclosures. The amendment lets issuers continue to sell those non-compliant cards through January 31, 2011 if they, otherwise comply with the Card Act, do not expire the underlying funds (ever), don't charge any fees, and provide signage, oral and electronic notice regarding the accessibility to those funds for up to two years after the January 31, 2011 date. If you are still reading this the ship has sailed for this amendment.
A Possible Approach:
If you are selling dollar valued gift certificates or gift cards that do not qualify for the promotional, loyalty exemption, you only need one expiration date, which must be the greater of five years or your state's minimum term. If you are selling a "service," or experience gift card or certificate, consider having two dates; a reasonable time frame during which you will honor the card or certificate for the service on the face and then your state's minimum for the underlying funds. The funds part could say "Funds valid until [date]". If you have a qualified promotional program where the purchaser buys a gift as part of a sales promotion, or receives it as some kind of award let those gift certificates or gift cards can expire in some reasonable time but make the funds available for your state's minimum term. If you give a certificate away, set the term to whatever you like so long as it complies with state law. You don't want to be foolish in what you offer your customers. Good practice is to set a reasonable expiration date and generally honor expired gift certificates in a reasonable way. That way you can manage your liability, but provide great customer service. Always be confident that you are compliant with state law and use tools and vendors that give you the flexibility to do so.
What to do next:
Anyone selling gift cards or gift certificate should take a good hard look at their entire program. A great start is a review of your state law. It is probably worth engaging counsel unless you have the time and background for understanding statutes and how they have been interpreted. Specifically, you need to know if your state law is more or less restrictive than the new federal law and if it imposes other substantive requirements. For example, some states require some gift cards to be redeemable in cash under certain circumstances. Some state set minimum terms for gift cards given away with no exchange of value. These are the kinds of details you need to understand to make your gift program comply with the law and work for you.
As discussed above, if your state law is more restrictive (requires longer terms) than the Card Act, it probably does not affect you that much. If it is less restrictive, that's good, but you have to do some real analysis and strategic planning. If all you are selling is dollar denominated gift cards, you might consider selling "experience" or service denominated cards or gift certificates. They are exempted from the Card Act and therefore expire as required by state law. To revisit the examples from above, if you are in a state with a two-year expiration requirement, a $50 gift card now has a five-year minimum term. But if instead you sell a 30 minute massage for $50, with no amount specified on the fact, it can expire in two years, but you may be able to expire it in one year if you make the underlying funds (the $50 paid by the purchaser) available for the entire two years mandated by state law. Again, understanding your state law is critical. Similarly, you might evaluate selling gift certificates or cards that qualify under the loyalty, award and promotional exemption for the Card Act. If you sell such certificates or gift cards exempt from the Card Act you may be able to expire their promotional value in some reasonably short time frame, but you should probably make the underlying value good for your state's minimum term.
After evaluating your program and creating a new strategic plan you may need to implement some new procedures and controls. Your tools and vendors should be able to accommodate strategies like experience-based gift certificates and dual expiration dates so that a promotional value or an experience can expire while the underlying funds remain available for a longer term. Again, this guide is not legal advice and should not be a substitute for your own counsel. Do your homework, get the right advisers and implement any new procedures as necessary. Finally, don't wait. The Card Act is in place now and the holidays will be here before you know it. If you act now you can limit your exposure and make your gift card program a wonderful customer service and marketing tool for your business.