Gift Card Liability Basics

The federal gift card rule has six exclusions, and one of them is a card, code or device issued in paper form only. A handwritten certificate sits outside the whole of it.

Which is worth knowing before you build anything, because the rules that do apply are strict: five years minimum on the funds, no inactivity fee until a year of genuine inactivity, and disclosures that have to be on the instrument itself rather than in a terms document beside it. The statute reinforces the point by defining a gift certificate as an electronic promise. None of that resolves what happens to the money, which is a state question this page does not answer. Below, the definitions, exclusions and prohibitions are read from the regulation and the statute. Rules get amended, so verify the exact current position with the agency before you sell anything. This is not legal advice. Adjacent pieces are indexed at the running the business hub.

What is a gift certificate, federally?

A card, code or device, issued on a prepaid basis, in a fixed amount.

Section 1005.20(a)(1) of Title 12 defines a gift certificate as a card, code or other device issued on a prepaid basis primarily for personal, family or household purposes to a consumer in a specified amount that may not be increased or reloaded in exchange for payment, and redeemable on presentation at a single merchant or an affiliated group of merchants for goods or services.

Paragraph (a)(2) then defines a store gift card in the same terms except that the amount may be increased or reloaded.

Both turn on the instrument being prepaid, consumer-facing and redeemable for goods or services at the issuer or an affiliated group.

A guiding operation selling a trip voucher for cash is squarely within that concept, subject to the exclusions below.

Section 1005.20 is carried on the eCFR.

What the underlying trip agreement should say is covered in the booking terms piece.

Due South, NC

Does the statute say the same thing?

It does, and its wording is narrower in one revealing way.

Section 1693l-1(a)(2)(B) of Title 15 defines a gift certificate as an electronic promise that is redeemable at a single merchant or an affiliated group of merchants sharing the same name, mark or logo, issued in a specified amount that may not be increased or reloaded, purchased on a prepaid basis in exchange for payment, and honoured on presentation for goods or services.

The phrase electronic promise is the one to notice, because it is doing the same work as the regulation's exclusion for instruments issued in paper form only.

Subparagraph (A) defines a general-use prepaid card by reference to redeemability at multiple unaffiliated merchants or at automated teller machines, which is a different instrument again.

So the statute and the regulation agree on the shape of the thing being regulated, and they agree that a purely paper instrument is not it.

Section 1693l-1 is published by the Law Revision Counsel.

Why the format decision comes before the design decision is covered in the gift certificates piece.

Finquest Sportfishing, WI

Which exclusions actually matter to a guide?

Two of the six, and they point in opposite directions.

Paragraph (b)(5) excludes any card, code or other device issued in paper form only, which is the exclusion that puts a handwritten or printed certificate with no electronic component outside the definitions entirely.

Paragraph (b)(4) excludes an instrument not marketed to the general public, which is narrower than it sounds and is not satisfied merely by selling quietly.

Paragraph (b)(6) excludes one redeemable solely for admission to events or venues at a particular location or group of affiliated locations, or for goods or services obtained in conjunction with such admission, which is unlikely to describe a guided trip.

Paragraph (b)(2) excludes an instrument that is reloadable and not marketed or labelled as a gift card or gift certificate, and it treats a temporary non-reloadable card issued solely in connection with a reloadable one as reloadable.

The practical consequence is that the format you choose determines which regime you are in, and that decision is usually made for aesthetic reasons.

What the operational side of issuing them involves is covered in the taking payments piece.

Can an expiration date be used at all?

Only within a five year floor, and only with disclosures on the instrument.

Paragraph (e) prohibits selling or issuing a covered instrument with an expiration date unless four conditions are met.

First, the person has established policies and procedures to give consumers a reasonable opportunity to purchase one with at least five years remaining until the expiration date.

Second, the expiration date for the underlying funds is at least the later of five years after initial issuance, or the date funds were last loaded, and the instrument's own expiration date if any.

Third, stated disclosures appear on the instrument, including the expiration date for the underlying funds or the fact that they do not expire, and a toll-free telephone number and website if maintained that a consumer may use to obtain a replacement after the instrument expires where funds may still be available.

