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Gift Cards: Are Restaurant Establishments Leaving Money on the Table?


How significant to the restaurant industry has the sale of gift cards become? In 2013, restaurant establishments collected $19 billion in revenues from the sale of gift cards, and that number is expected to steadily increase through 2016.1 While restaurateurs realize how lucrative gift card sales can be, are they leaving money on the table when it comes to unredeemed gift cards and gift certificates? The answer is yes.

What if the gift card is not redeemed?

Once the gift card is sold, the seller records the liability on its balance sheet. The gift card is eventually redeemed and the revenue is recognized. What if that gift card is not entirely redeemed by the buyer? More importantly, does the seller have an opportunity to convert these unused funds to revenue?

Many companies continue to wrestle with unclaimed property issues related to unredeemed gift cards – that is the bad news. The good news – a planning opportunity exists for unredeemed gift cards to minimize prospective unclaimed property tax liabilities and compliance burdens.

Do sellers have an opportunity to convert funds from unused gift cards to revenue?

Restaurant owners often set up a separate entity, a gift card company (“Giftco”), to address unredeemed gift cards.2 Giftcos are used to track and safeguard unredeemed gift cards (the unused funds are referred to as ”breakage” in the industry). However, the question is whether that is the most effective – and profitable – manner in which to deal with unredeemed gift cards.

While the concept of a Giftco is not new, businesses continue to face challenges with unclaimed property issues with respect to unredeemed gift cards. These issues include:

  • Timing for remitting the unclaimed property;
  • Amount to escheat (revert funds back to the state) the jurisdiction; 
  • Record-keeping to maintain compliance with state reporting obligations; and
  • Complexities when there are joint ventures or different ownership among the restaurants. 

Setting up a gift card company in a favorable jurisdiction can make all the difference. A favorable jurisdiction has unclaimed property provisions that do not escheat unexercised gift cards. Therefore, establishing a gift card company in a favorable jurisdiction generally allows the Giftco to ultimately convert unused funds into income provided the funds are transferred subsequent to the expiration of the dormancy period. Once the Giftco has been properly and legally established, all future sales of gift cards are governed by the unclaimed property rules of the state it was formed (state of incorporation) as long as the entity does not keep the name and addresses of the “holders” of the gift card/gift certificate. What does setting up a Giftco in a favorable jurisdiction accomplish? It minimizes prospective unclaimed property issues and compliance burdens associated with unexercised gift cards/gift certificates. To date, there are approximately 32 states with favorable unclaimed property rules. How does this structuring translate into additional revenue by the Giftco? Corey Rosenthal, CohnReznick Principal and New York Office State and Local Tax (SALT) Practice Leader, estimates the non-redemption rate for gift cards of his clients to be approximately 8%-10% per annum.

An illustration

A CohnReznick client, a fast casual concept, noted that a significant number of issued gift cards went unredeemed. We assisted the client by analyzing their unclaimed property issues associated with unexercised gift cards, quantified their potential benefits of setting up a gift card company structure and implemented an optimal gift card structure that will allow the company to reap tremendous financial benefit from setting up the Giftco. In the initial year, it is anticipated that the company will realize over $100,000 of income that was solely attributed to the unredeemed gift cards.

The impact to revenue

CohnReznick clients have realized benefits from unused gift cards ranging from $40,000 to greater than $1,000,000 in redeemed revenue. Results can vary by industry and company and unclaimed property dormancy periods can differ from state to state. What factors are examined when a company is contemplating the formation of a Giftco and what structure provides the best opportunity for success? The following are important questions to consider when contemplating the formation of a Giftco:

  • Is there a significant volume of unclaimed assets on the balance sheet?
  • Does the company anticipate continuing to utilize gift cards as a component of its business operations and will the name and addresses of such holders be documented?
  • What state(s) does the company operate in, and what is the state of incorporation?
  • How should the Giftco be structured, which is the optimal jurisdiction to set up the Giftco, and what is the best tax structure to utilize?

It is not only critical to know the unclaimed property that exists on the balance sheet, but to also be aware of the components of the property, such as the year of issuance, so that the appropriate dormancy period(s) can be determined. Finally, a company must determine what Giftco structure will best fit its profile, both from a tax and business perspective.

What Does CohnReznick Think?
Giftcos can be very lucrative for restaurant businesses, allowing them the potential to convert unredeemed gift cards into revenue. Proper setup of these Giftcos is imperative to avoid any state audit scrutiny. Failure to execute proper company structuring can result in an inability to maintain compliance with state reporting obligations, thereby eliminating any potential benefits of the Giftco. All affected companies should analyze their unclaimed reporting responsibilities and consider the strategy of implementing a Giftco entity in an escheat friendly jurisdiction.


For more information, please contact Cindy McLoughlin, Partner who leads the Hospitality Industry Practice in New York, at 516-336-5510, Marshall Varano, Partner who leads the Hospitality Industry Practice in San Diego, at 858-300-3424, or Corey Rosenthal, Principal and New York Office State and Local Tax Practice Leader, at 646-625-5729.

To learn more about CohnReznick’s Hospitality Industry Practice, visit our webpage.

[2] Some states have escheat rules requiring sellers to transfer these amounts back to the state.

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This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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