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Prepaid Discount Vouchers: Unclaimed Property Considerations

Many business owners and finance personnel in the hospitality industry may be exposed to significant unclaimed property liabilities prompted by recent technological, entrepreneurial, and marketing innovations.

Today there are a number of companies, including Groupon and Living Social, which offer "daily deal" promotions whereby a variety of products and services are sold at a significant discount. Under these arrangements, consumers are able to buy vouchers or coupons that can later be redeemed for goods and/or services. But if these vouchers or coupons are not redeemed prior to the expiration of a pre-determined dormancy period, the merchant selling the voucher or coupon may be exposed to liabilities far in excess of the amount they received from the sale of the unused vouchers under so-called "escheat" laws.

For example, a consumer might pay $50 for a voucher to purchase $100 worth of food at a restaurant. The $50 charge for the prepaid voucher would generally be split between the restaurant and the deal site selling the voucher, with each receiving $25. To the extent this voucher is not used prior to the expiration of the dormancy period, the restaurant may be required to pay to the state the entire $50 face value of the voucher or, $100 if such state deems the voucher a $100 gift certificate. Given that the vendor only received $25, the restaurant would have to come up with the difference for every unredeemed voucher. Needless to say, the potential exposure for unsuspecting merchants can be substantial as online deal sites continue to grow.

Often, state unclaimed property examinations target large businesses or specific industries, such as hospitality, retail, healthcare, insurance, and financial services. The growth of these daily deals could, however, drastically change that landscape. As with many evolving areas, there are many unresolved unclaimed property issues that merchants must consider if they intend on selling through "daily deal" sites, including whether prepaid vouchers should be treated as gift certificates for unclaimed property purposes, if a separate legal entity structure should be created to sell the vouchers or coupons, the value to be escheated if the property becomes "dormant," and who is ultimately deemed to be the holder of the property for purposes of the unclaimed property liability.

As state unclaimed property laws continue to evolve in the face of rapid technological innovations and expanding state budget deficits, businesses must be aware of these and other potential issues that may arise and thereby create significant unintended legal and financial obligations. Given the complexity and ever-changing landscape regarding unclaimed property matters, we often recommend that our clients work with either an unclaimed property firm or law firm to assist in addressing these and other potential issues that should be considered.

For more information on the potential unclaimed property implications of prepaid discount vouchers, please contact Gary Levy, CPA, partner and director of J.H. Cohn's Hospitality Industry Practice, at or 646-254-7403; Corey L. Rosenthal, JD, a J.H. Cohn director and member of the Firm's State and Local Tax Practice, at or 646-625-5729; Patrick J. Duffany, CPA, JD, partner and director of the Firm's State and Local Tax Practice, at or 860-368-3607; or your J.H. Cohn engagement partner at 877-704-3500.

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Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

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 J.H. Cohn 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.

Published date: 1/26/2012

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