Are Rebates, Refunds and Incentives Considered Unclaimed Property?

In the world of unclaimed property, there tend to be more questions than answers with certain property types and what should be considered reportable to the states. High on that list are rebates, refunds and incentives. While efforts have been made to help clear the fog, questions still abound as companies seek to improve customer experience and retain customer loyalty. Today we see hotel chains offering the opportunity to purchase additional points when booking a room, credit card programs that allow clients to redeem points to pay for charges on their account or convert points to cash and refunds being offered in the form of gift cards. Should these balances be considered unclaimed property? The answers are less than clear and should be carefully considered by companies offering similar programs.

Rebates

When looking at rebates, key considerations include the fulfillment of conditions necessary to be eligible to receive the rebate and the rebate is paid in cash. While some states specifically exempt rebates, many others consider them to be reportable under the catch-all provision. States that currently exempt rebates include Maryland for rebates issued in the normal course of business, Nevada if the rebates are owed between business associations with an ongoing relationship, and Michigan and Ohio if the rebates are due to a business. Complexity around rebates broadens when a third-party fulfillment company handles rebates on behalf of the issuing company. In any situation, contract terms and conditions should clearly identify the requirements that need to be met for rebates to be considered distributable, the form of payment and parties responsible for outstanding obligations that could represent unclaimed property.

Refunds

At first glance, refunds appear to be a bit more straight forward. But with the introduction of refunds being issued via gift cards redeemable for store merchandise, the complexity continues. The introduction of gift cards as a replacement for cash has many pluses for companies, including reduced risk of compensating someone for the return of stolen goods. An unexpected benefit could also arise when we consider that many states either exempt unused gift card balances that don’t expire or allow companies to retain their profit, which means that the value of the property sold, or the related profit, stays within the company. Like rebates, the terms and conditions controlling refunds need to be clearly stated and made available to the purchaser.

Incentives

Incentives can take many forms, including points earned as a result of using a credit card, accrued airline miles, grocery store reward points that can be used towards a future purchase or even earning a free coffee after the purchase of 10 at full price. States have tried many times to demand accumulated dormant points as unclaimed property but have been unsuccessful. The 2016 Uniform Unclaimed Property Act excludes loyalty cards from the definition of reportable property and defines a loyalty card as:

“Loyalty card means a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate, or promotional program which may be used or redeemed only to obtain goods or services or a discount on goods or services. The term does not include a record that may be redeemed for money or otherwise monetized by the issuer.”

In short, common factors contributing to the determination that incentives and reward programs should not be considered reportable property include:

• Balances cannot be converted to cash, cannot be converted to gift cards and must be used towards the purchase of merchandise.
• Customers did not pay for the points and no consideration was exchanged.
• Points are offered free of charge to everyone who signs up for the program.
• Everyone is treated equally within the program.

Overall, refunds, rebates and incentive programs add value to the customer experience, are widely used throughout many industries and will continue morph into new configurations in the future. Knowing that each of these areas has unique considerations when regarding potential unclaimed property exposure will enable your organization to be prepared for the challenge.

At a minimum, new and existing programs should be evaluated for potential unclaimed property exposure with internal counsel and those well versed in unclaimed property requirements. Terms and conditions should also clearly state how unused balances will be handled and the responsibilities assigned to all parties.

Taking a proactive approach to determining potential risks will enable you to take advantage of various voluntary programs offered by the states, avoid costly interest and penalties related to overlooked balances and establish programs that are a win-win for all parties.