Gift Cards – A Gift to Restaurants?

By Constantine Mittendorf

Gift Card

If you have an unused gift card from your birthday last year, then you’re not alone. Consumer Reports surveys have found a quarter of people who receive gift cards don’t use them within a ten month period.

This can be very profitable for a restaurant that sells gift cards. The restaurant gets the money up front and a large percentage recipients never use the balance on the card. Lots of people either lose the gift card, forget about it, or just never redeem it. In fact, it’s so common that the industry has a term for it – breakage.  Gift cards can be a great deal for a restaurant, but there are some pitfalls.

Gift card counterfeiting and gift card fraud are on the rise, which may create insurance risks.

Gift cards can also create accounting issues. If the restaurant suspects that a balance on a gift card has been abandoned, then do those funds need to be turned over to the government in accordance with state abandonment laws? If not, when can a restaurant record the unused balance as a profit? Are there any Generally Accepted Accounting Principles on gift cards?

As it turns out, there are laws at the federal and state level that regulate gift cards. For example, California law prohibits gift cards from having expiration dates or service fees (subject to some exceptions). Also, California law allows the customer to receive the cash balance on the card if it is under $10.

Make no mistake – these laws have been used to sue companies that sell gift cards and discounted gift cards. These cases have cost some companies of millions of dollars. However despite these lawsuits, easily billions of dollars of gift cards still go unspent every year.

The bottom line is that if you’re thoughtful, a gift card can be a gift to both a restaurant’s customers and its owners.

© 2009- Duane Morris LLP. Duane Morris is a registered service mark of Duane Morris LLP.

The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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