by George B. Delta, Esq. | June 05, 2012
In 2010, New Jersey amended its gift card laws substantially through A.B. 3002, the state's annual budget bill. The new law defined a stored-value card (SVC) to include paper gift certificates; records that contain a microprocessor chip, magnetic stripe, or other means for the storage of information; gift cards; electronic gift cards; rebate cards; store cards; and similar records or cards. Whereas New Jersey had not considered gift cards unclaimed property subject to escheat, the new law treats an SVC as abandoned if there has been no activity on the card for two years. Dormancy fees are also completely prohibited. 

More controversially, the new law requires SVC issuers to collect the purchaser's name and address and to maintain, at a minimum, the purchaser's zip code. If a card is sold in New Jersey, and the card issuer does not have the name and address of the purchaser, then New Jersey is presumed to be his or her location. This has proven burdensome on the purchasers as well as damaging to retail gift card sellers that are required to gather this information.

The personal data collection requirement in New Jersey's law was an effort to raise additional revenue by treating the unused amount on SVCs as unclaimed property after two years. By doing so, New Jersey was trying to codify a third priority rule for escheat based on an SVC's place of purchase. Neither the U.S. Supreme Court nor any federal appeals court has permitted the state where a gift card is purchased to treat it as unclaimed property subject to its escheat laws. The new law applies to all SVCs, including retroactively to those issued before its July 1, 2010 effective date.

The amendments to New Jersey's gift card escheat rules were part of an effort to close its deficit. Merchants and gift card retailers like American Express, the New Jersey Retail Merchants Association, and several others sued to end its enforcement, and a federal district court issued a preliminary injunction on November 13, 2010 prohibiting enforcement of the provision naming New Jersey as the location of the funds on unused cards (if the card is sold in the state) and the retroactive application of the statute to gift cards that are redeemable for services or merchandise only. The court upheld the provision requiring issuers to collect the purchaser's name and address, or, at a minimum, his zip code in American Express Travel Related Services v. Sidamon-Eristoff, 2010 WL 4722209 (D.N.J. Nov. 13, 2010). The Third Circuit affirmed the lower court's decision in its entirety in New Jersey Retail Merchants Association v. Sidamon-Eristoff, No. 10-4551 (3d Cir. Jan. 5, 2012).

The appeals court held that the U.S. Supreme Court has established only two rules of escheat. Under the first priority rule, the abandoned property returns to the state of the last known address of the creditor (usually the gift card's owner or holder). If that is unknown because the card's issuer does not have that information, under the second priority, the abandoned property falls to the state of incorporation or organization of the debtor.

The Supreme Court has not recognized or established a transactional or place of purchase priority rule for escheat. Therefore, the appeals court ruled that New Jersey could not impose a "third priority" rule of escheat based on place of purchase of an SVC. The court of appeals left in place the data collection provisions (name, address, and/or zip code) on the theory that those provisions made it more likely that New Jersey would be able to obtain unclaimed property on behalf of its rightful owner.

The net effect of the legal wrangling is that New Jersey wound up with the shortest escheat period among states (two years) and a high cost of doing business (the collection of a consumer's personal data). So, in early April, American Express, InComm, and Blackhawk Network stated that they would stop selling gift cards in New Jersey. Indeed, American Express began to pull its cards from pharmacies, grocery stores, convenience stores, and other retail outlets during the first week of April. It noted that in addition to an unreasonably short escheat period, New Jersey's name, address, and/or zip code collection requirements posed an unnecessary and costly administrative burden on businesses as well as potential privacy issues for consumers.

Moreover, American Express and others are rightfully concerned that they cannot ensure third party retailers will comply with New Jersey's personal information collection requirements for stored-value cards that such merchants sell in the state.

New Jersey intended the 2010 amendments to its unclaimed property law to raise revenue of at least $50 million annually, but they will probably have the opposite effect. If a survey announced by the New Jersey Retail Merchants Association and the Retail Gift Cards Association is correct, the state could stand to lose at least $64 million in sales tax revenue from lost incremental sales above the face amount of redeemed stored value cards.

Now that courts have correctly struck down a third priority rule for escheat based on place of purchase, it is strange that New Jersey continues to require merchants to collect name, address, and/or zip code information from consumers who purchase SVCs, especially when several important card issuers and vendors have stopped operating in the state. Maybe the state will come to its senses and will repeal unnecessary new gift card law, which will never work the way it envisioned. Stay tuned.