The gift-card giveaway

The gift-card giveaway

MANY RECIPIENTS DON’T REDEEM FULL VALUE

By Mike Antonucci / Mercury News

Article Launched: 01/13/2008 02:16:10 AM PST

When you buy a gift card, it’s not the retailer who’s supposed to get a
present. But that’s how it works out when consumers fail to redeem all
or part of gift cards worth billions of dollars every year.

And given the continuing boom in gift card purchases during the
all-important holiday retail season, one question stands out: Why do so
many people fail to cash in?

"They’re not perceived to be money," said Kit Yarrow, a professor of
psychology and marketing at Golden Gate University in San Francisco.
"Partly that’s because it’s a gift that they got for free. They didn’t
work for it."

One business research firm, TowerGroup in Massachusetts, has estimated
that $7.8 billion will end up unredeemed for 2007, out of $97 billion
in gift card value purchased by consumers. Dave Sievers, a consumer
products and retail expert for Archstone Consulting in Stamford, Conn.,
believes that as many as 20 percent of gift cards could be going
unused, based on his conversations with retail clients.

The upward spike in gift card purchases over recent years has made it
increasingly tricky to evaluate retail sales results for the crucial
months of November and December. Industry analysts are eager to
interpret what those sales signaled about consumer spending and the
overall economy, but the heavy use of gift cards poses complications.

When retailers are waiting for consumers to redeem cards for their
specific stores (as opposed, for example, to a prepaid Visa gift card that can be used
at numerous types of merchants), the value of the cards is listed as a
liability and the money is held in escrow, according to the National
Retail Federation. Maureen Riehl, government and industry relations
counsel for the federation as well one of its vice presidents, noted
that the point at which a retailer counts an unused card as income can
vary according to each company’s accounting procedures and tax
situation.

Jesse Weller, Internal Revenue Service spokesman for the
Bay Area, explained by e-mail: "The tax laws and accounting rules in
this area are very complex. Most retailers use an accrual-basis method
of accounting. Generally, an accrual-basis business that sells gift
cards or certificates must report income when received, but there are
rules that if followed properly, allow businesses under certain
circumstances to delay reporting the unredeemed gift card income for up
to either one year or two years following the year of the sale."

More IRS information is at www.irs.gov/businesses/article/0,,id=170842,00.html.

A National Retail Federation spokesman also emphasized that unused
cards without expiration dates – and by law in California that includes
all store-branded cards – still can be redeemed after a retailer
records them as income.

A 2006 Los Angeles Times story, widely cited for noting the large
revenues from unused cards, listed one-time gains as including $30
million for Limited Brands in 2005, $43 million for Home Depot in 2005
and 43 million for Best Buy in 2006.

Gift cards are particularly important to retailers because they bring
people into stores, and customers frequently spend beyond the value of
their cards. But those consumers may wait months before doing so.

Archstone’s 2007 holiday research, which surveyed both the online and
brick-and-mortar shopping habits of more than 1,000 Web users,
determined that 56 percent of cards are redeemed within the first month
of purchase and that 85 percent are redeemed within three months.

The Deloitte professional services firm found that 49 percent of the
people it recently surveyed had at least one gift card that remained
partially or completely unused. In the Bay Area, 56 percent of people
had partially or completely unused cards. Also in the Bay Area, 12
percent had more than five cards they hadn’t used.

Golden Gate University’s Yarrow said consumers have encountered a
variety of problems with gift cards at the same time they’ve been
buying more of them. Among the hassles: Having to carry more plastic
cards; confusion about the differences between store-branded cards and
bank-issued cards (the latter generally include service charges);
frustration over card activation errors, and the inability to get cash
back when a purchase doesn’t exhaust the value of a card.

Nicholas Cline, 36, is one of Yarrow’s master’s degree students at
Golden Gate University, and said in an e-mail he’s "a little skeptical
about what the true intentions are of the companies that sell" gift
cards.

He added, "I feel they promote it as a convenience but use it as a tool
to nickel and dime consumers. Hoping they will lose the card or throw
it in a drawer or something."

In mid-December, he said, he was refused the change from a purchase of
$49.40 on a $50 gift card at a major department store. To Cline, "it
almost felt like a scam" because of the unlikelihood of ever spending
the remaining 60 cents.

In California, however, a law went into effect Jan. 1 that enables
consumers to cash out a store-issued gift card (but not a bank-issued
card) if the balance is less than $10.

The legislation was written by Sen. Ellen Corbett, D-San Leandro, and
Richard Holober, executive director of the Consumer Federation of
California, who said the law goes further than any other in the United
States. Montana and Washington are next best with laws covering
balances under $5.

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