California court rules some merchandise credits not subject to escheatment
Certain merchandise credits not escheatable
TAX ALERT |
Treatment of certain types of unclaimed property—such as gift cards, gift certificates and merchandise credits—is often subject to dispute. A recent ruling by a California superior court attempts to offer retailers some clarity, at least as it pertains to certain merchandise credits. Whether the decision will be turned over in appeal or if the same logic may be applied to similar unclaimed property other states is still unknown.
Retailers issuing merchandise credits that cannot be redeemed for cash should consider whether they may have unclaimed property refunds available in California or other states.
On March 4, 2016, the California Superior Court for the County of San Diego issued its order on summary judgment in Bed Bath & Beyond v. Chiang, No. 37-2014-12491 (Super. Ct. San Diego, CA March 4, 2016), holding that certain merchandise credits not redeemable for cash are not subject to the state’s Unclaimed Property Law (UPL).
Bed Bath & Beyond, a national retailer of home merchandise and furnishings, issued merchandise credits to customers who returned products without a receipt. The credits were only redeemable for merchandise, not for cash, and had no expiration date. Between 2004 and 2012, the company escheated approximately $1.8 million of such credits to California that had remained unused for three years. However, Bed Bath & Beyond later filed a refund claim on the basis that such credits were not actually subject to escheat under the UPL. When California denied the claim, the company sued for refund in the California Superior Court for the County of San Diego.
The Superior Court granted Bed Bath & Beyond’s Motion for Summary Judgement, finding that the credits were not, in fact, subject to the UPL under the “intangible property” catchall provisions of California’s UPL Cal. Code Civ. Pro. section 1520 as the state asserted. That section requires the escheatment of “all intangible personal property” that is not otherwise held or excluded and that has remained unclaimed for more than three years after being payable or distributable. Because the credits were not redeemable for cash, the court determined that they were not actually owed as required by the statute and accordingly not subject to escheat.
The court also found that the merchandise credits were not subject to escheat as they were analogous to gift certificates, which are specifically exempt from the UPL. Despite the fact that such merchandise credits were not intended as a gift, but rather, were issued when merchandise was returned, the court nonetheless noted that they were similar to instruments provided under store loyalty and promotional programs which also fall under the exemption when there is no expiration date. On that basis as well, the court determined the merchandise credits were not subject to escheat under the exemption for gift certificates in the UPL.
For your consideration
While the state may appeal the court’s decision, this decision is a significant first step in the litigation process for companies that issue merchandise credits on a national basis. First, companies that have escheated merchandise credits to California should review their unclaimed property filings and consider filing refund claims in California. Also, because most states have not issued specific guidance on how to treat merchandise credits, this decision may provide rationale for claiming refunds in other states with substantially similar laws in factually similar situations. Finally, the court’s use of the “gift certificate” analogy may indicate that other types of credits or forms of payment could also be construed as exempt from escheat law in states with laws similar to California.
Companies should discuss the impact with their unclaimed property advisors to determine whether a refund claim should be filed for any merchandise credits previously escheated to California and other states.