Charly Rok finally found a way to use her Bloomingdales gift card. She’d gotten it over a year ago, stuck it in a dresser drawer, and pretty much forgotten about it. Until the day she found a designer suit she wanted for her husband, an expense she thought would be easier to justify if she used the gift card. But when she got to the register at Manhattan’s 59th Street store, she met with an unpleasant surprise: the card was rejected. “It had expired. I couldn’t believe it,” Rok recalled. “I had to go through this long-drawn out process with the store to get my money back.”

Rok’s experience underscores a new consumer reality. As gift cards increase in popularity, many people wait a while — or just forget — to use them. Rok estimates she receives five to eight gift cards a year and admits that she doesn’t keep track of them. “I try to use them as fast as I can, but it’s hard,” she said. “I mean, I don’t even shop at Bloomingdales that much.”

In fact, only one-third of consumers use a gift card within a month of receiving it, according to a Marketing Workshop Inc. survey, and research firm The Tower Group estimates that as much as 10 percent of the total gift cards bought each year go unused, leaving about $8 billion worth of unspent money floating around. That’s a sum sizable enough to pit retailers against state treasuries in a fight over who gets to claim the gift-card money consumers don’t spend — and when. Just how long they wait before either party can assume the card will never be redeemed depends on how a state’s abandoned property laws apply and how the retailer chooses to interpret accounting rules.

How States Get the Money
Abandoned property statutes, called escheat laws, allow the state to take custody of property such as dormant bank accounts and uncashed checks and hold it in a general treasury account until the rightful owner can be located. For unredeemed gift cards, these laws require retailers to try and contact the person about his unused funds. But if the store can’t find the owner, the untapped money is sent to the purchaser’s home state, if it’s known. If not, the money goes to the state where the retailer is incorporated. At this point, the state must also attempt to locate the consumer who bought the card — not the person who got it as a gift — and give him his money back.

In reality, a consumer rarely gets his money back after a state treasury gets it, said Charlie Kile, an accounting professor at Middle Tennessee State University. “The buyer’s identity is rarely known and ownership of the card is usually transferred with gift giving, so it’s hard to find the person, let alone know who exactly to return it to.”

Escheatment laws vary from state to state, but three general types exist. Twelve states, plus the District of Columbia and the Virgin Islands, typically seize unused gift card balances between two and five years after their issue date. Delaware, where many retailers are incorporated, claims untapped gift card money after five years. Six states, including Missouri and Nevada, let retailers keep 40 percent of the unused card balance after three to five years; the remaining 60 percent goes to the state treasury. Finally, 32 states generally do not consider gift cards to be abandoned property. Instead, states such as Connecticut and Florida route the unused money back to retailers.  (The National Conference of State Legislatures makes available a comprehensive list of state escheat laws on its Web site).

Overall, states control a lot of unclaimed property, roughly $33 billion worth according to a 2006 survey conducted by the National Association of Unclaimed Property Administrators. The portion of that $33 billion that comes from gift card escheatment is tough to determine, however, because most states lump unclaimed gift cards in with other abandoned property, such as unclaimed and uncashed dividend and payroll checks, tax refunds, tax refunds, and inheritances. The amount of gift-card money in some state treasuries is “certainly in the millions of dollars,” said Stephen Larson, president of the National Association of Unclaimed Property Administrators and Iowa’s deputy treasurer. “Many states have also become more aggressive in recent years, making sure the cards are reported and remitted properly.”

Retailers Fight Back
Understanding how much retailers profit from unused gift cards requires an understanding of how they account for them. Generally Accepted Accounting Principles (GAAP) require that when retailers sell a gift card, they first record it as a liability on their balance sheets. It is, after all, a debt they will have to pay in merchandise when the gift card owner chooses to collect it. They can move it over to income side only when a consumer actually spends it.

However, if a company can determine that a certain percentage of its customers, on average, will not redeem a gift card over, say, a five-year period, they can transfer a portion of gift card liability to income through a practice called “breakage.” For instance, if a retailer determines that 5 percent of its gift cards are never used, then it can claim 5 percent of its total gift card liability as income as the remaining gift card values are redeemed. All told, this can add up to some big bucks. Last year, Home Depot recognized $36 million from gift card breakage, and Limited Brands, which owns Victoria’s Secret and Bath & Body Works, raked in $48 million, according to their annual financial reports.

This explains why retailers resent state treasuries invading their turf. Since they spend the money to issue and maintain gift cards, they believe they have first dibs on that money. It would be theirs if the customer brought the card into the store and used it, and it should be theirs if the customer chooses not to spend it. “This is an effort by states to grab money wherever and however they can,” said Craig Shearman, vice president of government affairs and public relations for the National Retail Federation. “In reality, there is no reason they should get any money at all. This is a transaction between retailers and consumers.”

Major national retailers have found ways to try and get around escheat rules. They can establish a separate limited liability corporation in a retail-friendly state, such as Ohio or Arizona, which allows them to take unused gift card money. Or they simply let a third-party company issue cards for them. “Since the retailer no longer issues gift cards, it doesn’t have any unredeemed balances to turn over to the states. The unredeemed balances, and the corresponding regulatory burdens, belong to us,” said Ted Ziegler, chief executive officer of Cardfact, an independent gift card issuing company.

Without the burden of complicated escheat laws to worry about, retailers can significantly boost their bottom line, thanks to their consumers’ folly. “It’s a nice little business,” said Tracey Reid, founder of Reid Unclaimed Property. “We’re talking about billions of potential dollars here [overall].” While these numbers appear substantial, retailers insist they’d rather see consumers just spend their gift cards more quickly. “It would save everyone a lot of trouble,” National Retail Federation’s Shearman said.

As for who’s looking out for consumers in all this wrangling, Charly Rok has a suggestion: “I think I’d rather just have people give me cash or a check.”

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