Quick, how many gift cards were in your Christmas stocking, and how
many will you actually get around to spending? Needham, Mass.-based
researcher TowerGroup estimates that of the $97 billion worth of plastic cards purchased in
2007, nearly $8 billion has gone unused, although no one has an exact
count.

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Just what happens to that pile of cash has become a matter of some
controversy. A lot of states—roughly half—claim that at least part of
the unspent balances should go to them under their unclaimed-property
laws. Other states let that excess dribble back onto retailers’ income
statements under varying conditions. Naturally, stores issuing the
cards are scrambling to ensure the most advantageous accounting.

Half the cards snapped up by shoppers last year were bought in
November and December, and most will be redeemed by the end of January.
That alone will give retailers, who had a dismal holiday season, a
boost, since they can’t claim revenue from selling a card until the
customer uses it to make a purchase. Until then, the card balance
generally appears on the corporate balance sheet as a liability since,
presumably, at some point a customer will trade it for merchandise.

It’s what happens to the cash on all those gift cards that are
misplaced, ignored, or only partly spent that’s at the heart of the
debate. For individual retailers, unspent balances can range anywhere
from 2% to more than 10% of all gift-card sales, according to
accounting and consulting firm Deloitte & Touche.

Who gets to keep that money depends on where the retailer locates
its card division. Some states, including Delaware and New York, demand
unspent balances be sent to them after periods ranging from two to five
years. (If the card is used after that point, the retailer generally
honors it but can apply to the state for a reimbursement.) Other
states, including Florida and Virginia, allow retailers to hang on to
the money. In those cases, after periods ranging from 18 months to
seven years, the retailer can move the money from the balance sheet
directly into operating income.

Investors who want to know how much of a retailer’s profit comes
from moving the merchandise and how much from simply pocketing unspent
card balances face a challenge, since few retailers disclose any
details about gift-card income. Still, it clearly can add up. In the
past two years, electronics retailer Best Buy,
which currently has $471 million in unspent balances on its books and
issues its cards from Virginia, added $135 million in unspent gift cash
to its total operating income of $3.6 billion. And teen chain store Hot
Topic
fed more than $3 million into profits in a single quarter when unspent
cards accounted for 22% of its $13.9 million in 2005 fourth-quarter
operating profits.

But for a retailer, just setting up a card operation in a state such
as Virginia that doesn’t attempt to collect unspent balances isn’t
always enough. Other states with different policies will claim a
portion, based on how much value remains on cards held by their
residents, unless retailers can show that they don’t know who holds the
cards.

New York, for example, is trying to haul in as many unspent dollars
as it can. In the past three years it’s brought in $19 million in
unspent balances, and State Comptroller Thomas P. DiNapoli has had
talks with other states about trying to push for a uniform federal
solution.

The problem of unspent card balances could be solved another way. In
Japan, card balances are stored in cell phones rather than on plastic,
which makes them much more accessible. Should that technology come to
the U.S., it could sharply reduce the number of cards that are simply
lost or forgotten.

Via Business Week