Gift cards are extraordinarily popular. Nearly 75 percent of holiday shoppers will buy at least one gift card, according to the National Retail Federation's (NRF) 2015 holiday consumer spending survey. And, 58.8 percent of consumers want to receive gift cards as a gift.
The survey also noted that the average amount spent on cards is expected to be somewhat lower than it was in 2014, but will still average a very respectable $153.80, with a per/card average of nearly $45.
Gift cards can boost your holiday sales regardless of your type of business.
The NRF survey found buyers selected a wide variety of gift cards. Although the most common types of cards purchased were for restaurants (34.8 percent) and department stores (34.4 percent), nearly every business from craft stores (4.2 percent) to office supply stores (1.9 percent) can expect to find shoppers looking for gift cards.
Gift cards can be more than just slip of paper or piece of plastic with a dollar value. Consider putting together attractive packages that showcase your best products and services, in addition to flat-dollar value certificates. In fact, this tactic can help overcome one of the objections that have recently surfaced regarding gift-card gifting: dueling card values. Some consumers express concern that the dollar value of their card will not be equal to the dollar value of a card given to them. A bundled card+product option solves this problem.
How do you account for gift cards
Granted, most business owners prefer to leave the accounting work to their accountant, but a basic understanding of the rules will prevent you from spending money that isn't yours (and make your accountant's job simpler).
Someone just gave you cash and you gave them a certificate or card in exchange for that cash. But, the money you just received isn't "revenue." In the world of accounting, it's actually counted on the liability side of the books. Whether you create a formal escrow account or not, income received in exchange for a gift certificate, isn't actually income to your business until that gift card it redeemed. Then the amount is deducted from the liability side of the balance sheet and moved to the revenue side.
Knowing this will help you avoid overspending the influx of holiday gift card case, only to find yourself scrambling to cover expenses if a large number of gift cards are redeemed in a short period of time.
Know the rules governing unused gift cards
Before you begin offering gift cards for your customers, it is important to understand the laws governing them. Federal law imposes some specific requirements on gift cards and certificates.
- Expiration dates. A gift card cannot expire for at least five years from either the date it was purchased or the date additional money was put onto the card. The expiration date must be clearly stated on the card.
- Inactivity fees. In most cases, you cannot charge inactivity fees until a year has elapsed since the card was issued. (And, inactivity fees cannot be charged more frequently than once a month.) Any fees you charge must be stated on either the card or the packaging.
- Sales fees. You can charge a customer a fee to purchase the card (or to issue a replacement card).
Note that these are federal rules and represent the minimum requirements for the cards. Many states have more stringent rules in place. For example, California and Connecticut prohibit expiration dates.
Certain states will claim unused gift cards
What happens when the gift card is not redeemed? A gift card that is not used may be swept into your state's fiscal coffers under the state unclaimed property laws. All 50 states and the District of Columbia have unclaimed property laws, but the laws are far from uniform.
Unclaimed property laws apply to intangible personal property, such as credit balances, uncashed paychecks and (in some states) gift cards. If a certain period of time (the dormancy period) goes by and the holder of the property does not redeem it, the value of the property "escheats" to the state. In other words, the value must be turned over to the state.
Some states exempt gift cards from unclaimed property laws completely. Other states draw distinctions based upon the terms and conditions of the card, such as whether the card has an expiration date or can be redeemed for cash. Still others treat them exactly like any other unclaimed property. If you sell gift cards in other jurisdictions, you will need to check the state unclaimed property rules governing gift cards.
Your accountant or tax professional can help you recoup amounts of unrealized revenue from cards that may never be redeemed, as well as help you properly account for cards when they are sold.