Loyalty Reward Programs Raise A Host Of Questions Under State Unclaimed Property Laws

Unclaimed or abandoned property is a multi-billion dollar revenue source for states. States are constantly seeking out new types of unclaimed property, especially given difficult fiscal situations. According to the National Association of Unclaimed Property Administrators (NAUPA), almost $33 billion of unclaimed property is currently held in state treasuries. As unredeemed balances on gift cards and stored value cards (i.e., breakage) have become a common type of unclaimed property in most states, will they also turn their attention to unused loyalty reward program values? If so, how should issuers of loyalty reward cards respond?

Loyalty Reward Card Programs

Loyalty reward cards are structured marketing programs that reward and encourage loyal behavior on the part of customers. These programs are variously described as discount cards, club cards or rewards cards. The owner of the card is typically entitled to either a discount on current or future purchases or an allotment of points that can be used toward making future purchases. According to one study, $48 billion of consumer loyalty reward points are dispensed each year, but at least $16 billion of those points are never used by consumers.1

The study also found that the financial services sector provides the most rewards, at $180 billion per year, followed by the travel and hospitality sector at $17 billion a year. Although retailers make up 40 percent of all loyalty reward program memberships, the study indicated that the retail sector issues loyalty rewards of $12 billion a year. In 2010, loyalty reward memberships in the U.S. exceeded 2 billion, up from 1.8 billion memberships in 2009. On average, a U.S. household has 18.4 memberships.

An Unclaimed Property Primer

Property is presumed abandoned by the owner after the running of a state's dormancy period applicable to the type of property involved (typically three or five years; one year for unclaimed wages) and subject to escheat to a state.2 In general, the unclaimed or abandoned property is reportable first to the state of the owner's last known address. If the holder's records do not contain the owner's name or address, or if the last known address state does not escheat the property, then the holder's state of domicile (incorporation) has the secondary right to the unclaimed property.3

Recently, some states have begun using a "deemed owner address" rule for gift and stored value cards. If the issuer of the gift card does not maintain the owner's last known address in its records, then the owner's address is presumed to be in the state where the card was sold.4

States have become increasingly aggressive and routinely schedule holders for unclaimed property audit examinations. Employment of third party audit firms by states, such as Kelmar Associates, LLC, ACS Unclaimed Property Clearinghouse, Revenue Discovery Systems and Verus Financial LLC, is now common. These firms typically audit holders on behalf of one or more states for a contingent fee that is measured by a percentage of unclaimed property recovered from a holder. It is common for an audit to cover a 10-year look-back period, plus the...