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Sunday, January 5, 2014

I WANT TO SELL GIFT CERTIFICATES AT MY NEW BUSINESS. ANY ISSUES?

 Like most subjects I cover here on Ask Roxy, the law regarding gift certificates is a state/federal combination, as in the federal government has some rules, your state has some rules, and they might not match up.  Of course, if there is an inconstancy between the two the federal law preempts the state law, but “inconstancy” is a term of art, folks, and your lawyer really needs to do a careful analysis in relation to the particular terms that may apply to you.



In the case of gift certificates, federal law only preempts state laws that are less restrictive and in conflict with the federal law so you need to know your state’s law. Violations may result in criminal and civil liability.

For now, I’ll make a deal with you:  I’ll be a good scout and do my best to wade through the legal muck and you read my disclaimer that basically says you can’t sue me if you’re following along and get your feet dirty.  Actually, that’s the same deal with all of my posts because this is legal information, not personalized legal advice.

Okay!  Now that I’ve inspired your confidence, let’s jump in:

First thing first, we need to put some definitions on the table so we know we are talking about the same thing.

When someone is thinking of using a “gift certificate” to increase business they may really mean one or more of four different things, all of which have their own definition under federal law.

1. A Gift Certificate
2. A Store Gift Card
3. A General Use Pre-Paid Card, or
4. A loyalty, reward or promotional gift card

Because I love my readers so much, I’ve slogged through the code and developed this nifty chart to breakdown some basic differences and their various requirements:

*in this chart a “yes” doesn’t necessarily mean that it is required, it could mean that it is an allowed option.  Also this chart only covers federal law, not the law of your state, which, like California’s, may be more consumer friendly.*



Gift Certificate Store gift card General-use prepaid card Loyalty, award or promotional gift card
May be increased or reloaded in exchange for payment? NO YES YES --
Redeemable at unaffiliated merchants and/or ATM machines NO NO YES YES
Used for telephone services?
NO
NO
Marketed to general public?
NO
YES
Expiration Dates
The underlying funds associated with a gift card or certificate may not expire sooner than five years after date of purchase or after date of last load, if it is a reloadable gift card. If the gift card's underlying funds expire at any time, an expiration date must be placed on the gift card. 
Gift cards issued through loyalty, award and promotional programs are exempt from the federal rules regarding expiration dates and service fees.
Dormancy, Inactivity, or Service Fees
Dormancy, inactivity and service fees may only be charged once per month and only after there has been no use for one year. See above.
Disclosures
The Act requires disclosures both: (a) prior to the gift card/certificate purchase and (b) on the card itself, when there are expiration dates or fees associated with the gift card.
The disclosures must provide specific information regarding the expiration dates and fees and must include a toll-free telephone number where consumers can obtain additional information.
The disclosures must be "clear and conspicuous," but there is no specific font requirement.
Disclosures must be made on or with the gift card, including the fact that the gift card is for promotional or loyalty purposes, whether there is an expiration date or fees associated with the underlying funds, and a toll-free telephone number for information related to any fee.





What can you do to avoid these disclosure, fee and expiration date rules? 

  1.  Gift certificates that are issued only in paper form are exempt from the federal rules. However, this exemption does not apply to gift cards that are initially issued to the purchaser electronically (for example, by e-mail) and then printed on paper. Rather, the gift card must originate in paper form. 
  2. Gift certificates that are not issued for a specific dollar amount are exempt, such as cards for a percentage discount (i.e., 10% off)
  3. Gift certificates related to a specific venue or event, including goods and services related to that event are exempt (i.e., a one-night hotel stay, or free hotdog with entry to the Boardwalk, or discount at nearby restaurant if you stay at hotel).

(by the way, for you code-heads out there, this all comes from 12 CFR 205.20)





But what about California law?



Under California law, there are a few more applicable rules to gift certificates (which also apply to “gift cards” as California Civil Code 1749.45-1749.6 covers both):
  1. a gift certificate or gift card, with a few exceptions, may NOT have an expiration date.  
  2. a gift certificate may NOT contain a service fee
  3. If you have a gift card with less than $10 value on it, you can redeem it for cash value. 
  4. If the seller of the gift card goes bankrupt the certificate holder may technically have a claim against the bankruptcy estate (but practically speaking, she is out of luck).
However, my California readers will be interested in the fact that the California regulations have loads of fun little loop holes to allow our business community to get around these consumer-friendly rules.  For example, gift certificates and gift cards that are useable with unaffiliated sellers may include an expiration date.  Has anyone bought a mall-wide gift certificate lately?  Watch the expiration date.

Also, the California law regarding expiration dates doesn’t apply to prepaid calling cards; free awards, loyalty or promotional cards; cards sold at a volume discount for fundraising; or cards issued for food products or grocery items.  Check with your lawyer if you think you can squeeze into one of those categories.  If you are allowed to have an expiration date, it must be in at least 10 point font and in all caps so people can actually read it.

By now you’ve rummaged through your files and pulled out your certificates and are asking, “But, Roxanne, my certificate has a ‘redemption’ date right on it.  Isn’t that an expiration date?”

Ah, yes, lawyers and legislatures (who are often one and the same) just love words.  We love them so much that we like to scatter a variety of similar ones around, give them different meanings, and watch people trip over them.  My all time favorite is the way regular people earn “income” but the wealthy earn “capital gains” which is a magically different type of dollar that, surprise surprise, is taxed at a lower rate.  But I digress…

If you issue gift certificates for your business you may put a “redemption date” on the front of your card or paper certificate.  A seller that chooses to put a redemption date on a gift card must give the purchaser a full refund of the amount paid for the card if the recipient does not redeem it by the redemption date.  This prevents people who have held on to a certificate for a particular service (a massage, for example) to wait so long that the service now costs more than what was originally paid.

Another loophole you may be interested in taking advantage of is that while you may not charge a service fee, you can charge a “dormancy fee” for non-use. What, you ask, is the difference between a “dormancy fee” and a “service fee”?  Well, a dormancy fee can only be charged if:
  1. the value remaining on the gift card is $5.00 or less; and
  2. the dormancy fee is $1.00 per month or less; and
  3. the card has been inactive for 24 consecutive months (for example, no purchases, "reloading," or balance inquiries); and
  4. the holder may reload or add value to the card.
If you want to do this, the certificate must bear a statement explaining any dormancy fees, visible to the purchaser prior to purchase.  Frankly, it seems like too much of a hassle for the small shop, but I’m sure on a large scale there is money to be made in dormancy fees.

The biggest loophole, you may have already guessed, is that if the card can be used anywhere, such as an American Express™, MasterCard™,  Discover™or Visa™ gift card, it is not covered by the California law at all. The California law, and all of its lovely consumer-friendly restrictions, only covers cards issued by specific stores.  For the rules covering those types of cards we have to go back to the Federal regulations (look at “general use prepaid” cards above).

Good luck out there!  I wish you and your business a happy and profitable new year!







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