Fourth, no fee or charge is imposed for replacing the instrument or providing the remaining balance in another way before the funds expire, unless it has been lost or stolen.

What the seasonal timing does to money held that long is covered in the cash flow piece.

What is the seven year wrinkle?

A specific disclosure requirement with one narrow escape.

Paragraph (e)(3)(iii) requires a statement, disclosed with equal prominence and in close proximity to the instrument's expiration date, that the instrument expires but the underlying funds either do not expire or expire later, and that the consumer may contact the issuer for a replacement.

The exception is where a non-reloadable instrument bears an expiration date at least seven years from the date of manufacture, in which case that statement is not required.

Which is a reason to think about the printed expiry on a batch of physical cards, since a longer date on the card removes a disclosure obligation.

It is also an illustration of how specific these requirements are, and of why a design run off without reading them tends to need reprinting.

Equal prominence and close proximity are both design constraints rather than legal abstractions, so the person laying out the card needs to know about them.

Why the brand surfaces need thinking through is covered in the print collateral piece.

When can an inactivity fee be charged?

After a full year of inactivity, once a month, and only if disclosed on the instrument.

Paragraph (d) prohibits any person from imposing a dormancy, inactivity or service fee on a covered instrument unless three conditions are satisfied.

There must have been no activity in the one-year period ending on the date the fee is imposed.

The amount of any such fee, how often it may be assessed, and the fact that it may be assessed for inactivity must all be stated clearly and conspicuously on the instrument itself.

And not more than one such fee may be imposed in any given calendar month.

For a guiding operation the honest read is that inactivity fees are more trouble than they are worth at this scale, and the reason to know the rule is to avoid drifting into breaking it.

How the pricing conversation should be framed instead is covered in the pricing piece.

Does charging a fee reset the clock?

No, and the definition of activity says so.

Paragraph (a)(7) defines activity as any action that results in an increase or decrease of the funds underlying a certificate or card, other than the imposition of a fee, or an adjustment due to an error or a reversal of a prior transaction.

So a fee reduces the balance without counting as activity, which means it cannot restart the one-year period that permitted it.

An error correction and a transaction reversal are likewise excluded, so neither of those revives a dormant instrument for this purpose.

That is a tightly drafted rule and it closes the obvious circular argument before anybody makes it.

It also means the only thing that resets the period is a genuine use or a genuine load, which is the outcome the rule was clearly aiming at.

What the record of each transaction has to show is covered in the bookkeeping piece.

Where must the disclosures appear?

On the instrument, and the regulation lists what does not count.

Paragraph (c)(4) requires the stated disclosures to be made on the certificate or card itself.

It then rules out three near misses: a disclosure in an accompanying terms and conditions document, one on packaging surrounding the instrument, and one on a sticker or other label affixed to it, none of which constitutes a disclosure on the instrument.

For an electronic instrument the disclosures must be provided electronically on the certificate or card given to the consumer.

And where an issuer provides a code or confirmation orally, it must promptly provide a written or electronic copy, with the applicable disclosures on that copy.

That last provision covers the guide who sells a voucher over the phone, which is a common way it happens and the way most likely to leave no compliant record.

Why the confirmation email is a document rather than a courtesy is covered in the email automation piece.

When must they be given?

Before purchase, and then they are fixed.

Paragraph (c)(3) requires a person that issues or sells a covered instrument to disclose stated information to the consumer before it is purchased.

It then adds the sentence with the most commercial force in the section: the fees and terms and conditions of expiration required to be disclosed prior to purchase may not be changed after purchase.

So a voucher sold on one set of terms carries those terms for its life, and a later change to your standard conditions does not reach the ones already out.

Which means the outstanding vouchers from three seasons ago are each governed by whatever you told that buyer, and you need to be able to establish what that was.

Paragraph (c)(1) and (c)(2) add that disclosures must be clear and conspicuous, generally in written or electronic form, and in a retainable form except for two identified cases that may be given orally.

Why versioned copies of your terms matter is covered in the digital workflow piece.

What is the actual liability?

An unfunded obligation to deliver a trip at a price you set years ago.

A voucher is cash received now against a service delivered later, and the accounting treatment follows that shape.

