Unclaimed Property: Gift Cards

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Unclaimed Property Gift Cards Other Unresolved
Controversies
National Restaurant Association Financial
Officers Tax Executives Study Group
April 18, 2007

• Mr. James Santivañez, President,
• JMS Advisory Group, LLC

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Georgia Tree Pollen Count
total tree pollen per cubic meter of air
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Gift Cards In The News

• 25 billion in U.S. gift card sales
• K-Mart FTC settlement
• Consumer Federation of America, Consumers Union
  and US PIRG dissent
• Darden Restaurants FTC settlement
• Office of Thrift Supervision offers guidance
• Simon Property case in Georgia
• Simon settles in New Hampshire
• USA Today article (Jan. 2007)

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Gift Cards In The News

• CompUSA
• QPS, Inc.
• Samsung
• Outback Steakhouse
• Williams-Sonoma
• Best Buy

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Interesting 2007 Legislation

• Maryland unused gift cards to benefit schools
  (unjust enrichment argument)
• Missouri prohibition of expiration dates
  service fees
• Other states AK, FL, HI, IA, MN, MT, OR, PA, RI

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New Laws Enacted in 2006

• States enacting gift certificate/card legislation
  in 2006
• CT, KS, KY, MT, NE, NJ, OH, PA, VT
• Focus is on restrictions expiration dates,
  dormancy fees, increased disclosures
• Unclaimed property reporting exemptions are
  enacted with greater frequency
• Shortening of dormancy periods
• LA, NY, TN, VT, WI

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Trends The Focus on Exemptions

• Expansion of reporting exemptions for gift cards
• Business to business exemptions
• Definition of business association
• Sources beyond the statute
• Payroll property exemptions
• Industry-specific exemptions

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Trends The Focus on Exemptions

• Biogen IDEC case Massachusetts
• Treasurer tried to enact emergency regulations
  to curtail application of exemption
• Holder challenged effective dates on audit
• Continued relationship defense advanced current
  AP AR liabilities are by definition not
  abandoned property under the law and do not need
  the exemption because they automatically fall
  outside of the Act.

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Trends Emphasis on Due Diligence

• States more focused on pre-filing due diligence
• States willing to grant exemptions for good
  internal processes (early due diligence)
• Reported property claims matching
• Greater report scrutiny in general

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Trends Annual Compliance

• Outsourcing achieving optimum operational
  efficiency focus on core competencies
• Software options increase
• Internal Management Reporting FIN 48
• Unclaimed property is not a tax

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Other Hot Issues/Litigation

• Metromedia Restaurant Group - Texas
• Rebates
• Young America litigation
• Office Depot litigation

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Audits

• Finalization of Delaware regulations
• VDA audit period is now 18 months vs. 3 years
• Stringent remediation standards
• Almost complete disregard without substantial
  documentation
• Number of audits on the rise in DE and elsewhere
• Waste Management, Inc.

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Audit Case Study

• Review of 2000 bank reconciliations
• 3 months where outstanding checks were found on
  audit
• Total of 2,400 in these 3 months
• Average of 800 estimated over the other 9 months
  of the year
• Even though no other o/s checks were found in
  other months

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Audit Case Study

• Auditors logic
• 2,400 / 3 800 monthly average
• 800 x 9 (other months) 7,200
• Total annual liability 9,600
• Extrapolated over audit period absurd!

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Transactional Priority Rule

• More strenuous arguments being advanced on audit
  with planning
• Also applies to the state of incorporation
  fall-back rule for exemptions
• Language of most statutes
• The state otherwise entitled to the property
  does not provide by law for escheat, or its
  escheat law is not applicable to the property in
  question.

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The Arguments

• The state provides for the custodial rules
  associated with that type of property
• In the alternative, the law would still be
  applicable to the property just no reporting
  requirement
• Federal common law preempts the application of
  these rules
• Goal of uniformity administrative simplicity
• Full Faith Credit Clause U.S. Constitution

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Final Thoughts

• Heightened awareness on behalf of both the states
  and the business community
• Consumer protection playing a larger role
• States starting to allocate unclaimed funds

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Thank You!

• It is always a pleasure to present to this group!
• James Santivanez
• President
• JMS Advisory Group, LLC
• 404.474.7733
• www.jmsadvisors.com