The operational risk is that the money gets spent in the season it arrives while the obligation lands in a later one, which is the same mismatch a deposit creates but stretched across years rather than months.

The pricing risk is that a voucher denominated in a service rather than in dollars gets more expensive to honour every year the rate rises.

And the record risk is that a five year instrument outlives whatever system you were using when you sold it, so the obligation exists and the evidence of its terms does not.

None of those is a reason not to sell vouchers, and all three are reasons to sell them in dollars, hold the money, and keep the terms.

How the deposit version of the same problem works is covered in the deposit piece.

How large does the obligation get?

Larger than it feels, because vouchers accumulate and redemption lags.

Take an operation selling twelve vouchers a year at an average of $600, which is $7,200 of cash in and $7,200 of trips owed.

If nine are redeemed in the following season and three carry over, the outstanding balance at the start of year two is $1,800, and at the same rate the running balance settles somewhere near $2,000 permanently.

That is roughly three trips of unfunded obligation sitting on the books at all times, which is manageable if the money was held and awkward if it was spent.

Now stretch it. Sell thirty a year at $650, which is $19,500 in, and let a quarter carry over each season: the standing balance is closer to $4,875 and the peak, arriving right after the December selling period, is higher still.

The number to know is the balance at the start of your season, because that is the amount of capacity already sold before a single new booking arrives.

How to hold that against the season is covered in the cash flow piece.

What about the unredeemed balance?

Not answered here, and it is a state question.

Whether an unredeemed balance can eventually be recognised as income, or must be reported and remitted to a state as unclaimed property, is determined by state law.

Those laws differ substantially, including on whether gift certificates are covered at all and on the dormancy period that applies.

No state statute was read for this page, so no position is offered, and the answer for your state has to come from your state.

What can be said is that treating the balance as yours the moment it looks stale is the assumption most likely to be wrong.

Which is a question for an accountant with sight of your state, and it is worth asking before the balances accumulate.

Why the underlying records have to survive is covered in the numbers piece.

When did the rule start applying?

To instruments sold from a specific date in 2010.

Paragraph (g)(1) applies the requirements of the section to any covered instrument sold to a consumer on or after 22 August 2010, or provided to a consumer as a replacement for such an instrument.

Which means the rules are long settled rather than new, and any guiding operation issuing vouchers today has been inside them for its whole life.

It also means the replacement provision carries the requirements forward, so reissuing an old instrument brings it into the current regime rather than preserving whatever it had.

Paragraph (g)(2) applies the loyalty, award or promotional disclosures where the period of eligibility for the programme began on or after the same date.

None of that is a live question for a new operation, and it is worth knowing if you inherited a stack of printed cards with a business.

What else transfers with a purchased business is covered in the acquisition piece.

Where do guides get this wrong?

Five places, and the first is denomination.

Selling a voucher for one full day rather than for a dollar amount, which transfers every future rate rise onto the issuer.

Printing an expiry without checking the five year floor on the underlying funds, which produces an instrument whose stated terms cannot be enforced as printed.

Putting the disclosures on a card sleeve or in an accompanying document, which the regulation expressly says is not a disclosure on the instrument.

Changing standard terms and applying them to vouchers already sold, when the fees and expiration terms disclosed before purchase may not be changed after it.

And spending the money in the season it arrives, which converts a manageable obligation into a cash flow problem in a later year.

How to hold seasonal money properly is covered in the cash flow piece.

What the refund side looks like is covered in the refund policy piece.

What is the practical setup?

Dollars, no expiry, disclosures on the instrument, money held.

Denominate in dollars so the instrument does not appreciate against you as rates rise.

Consider issuing with no expiration date at all, since the five year floor plus the disclosure obligations make a short expiry both hard to draft and small in value.

Put every required disclosure on the certificate itself rather than alongside it, and if you sell over the phone, send the written or electronic copy promptly with the disclosures on it.

Keep a dated record of the terms each voucher was sold on, because they cannot be changed afterwards and you will be asked years later.

Hold the money against the obligation rather than treating it as revenue for the season it arrived, and confirm the state position on unredeemed balances with an accountant.

The consumer bureau's own presentation of the rule is at the Consumer Financial Protection Bureau.

What the card processing side costs is covered in the card fees piece.